The Franchise Memorandum

Similarly, the Appellate Court of Illinois affirmed an order dismissing a franchisee’s complaint and ordering the parties to submit to arbitration, despite the fact that the defendants were not signatories to the franchise agreement. In Kim v. Kim, 2016 IL App. (1st) 153296-U (Ill. App. Ct. Nov. 30, 2016), a franchisee sued employees of the franchisor claiming that the employees had fraudulently induced him to enter into a franchise agreement with the franchisor. The franchisor itself was not a defendant. Citing to the franchise agreement’s arbitration clause, the employees initially responded to the complaint by filing a motion to dismiss and compel arbitration. The court denied the first motion, finding it unclear whether one of the employees had been acting in his capacity as an employee of the franchisor. After the franchisee admitted in deposition testimony that he thought the employee was acting as a representative of the franchisor, the employees renewed their motion to dismiss. The trial court granted the second motion, and the franchisee-plaintiff appealed.

The Appellate Court affirmed. The court began by analyzing choice of law. The trial court had applied the FAA, but the Appellate Court determined the FAA did not apply, since the franchise agreement designated Delaware as the exclusive choice of law, without reference to the FAA. Delaware law, however, did not change the result. First, the court found that the employees had acted consistently with their right to compel arbitration. Therefore, waiver had not occurred. Second, the court refused to consider the claim that complying with the arbitration clause would be too expensive, since the franchisee failed to present that argument to the trial court. Finally, the court rejected the argument that the franchise agreement’s arbitration clause did not apply. While the employees themselves were not signatories to the franchise agreement, the franchisee’s claims depended on the existence of the agreement. Therefore, applying principles of equitable estoppel, the court found that the franchisee could not avoid application of the franchise agreement’s arbitration provision.