The Franchise Memorandum

The United States District Court for the Southern District of Georgia granted a franchisor's motion to compel arbitration, concluding that a franchisee and its employee were not transportation employees of the franchisor, and thus not exempt from the Federal Arbitration Act. Morning Star Assocs., Inc. v. Unishippers Global Logistics, LLC, 2015 U.S. Dist. LEXIS 66042 (S.D. Ga. May 20, 2015). The case arose out of three franchise agreements between Morning Star and Unishippers and a noncompetition agreement between Morning Star and one of its employees. Each of the franchise agreements and the noncompetition agreement included an arbitration provision requiring the parties to arbitrate certain disputes and delegating all arbitrability questions to the arbitrator. Despite the arbitration provisions, Morning Star filed an action against Unishippers in federal court in Georgia raising claims of fraud, breach of contract, conversion, unjust enrichment, and unfair competition. In opposing Unishippers' motion to compel arbitration, Morning Star argued, among other things, that the franchise agreements and noncompetition agreement were employment contracts with transportation workers and therefore exempt from the FAA.

Section 1 of the Act expressly exempts "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." The court, however, rejected Morning Star's claims that the franchise agreements and noncompetition agreement constituted employment contracts, noting that the controls outlined in the franchise agreements were the types of controls typically retained by franchisors to ensure system standards and to protect the franchisor's brand. The court observed that Unishippers did not have any control over Morning Star's labor relations and there was no indication that Unishippers oversaw Morning Star's hiring, interviewing, wage rates, or benefits decisions. Therefore, the court granted Unishippers' motion to compel and concluded that merely reserving the right to control certain quality standards in order to protect a franchisor's brand was a practice common in the franchise industry and insufficient to convert an independent contractor relationship into a contract of employment.