The Franchise Memorandum

A Michigan federal court recently decided that an arbitration provision contained in a franchise agreement governed claims arising out of a subsequent, related agreement. The parties in Braverman Props., LLC v. Boston Pizza Rests, 2011 U.S. Dist. LEXIS 68536 (W.D. Mich. June 27, 2011), had a franchise agreement that included an arbitration provision requiring arbitration of “any and all controversies, claims and disputes between [the parties] arising out of or related to this Agreement.” The franchise agreement also gave the franchisor, Boston Pizza Restaurants, a right of first refusal if the franchisee sold the real estate or other assets of the business. When the franchisee entered into a purchase agreement with a third party, Boston Pizza notified the franchisee of its intent to exercise its right of first refusal. Boston Pizza later attempted to terminate the purchase agreement, leading the franchisee to bring four claims based on the attempted termination.

Boston Pizza moved to dismiss the claims for lack of subject matter jurisdiction, arguing that the arbitration provision contained in the franchise agreement applied to the claims that arose out of the attempted termination of the purchase agreement. The franchisee maintained that the arbitration provision did not apply since its claims were not based on provisions in the franchise agreement. The court agreed with Boston Pizza, noting that the scope of a broadly worded arbitration clause is determined by asking whether the claim could be maintained without reference to the agreement containing the arbitration provision. In this case, the court reasoned that each claim (common law fraud, breach of contract, tortious interference, and violation of the Michigan Franchise Investment Law) stemmed from the right of first refusal. Because each claim related to a right granted by the franchise agreement, the broadly worded arbitration provision applied, and the court lacked subject matter jurisdiction.