The Franchise Memorandum

A United States District Court in Iowa has granted a franchisor’s motion to dismiss the complaint filed by its franchisee and enforced the applicable arbitration provisions. Cahill v. Alternative Wines, Inc., 2013 LEXIS 14588 (N.D. Iowa Feb. 4, 2013). The franchisee sued the franchisor and its CEO for breach of a purchase agreement and services agreement between the franchisee and the franchisor, violation of Iowa business opportunity laws, and fraud. The defendants moved to stay or dismiss, seeking to enforce the services agreement’s provision requiring arbitration in North Carolina. 

The franchisee argued that the arbitration provisions contained in the agreements were unenforceable under Iowa Code section 537A.10(3), which voids any franchise agreement provision restricting jurisdiction in another state. The franchisee further argued that the statute applied to all franchise agreements and was not limited to arbitration agreements, so it did not preempt the Federal Arbitration Act. The court disagreed, holding that the Iowa statute’s prohibition does not differentiate between forum selection clauses in contracts and forum selection clauses in agreements to arbitrate. Because the statute directly conflicts with the FAA and its broad policy for allowing arbitration of disputes when the parties have so agreed, it violates the Supremacy Clause of the U.S. Constitution. The court further held that the CEO, who was not individually a party to any of the agreements, could enforce the arbitration provisions because of his close relationship with the franchisor and because the claims against him were all derived from the same agreements. Finally, the court explained that dismissal was warranted as opposed to a stay because all of the matters at issue were subject to arbitration.