The Franchise Memorandum

A federal court in Tennessee has granted a franchisor’s motion to compel arbitration of all of a franchisee’s claims. Fruit Creations, LLC v. Edible Arrangements, LLC, 2020 WL 5095460 (M.D. Tenn. Aug. 27, 2020). Between June 2009 and August 2017, Fruit Creations and its affiliates entered into franchise agreements to own and operate six Edible Arrangements franchises in Tennessee. Each franchise agreement stated that the parties agreed to submit to arbitration all claims between them (and their respective owners, officers and affiliates) relating to the franchise agreement or any other agreement between them, the franchise relationship, the scope or validity of the franchise agreement or any other agreement between them (including the validity and scope of the arbitration obligation), or any franchise system standard. In its amended complaint, filed in May 2020, Fruit Creations alleged seven causes of action, including breach of contract, fraud in the inducement, and breach of Tennessee Consumer Protection Act (TCPA). In June 2020, Edible Arrangement removed the case to federal court and promptly moved to stay the litigation and to compel arbitration.

Edible Arrangements argued that Fruit Creations agreed to arbitrate the claims when they signed the franchise agreements, that the arbitration provision is enforceable, and that all of Fruit Creations’ claims fall within the scope of arbitration. Fruit Creations did not refute any of these arguments. Instead, Fruit Creations argued that Tennessee law applied to the franchise agreements, including the question of arbitrability (and not Connecticut law, as stated in the agreements) and the “enforcement” section in the franchise agreements, when read as a whole, clearly showed the parties did not intend to arbitrate. The court noted that Fruit Creations had also implicitly argued that its TCPA claims should not be submitted to arbitration, and Tennessee law does not permit the waiver of certain rights. The court concluded that while Fruit Creations’ arguments were creative, they were “wholly without merit.” The court first held that the question of applicable law was clearly delegated to the arbitrator. Next, the court found that the “enforcement” section as a whole in each franchise agreement evidenced the parties’ intent that all claims should be arbitrated. In addition, the court stated that while the Tennessee Supreme Court had held that fraud in the inducement claims were generally for the court to decide, and not the arbitrator, the parties had clearly agreed that the Federal Arbitration Act (FAA) would govern questions of arbitrability for all claims related to the franchise agreement. Therefore, the court stayed the litigation and submitted all causes of action to arbitration.