The Franchise Memorandum

The United States Court of Appeals for the Fourth Circuit recently bifurcated a franchisor's common law claims from several franchisees' Maryland Franchise Law claims pursuant to the Federal Arbitration Act, and required the franchisor to pursue its claims in arbitration while the franchisees pursue their claims in Maryland district court. Chorley Enters. v. Dickey's Barbecue, 2015 U.S. App. LEXIS 13652 (4th Cir. 2015). Dickey's, a national franchisor of quick-service barbecue restaurants, claimed several of its Maryland franchisees breached their franchise agreements by running their restaurants poorly. The franchisees, in turn, claimed that Dickey's misrepresented startup and other costs in violation of the Maryland Franchise Law. The issue on appeal was whether the parties' claims should be arbitrated, as Dickey's argued, or heard in Maryland federal court, as the franchisees contended.

The franchise agreements at issue contained seemingly contradictory provisions. The agreements required arbitration of all claims "arising out of or relating to" the agreements (the "Arbitration Provision"), while at the same time stating the agreements "shall not require" the franchisees to waive their "right to file a lawsuit alleging a cause of action arising under the Maryland Franchise Law in any court of competent jurisdiction in the State of Maryland" (the "Maryland Provision"). In the district court, the franchisees claimed the Maryland Provision fundamentally conflicted with the Arbitration Provision, thus rendering the Arbitration Provision void such that all of the claims had to proceed in the district court. Dickey's, in contrast, argued that the Maryland Provision is consistent because it merely preserved the franchisees' right to bring a claim under the Maryland Franchise Law in either arbitration or in court. The district court held that both parties' interpretations were plausible, thus rendering the agreement ambiguous, and requiring resolution by a jury.

The Fourth Circuit reversed, holding that there were no genuine disputes of material facts regarding the existence of an agreement to arbitrate, and that the clear and unambiguous language of these provisions required that the common law claims asserted by Dickey's proceed in arbitration, while the franchisees' Maryland Franchise Law claims proceed in Maryland district court. The Fourth Circuit reasoned that this outcome, while seemingly inefficient and potentially leading to conflicting results, was mandated by the Federal Arbitration Act, which requires piecemeal litigation where an agreement calls for arbitration of some claims, but not others. In doing so, the Fourth Circuit warned that if the parties wanted to avoid this type of result, they could have agreed on a single forum for all their claims, but they did not, and it is not the court's role to rewrite their agreements to save them from their own self-imposed, inefficient arbitration procedures.