The Franchise Memorandum

A federal court in Tennessee recently granted a franchisor’s motion to compel arbitration, including as to questions of arbitrability, in response to a 15 count complaint brought by 54 separate franchisees. Anthony v. Van Over, 2023 WL 6317685 (E.D. Tenn. Sept. 27, 2023). The crux of the underlying complaint is that the plaintiff franchisees were “fraudulently misled on a variety of statistics relating to profitability and time required to successfully manage and operate PMA franchises.” In response, the franchisor defendant Premier Franchising Group, along with the other defendants who were officers and employees of the franchisor, asserted that each franchise agreement contained an arbitration agreement that delegated the question of arbitrability to the arbitrator. The delegation clause stated that disputes arising out of or relating to the franchise agreements “will be resolved exclusively by arbitration conducted according to the then current commercial arbitration rules of the American Arbitration Association.” The court noted that Rule 7(a) of the current AAA Commercial Rules established that “[t]he arbitrator shall have the power to rule on . . . the arbitrability of any claim or counterclaim, without any need to refer such matters first to a court.” The court found that the delegation provision constituted clear and unmistakable evidence that the parties agreed to delegate arbitrability to the arbitrator.

The court also rejected the plaintiffs’ argument that the individual non-signatories to the franchise agreements were ineligible to compel claims to arbitration, holding that in the Sixth Circuit, a non-signatory’s ability to enforce the arbitration agreement involved a question of arbitrability, and had to be resolved by an arbitrator. The court also rejected the plaintiffs’ “specific” challenge to the delegation provision, which required them to “show that the basis of their challenge is directed specifically to the delegation provision” and rests “in part, on different factual or legal grounds than the ones supporting its challenge to the arbitration agreement as a whole.” The court held that the plaintiffs’ arguments against the enforceability of both the arbitration agreement and the delegation provision were “woven with a common thread.” Upon compelling arbitration, the court stayed rather than dismissed the action.