The Franchise Memorandum

A federal district court dismissed a complaint brought by international franchisees against a franchisor, a senior federal judge, and an arbitrator challenging the handling of arbitrations brought in the United States. Bletas v. Deluca, 2011 U.S. Dist. LEXIS 133132 (S.D.N.Y. Nov. 15, 2011), arose out of a longstanding dispute between Subway and its franchisees in Greece for nonpayment and standards violations. Subway terminated the franchise agreements and then initiated arbitration proceedings against the franchisees in the United States to enforce the terminations and collect unpaid fees and other damages. Subway prevailed in the arbitration proceedings and filed petitions in federal court to confirm the awards. In response, the franchisees, acting on a pro se basis, sued the federal judge considering the petitions to confirm and the arbitrator who issued the awards at issue on the grounds of “fraud, corruption, misconduct, exceeding of powers, perjury, and violation of public policy.”

The court dismissed the complaint against the judge and arbitrator on the basis of judicial and arbitral immunity. The franchisees also filed a 65-page complaint against Subway, accusing the company of various crimes, violations of constitutional and human rights, fraud, breach of contract, antitrust, and various torts. Subway moved to dismiss the complaint and for sanctions under Rule 11 of the Federal Rules of Civil Procedure. The court granted Subway’s motion dismissing the claims and sanctioned the franchisees for Subway’s expenses in defending the action. Although the franchisees alleged that Subway committed various crimes, the court noted that this claim violated the basic principle that only the government can criminally prosecute. The constitutional and human rights claims also failed because, as the court noted, the Constitution regulates only the government, not private parties, and the franchisees failed to show any human rights violations in the actions Subway took in terminating their sandwich shops. Finally, as for the breach, fraud, and antitrust claims, the court found that the franchisees were required to arbitrate those claims under the franchise agreements and failed to raise those claims during the arbitrations that they had filed. Finally, the court also dismissed the tort claims based on actions taken by Subway’s in-house counsel, finding that those actions were undertaken during the course of the litigation and were privileged.