The Franchise Memorandum

The federal court in Maine also recently granted a motion to compel arbitration filed by daycare center franchisor Toddle Inn Franchising, holding that the arbitration provision included in its franchise agreement with franchisee KPJ Associates survived the expiration of the agreement. Toddle Inn Franchising, LLC v. KPJ Assocs., LLC, 2018 WL 6515129 (D. Me. Dec. 11, 2018). The dispute arose when, after operating for two years under an expired franchise agreement, KPJ notified Toddle Inn that it intended to open a competing daycare center at its Toddle Inn franchised business location. Toddle Inn filed suit and requested an injunction and temporary restraining order to prevent KPJ from proceeding, and then subsequently filed a motion to compel arbitration and to stay the federal court proceedings pending arbitration.

To address the motion to compel arbitration, the court applied the First Circuit’s two‐pronged test for deciding the arbitrability of disputes. Under that test, a court first must determine whether the dispute “has its real source in the contract,” and second whether post‐expiration arbitration of the issue is “negated expressly or by clear implication.” The court held that Toddle Inn’s suit to prevent KPJ from using its confidential information and equipment and violating the covenant against competition in the franchise agreement clearly had its “real source”in the contract, satisfying the first prong. The court further held that the agreement’s survival clause, which stated that those provisions that “expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect,” included within its scope the agreement’s broad arbitration provision, which was generally untethered to any particular period in time. Lastly, the court found that Toddle Inn had not waived its right to arbitrate the dispute through its conduct because Toddle Inn filed its motion seeking arbitration less than a month after commencing the federal court action, and the litigation was at an early stage. The court therefore granted Toddle Inn’s motion to compel arbitration and stayed the case pending the outcome of the arbitration.