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Court Upholds Franchise Arbitration Provision

Commercial Litigation Report

Authors: Jeffrey A. Carr and A. Christopher Young

9/08/2005

Mandatory arbitration provisions with forum selection clauses are commonly found in franchise agreements or circulars . In Green Tree Fin. Corp.- Ala. v. Randolph, 531 U.S. 79 (2000), the U.S. Supreme Court suggested that an arbitration clause may be unenforceable where the arbitration would be prohibitively expensive, making the franchisee unable to vindicate its federal statutory rights, such as those arising under the antitrust laws. The Court, however, did not invalidate the parties’ agreement to arbitrate, as the franchisee who bore the burden of proof to invalidate the arbitration agreement failed to proffer information supporting the cost-prohibitive nature of the arbitration.

Recently, the U.S. District Court for the Northern District of Illinois, in The Quizno Master v. Kadriu, (04-c-4771, N.D. Ill.), rejected a franchisee’s attempt to invalidate an arbitration clause by claiming the provision was cost-prohibitive. Quizno’s sought to enjoin its franchisee from continuing to use Quizno’s trademarks under the Lanham Act and the post-termination provisions of the parties’ franchise agreement. The franchisee brought a counterclaim for fraudulent inducement of the franchise agreement in general. The agreement, however, provided that claims relating to the validity of the contract would be submitted to arbitration. Accordingly, Quizno’s moved to dismiss the counterclaims. In response, the franchisee contended, among other things, that arbitrating the counterclaims would be cost-prohibitive compared to litigating them in the existing lawsuit. The franchisee sought to invalidate the arbitration provision based on these costs.

The court found that the rationale in Green Tree does not apply where the claims that are subject to the mandatory arbitration provision do not implicate federal statutory rights. The counterclaim of the franchisee was based solely on fraudulent inducement of the franchise agreement and did not implicate a federal statute. Like the Supreme Court in Green Tree, the court noted there “must be a showing both of individualized evidence that prohibitive costs from arbitration are likely and that the moving party cannot financially meet those costs.” The franchisee did not come forward with particular costs.

While arbitration clauses with forum selection clauses are generally enforceable, exceptions exist, especially where an arbitration hearing will pose an undue financial burden on the franchisee and could frustrate the franchisee’s ability to enforce its federal statutory rights in a federal court. Carefully consider the scope of the arbitration provision, including any forum selection clause and whether statutory rights are included in that scope.

A. Christopher Young and Jeffrey A. Carr

This article is informational only and should not be construed as legal advice or legal opinion on specific facts.