The Franchise Memorandum

The United States District Court for the Middle District of Tennessee last month ruled that dispute resolution procedures in the parties’ franchise agreements survived termination of the agreements and must be followed prior to the initiation of litigation. Shoney’s N. Am., LLC v. Vidrine Rests., Inc. (M.D. Tenn. Jan. 22, 2013). Shoney’s commenced the action seeking liquidated damages arising from its termination of a number of franchise agreements with Vidrine. More than six months after Shoney’s initiated the suit, Vidrine filed a motion to stay the action pursuant to the dispute resolution clauses in the parties’ franchise agreements.

The dispute resolution clauses, which were the same under each franchise agreement, provided neither side could initiate a legal action “arising out of or relating to” the franchise agreements until the parties completed mediation. Shoney’s argued the dispute resolution clauses no longer applied because they were extinguished with the termination of the franchise agreements. Shoney’s further argued that Vidrine had waited too long to file its motion, and that, in any event, both parties had declined to exercise their right to mediate. Vidrine argued they were contractually entitled to mediate their disputes with Shoney’s before any legal action could be brought. The court agreed with Vidrine on all counts. According to the court, the franchise agreements’ dispute resolution clauses, by their terms, survived termination of the agreements and would continue to do so until “satisfied in full” or until they expired “by their nature.” Accordingly, the court granted Vidrine’s motion to stay the pending litigation until the parties satisfied the requirements of the dispute resolution clauses.