The Franchise Memorandum

A federal court in Tennessee recently compelled arbitration for parties in a franchise disclosure dispute. B&P Glass Mirror, LLC v. Clozetivity Franchising, LLC, 2023 WL 3484205 (M.D. Tenn. May 16, 2023). Plaintiff B&P entered a franchise agreement for a customized closet and storage solutions business with defendant Clozetivity. Although Clozetivity furnished its Franchise Disclosure Document to B&P before entering into the agreement, B&P subsequently discovered that Clozetivity failed to make required disclosures regarding litigation history of its members, including claims related to violations of franchise regulations. B&P brought claims against Clozetivity for fraudulent inducement to contract and a claim under the Tennessee Consumer Protection Act. Clozetivity asked the court to honor the franchise agreement’s arbitration clause, putting the dispute in front of an arbitrator rather than the federal court, and the court granted the motion to compel arbitration.

B&P argued that its claims were not subject to arbitration because Tennessee law categorically prohibits arbitration of fraudulent inducement claims. Clozetivity argued, however, that New Jersey law applied under the Franchise Agreement, not Tennessee law. Ultimately, the court declined to engage in a complex choice of law analysis because even if Tennessee law were applicable, it is well-established that when state law prohibits outright the arbitration of a particular type of claim, the conflicting rule is displaced by the Federal Arbitration Act. The court observed that any earlier decisions to the contrary, including those B&P relied on, are no longer controlling precedent. Finally, the court noted that B&P, as the party opposing arbitration, had burden to prove there was a genuine issue of material fact as to the validity of the agreement to arbitrate, but there was no evidence that the parties intended to exclude any particular claims from arbitration or to displace application of the FAA. Thus, the court compelled the parties to arbitrate.

*Suhaib Mohammad is a Summer Associate for Lathrop GPM who contributed to the writing of this post.