The Franchise Memorandum

A district court in Texas denied a franchisee’s motion to compel arbitration in Stockade Companies, LLC v. Kelly Restaurant Group, LLC, 2017 WL 1968328 (W.D. Tex. May 11, 2017). Although the parties’ franchise agreements contained an arbitration clause, the court held that the substance of the claims at issue had been expressly excluded from the arbitration clause. In part because the substance of the claims were excluded from arbitration, the court also held that the franchise agreements did not contain sufficient evidence that the parties had agreed to arbitrate the issue of arbitrability.

The franchisor, Stockade Companies, brought an action against the franchisee for continuing to use Stockade’s trademarks after the parties’ franchise agreements had terminated, and for violating the covenant against competition. The franchisee argued that the franchise agreements required that the parties arbitrate the dispute. The franchise agreements contained two clauses regarding arbitration. First, the franchise agreements stated that “any and all controversies, claims and disputes . . . arising out of or related to” the agreements would be resolved through arbitration under American Arbitration Association (AAA) rules. Next, the franchise agreements carved out Stockade’s right to seek “temporary or permanent equitable relief . . . that may be necessary to protect its Proprietary Marks or other rights or property” in court.

The court observed that while adopting the AAA rules is usually viewed as clear evidence that the parties agreed to arbitrate the arbitrability of claims, the presence of a clause excluding claims from arbitration negates that evidence. It concluded that the franchise agreements did not contain sufficient evidence that the parties intended to arbitrate the issue of arbitrability. The court further held that the claims and type of relief Stockade was seeking fit the explicit exception from arbitration in the franchise agreements because Stockade was suing to enjoin the franchisee from infringing on its trademark and from violating the covenant not to compete. Accordingly, the court denied the franchisee’s motion to compel arbitration.