Franchise 101: No Parent Trap; and Leaving A Light On, For Withheld Funds
Franchisor 101: No Parent Trap
A group of franchisees filed a petition to compel arbitration against two franchisor entities and their parent company. The district court found that the franchisees failed to show the parent company was bound by the arbitration agreements as a non-signatory and denied the motion as to the parent company.
The franchisees sought to compel arbitration under franchise agreements executed with Row House Franchise SPV, LLC (“Row House”) and PB Franchising, LLC (“PB”), both of which Xponential Fitness, LLC (“Xponential”) own. Each franchise agreement contained an arbitration clause requiring all disputes to be resolved through arbitration. Xponential was not a signatory to any franchise agreement.
Nonetheless, the franchisees argued Xponential should be required to arbitrate under agreements executed with Row House and PB under several theories. The court sided with Xponential, holding that the franchisees failed to establish that Xponential was bound under the arbitration agreements.
Xponential first presented a “no recourse” provision within the franchise agreements as evidence that the parties lacked intent for the agreements to be enforceable against nonparty affiliates. The court concluded that the arbitration provisions do not necessarily prohibit arbitration against a nonparty affiliate, even if the affiliate’s liability could be precluded.
The court next considered whether Xponential exercised sufficient control over Row House and PB and whether Row House and PB acted as agents or instrumentalities of Xponential and were no longer independent entities. The court held that evidence of informational emails, websites showing affiliated brands, shared legal counsel, and/or consent orders referencing the parent did not have the degree of control required to establish an agency relationship.
The court rejected the franchisees’ argument that Xponential, as a limited liability company member, was a third-party beneficiary of the arbitration agreements. The court noted that the arbitration provision extended coverage to officers, directors, shareholders, agents, and employees — but did not include LLC “members.” Because the agreements carefully distinguished between these enumerated categories and LLC members, the court declined to treat the terms as interchangeable.
The court concluded that Xponential should not be required to arbitrate under the agreements executed with Row House and PB and denied the franchisees’ petition as to Xponential.
This decision serves as a reminder that courts will uphold corporate independence as much as possible and carefully evaluate attempts to treat subsidiaries and parent companies as one entity. Agreements prepared by franchise counsel should ensure that the franchisor’s affiliates are outside the scope of the franchisor’s obligations and that they appropriately maintain separation.
Zaltsman v. Xponential Fitness, LLC, No. 25-cv-02764 (C.D. Cal. Mar. 17, 2026)
Franchisee 101: Leaving A Light On, For Withheld Funds
A federal district court in California granted in part a franchisee’s motion to enforce a temporary restraining order (“TRO”) issued by a state court, finding the franchisor engaged in coercive “self-help” measures by withholding reservation proceeds, and issued an order to show cause as to why the franchisor failed to release them under the TRO.
The franchisee, Camarillo Hospitality LLC (“CH”), entered a franchise agreement with G6 Hospitality LLC (“G6”) to operate Motel 6 and Studio 6 hotel properties in California. CH subsequently filed suit over disputed amounts owed under the franchise agreement, alleging that G6 used its “Brand Collect” system to withhold online travel agency (“OTA”) reservation proceeds.
A state court issued a TRO, which, among several directives, required G6 to release approximately $406,958 in OTA funds within 24 hours. Following issuance of the TRO, G6 removed the case to federal court and sought emergency dissolution of the TRO, which the district court denied.
The court found that CH presented clear and convincing evidence that G6 failed to timely release the OTA funds and required G6 to show cause for its noncompliance. The court rejected G6’s argument that the funds had not yet been reconciled, despite G6 later claiming the funds were used to pay OTA liabilities and therefore were no longer in its possession.
The court noted that G6’s own account showed it used “self-help” measures to deliberately disperse funds to third parties, which is the very conduct the TRO intended to prevent.
As a final attempt, G6 asked the court to credit the $406,958 toward amounts already paid to CH. The court declined, stating the state court order was clear, and that they must release the funds. The court therefore ordered G6 to either immediately release the funds or show cause why it should not be held in contempt for violating the court order.
Among the remaining claims, CH sought reinstated access to OTA and similar booking platforms. However, the court noted that there was insufficient information as to who maintained primary access in this case and that it might be impossible for G6 to transfer primary control of the platforms to CH.
This case illustrates risks associated with third-party payment systems commonly used in franchising and the level of control franchisors may retain. Franchise counsel should advise franchisees of their rights regarding the franchisor’s obligations to manage funds held for franchisees’ benefit.
Camarillo Hosp. LLC v. G6 Hosp. LLC, No. 26-cv-01906 (E.D. Cal. Mar. 18, 2026)