The Franchise Memorandum

A federal court in Maryland has held that an arbitration clause in a franchise agreement is ambiguous and has set a jury trial to determine whether the parties intended to arbitrate the franchisee's claims or litigate them in court. Trouard v. Dickey's Barbeque Restaurants, Inc., 2014 U.S. Dist. LEXIS 106218 (D. Md. Aug. 1, 2014). The franchisee plaintiffs in this case claimed Dickey's understated the start-up costs involved and overstated the expected profits with respect to their franchises. The franchise agreement at issue contained an arbitration clause that required the parties to mediate and then arbitrate "all disputes" between them. The agreement, however, also stated that the franchisees could file suit against Dickey's for violations of the Maryland Franchise Act. After the franchisees complained to Dickey's that it had violated the Act with respect to its pre-contract disclosures, the franchisor preemptively filed a demand for arbitration in Texas, seeking damages for breach of contract and fraud. The franchisees then filed a complaint in federal court in Maryland along with a preliminary injunction motion to prevent Dickey's from proceeding with the arbitration. In response, the franchisor moved to compel arbitration.

The court denied both motions. The "pivotal question," it commented, "was whether either the Franchise Agreement or the Development Agreement includes a valid arbitration provision that pertains to the dispute." The court concluded that the arbitration provision was ambiguous because the language of the conflicting clauses was "susceptible to multiple meanings to a reasonably prudent person" and that there was no additional evidence in the record beyond the contractual language to eliminate the ambiguity. The franchisor could reasonably believe, the court explained, that while the franchisees had the right to litigate their claims in court, they waived that right through the arbitration clause. The franchisees were also equally reasonable in their position that the contracts allowed them to litigate their Maryland Franchise Act claims without reference to the arbitration clause. Since both sides had different interpretations of wholly ambiguous contractual language, the court concluded that "a significant factual dispute exists regarding the intent of the parties with regard to the Arbitration Clause and the interplay between the Arbitration Clause and the Maryland [Franchise Act] Clause in the Franchise Agreement. A jury must decide this issue."