The Franchise Memorandum

In Doctor’s Associates, Inc. v. Nat, 2009 WL 162680 (Cal. App. 2 Dist. Jan. 26, 2009), the California Court of Appeals upheld a lower court ruling affirming an arbitrator’s decision that a franchisor breached its obligations to assist a Subway franchisee in the sale of his franchises. Franchisor Doctor’s Associates, Inc. (“DAI”) had originally filed an arbitration seeking to terminate the franchisee’s two locations in Southern California for underreporting of sales and other breaches of the franchise agreements. During the course of this initial arbitration, the parties reached a settlement agreement, the terms of which were set forth in a consent award. The agreement required franchisee Nat to sell his franchises by a certain date and obligated DAI to “assist [the franchisee] in finding a buyer in good faith.” The stores, however, were not sold by the deadline.  DAI then filed a petition in state court to confirm the consent award as a final judgment and terminate the franchises. The trial court found for DAI.

The franchisee next filed a new demand for arbitration, claiming that DAI’s refusal to consent to the transfer of his stores had breached the franchisor’s obligations under the consent award to assist him in the sale of the restaurants. The arbitrator in this second arbitration found that while DAI acted in good faith before the deadline, it had waived the deadline by failing to object to the franchisee’s continued efforts to sell the stores after that date had passed. In fact, the arbitrator found that DAI had encouraged the franchisee to continue his efforts to sell the stores (and to continue to operate the locations) after the deadline because DAI would have had to pay a landlord significant penalties if one of the stores had been allowed to go dark.

After this second round of arbitration, DAI failed in its effort to vacate the award before the state trial court.  In affirming that decision, the court of appeals now has found that there was no merit to DAI’s contention that the second arbitrator had exceeded his powers. The court also rejected DAI’s argument that the arbitration could not have been brought because it had been based on a breach of a consent award, which did not mandate arbitration.