A recent Maryland court decision in a franchise dispute demonstrates the importance of a carefully-drafted arbitration clause.
The case, Meena Enterprises, Inc. v. Mail Boxes Etc., Inc., Bus.
Franchise Guide (CCH) ¶14,910 (D. Md Oct. 13, 2012), involved a dispute
between Mail Boxes Etc. ("MBE"), a franchisor of mailing services
businesses. In March 2001, United Parcel Service purchased MBE. At the
time of the acquisition, UPS announced that MBE franchises would
continue to offer choices among delivery services (e.g., UPS, Federal
Express, and Airborne Express), but that “the relationships may be
altered somewhat” as a result of the purchase.
Plaintiff Meena Enterprises, Inc. (“Meena”) was a franchisee that
operated two MBE franchises pursuant to Franchise Agreements that it
assumed in August 2001; the Agreements were signed by Mail Boxes Etc.
USA, Inc. (an affiliate of MBE) and not MBE itself. One franchise was
located in the University of Maryland Student Union; the other located
in College Park. During the initial term of the Agreements, MBE and
UPS allowed Meena to continue to operate their franchise in the
University of Maryland student union as an MBE store because Meena “was
required to offer Federal Express shipping services” under its lease
with the school.
When it came time to renew the Agreements in 2011, MBE purportedly
insisted that the University of Maryland location be converted to a UPS
store. Meena advised MBE that conversion was not possible because of the
University’s FedEx requirement. Given MBE's alleged lack of marketing
support for the MBE brand, Meena requested that MBE allow it to operate
the Student Union location as an independent store after the Franchise Agreement expired. MBE did not respond to this request prior to both Franchise Agreements’ expiration in August 2011.
Meena sued in January 2012, asserting claims against MBE for breach
of contract, fraudulent inducement, and negligent misrepresentation, and
sought a declaratory judgment to preclude MBE from enforcing the
covenants not to compete that were contained in the Agreements.
Each of the Agreements included an arbitration clause that provides, in relevant part:
Every controversy, claim or dispute arising out of or in connection with the negotiation, performance or non-performance of this Agreement, including, without limitation, any alleged torts and/or claims regarding the validity, scope and enforceability of this Section, shall be solely and finally settled by binding arbitration conducted in the locality in which the franchise is located.
The Agreements also each state that they are “to be construed under
and governed by the laws of the State of California except for any
provisions which are found to be unenforceable in California.”
MBE filed a motion to compel arbitration pursuant to the Federal Arbitration Act ("FAA").
In dealing with this Motion, the Court first recognized the rule that,
under the FAA, it was required to “engage in a limited review to ensure
that the dispute is arbitrable.” Hooters of Am., Inc. v. Phillips, 173
F.3d 933, 938 (4th Cir. 1999). This would involve two steps: (1)
determining who should decide whether the dispute is arbitrable: the
arbitrator or the court; and (2) if the court is the proper forum in
which to adjudicate arbitrability, deciding whether the dispute is
arbitrable.
Meena contended that because MBE was not a signatory to the
Agreements (which were signed by Mail Boxes Etc. USA, Inc.), MBE could
not enforce the arbitration clauses. The Court disagreed, finding that
Meena agreed to assume all of the predecessor franchisee’s “rights and
duties” under the Agreements, and that those “rights and duties” clearly
encompass the duty to arbitrate “[e]very controversy, claim or dispute
arising out of or in connection with” the Agreements. The Court also
found that Meena was equitably estopped from avoiding the arbitration
clause because “each of [Meena’s] claims against MBE makes reference to,
and presumes the existence of, the Franchise Agreements. . . in other
words, but for the Franchise Agreements, [Meena] would have no basis for
recovery on its claims.”
Meena also challenged the arbitration clause as unconscionable.
Recognizing the rule that “a challenge to the validity of an arbitration
clause is decided by the court,” the Court nonetheless stated that the
presumption can be overcome where the parties “clearly and unmistakably”
give the arbitrator responsibility for determining “gateway” questions
of arbitrability. The Court found that the above-referenced language
“unequivocally delegates to the arbitrator all claims regarding the
validity of the arbitration clauses and therefore constitutes a clear
and unmistakable delegation provision.” As a result, the Court stayed
the action pending a decision by the arbitrator regarding the gateway
question of arbitrability.
If you are a franchisor and you require arbitration of disputes in your franchise agreement, you should be mindful of the Meena
decision. If you want "gateway" issues of arbitrability to be decided
by your arbitrator, and not a court, your arbitration provision needs
to clearly address this issue. While the Mail Boxes Etc. arbitration
clause is not a model of clarity on this point, the Meena decision does illustrate the point.
Source: netlawreview
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