The Franchise Memorandum

A federal district court in Maryland recently enforced an arbitration provision in a rescinded franchise agreement. Burrell v. 911 Restoration Franchise Inc., 2017 WL 5517383 (D. Md. Nov. 17, 2017). The franchisor, 911 Restoration, previously offered to rescind its franchise agreement with franchisee Burrell because 911 Restoration was not authorized to sell franchises in Maryland at the time the franchise agreement was executed. Although Burrell accepted the rescission offer, it subsequently brought an action against 911 Restoration alleging damages of more than $1,000,000 for, among other things, financial losses and lost business opportunities. 911 Restoration argued that the court should compel arbitration because the franchise agreement contained an arbitration provision which required all disputes between the parties to be “submitted to final and binding arbitration as the sole and exclusive remedy.”

The court agreed with 911 Restoration, explaining that in order to succeed on a motion to compel arbitration, a party must demonstrate four elements: (1) the existence of a dispute between the parties; (2) a written agreement that includes an arbitration provision; (3) the relationship of the transaction to interstate commerce; and (4) the failure of the nonmoving party to arbitrate the dispute. Burrell argued that 911 Restoration could not meet the second element of the test because the parties had rescinded the franchise agreement. The court disagreed, noting that arbitration provisions generally are separable from the contracts in which they are embedded, especially when the agreement explicitly states that the arbitration provision should survive rescission. Having found a valid arbitration provision that survived rescission of the agreement, the court dismissed the case and compelled arbitration.