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The Franchise Memorandum

Second Circuit Upholds Arbitration Agreement In Prospective Francisee’s Application
Posted in Arbitration

The United States Court of Appeals for the Second Circuit has upheld an arbitration agreement between Doctor’s Associates, Inc. (“DAI”), the franchisor of Subway restaurants, and a prospective franchisee, finding that it was supported by sufficient consideration during the application process. Doctor’s Associates, Inc. v. Alemayehu, 934 F.3d 245 (2d Cir. 2019). In 2016, Alemayehu sought to purchase an existing Subway franchise in Colorado. As part of the application process, Alemayehu checked a box on an online form agreeing to submit any claims arising from the application process to arbitration venued in Bridgeport, CT. When DAI denied Alemayehu’s application he filed a lawsuit alleging racial discrimination. DAI responded by bringing an action in a Connecticut federal court seeking to compel the arbitration of Alemayehu’s claims. The district court denied DAI’s motion, finding that the putative arbitration agreement lacked consideration because it contained only unilateral promises made by Alemayehu and failed to require anything of DAI.

The Second Circuit determined that the district court erred in its conclusion on the consideration issue. The Second Circuit agreed that, under the Federal Arbitration Act, the threshold issue of whether the arbitration agreement was supported by consideration should be resolved by the court rather than the arbitrator. But the appellate court went on to note that a fundamental tenet of the law of consideration is that consideration may consist of a performance or a return promise, and that any performance which is bargained for is consideration. Here, Alemayehu received a bargained-for performance in exchange for his agreement to arbitrate. DAI was under no obligation to entertain an application from any prospective franchisee who did not agree to DAI’s preconditions. By completing and submitting his application, Alemayehu offered his promise to arbitrate in exchange for DAI’s subsequent review of his application. As a result, the Second Circuit vacated the judgment of the district court and remanded the case for further proceedings consistent with its opinion.

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