Franchise 101: Hey, That’s My ADR Provision; Suggestive Termination

Franchisor 101: Hey, That’s My ADR Provision

A California federal court stayed proceedings in favor of the franchisor and ordered the parties to undertake the dispute resolution procedures in the franchise agreement, holding that the parties clearly and unmistakably agreed to them.

Ringside Development Company, a franchisor in the biohazard remediation industry, entered into a franchise agreement with Jameson, as franchisee, to operate a Ringside franchised business in California. The franchisee initiated a lawsuit against the franchisor in Alameda County, California, alleging that the franchisor’s equipment and chemicals were substandard and caused harm to the franchisee’s business, along with other causes of action alleging that the franchisor made fraudulent misrepresentations about its products. The franchisor subsequently removed the action to federal court.

The franchise agreement contained a three-step alternative dispute resolution procedure, which required the parties to first meet face-to-face to resolve any disputes, then engage in mediation if the face-to-face meeting is unsuccessful, and ultimately arbitrate their disputes if mediation is unsuccessful. The franchisor maintained that it requested a face-to-face meeting with the franchisee, but the franchisee instead commenced litigation. The franchisor moved to stay the action pending resolution of the dispute through the contractually mandated mediation or arbitration.

The franchisee opposed the stay, arguing the franchisor could not require out-of-district arbitration because the parties did not establish mutual assent to the forum selection and choice-of-law clauses in the franchise agreement. The court found there was sufficient evidence to conclude there was a meeting of the minds between the parties and that the parties agreed in the franchise agreement that any disputes related to venue or choice-of-law are to be resolved by the arbitrator.

The franchisee also argued that the franchisor could not seek to compel arbitration because the franchisor failed to satisfy the mandatory conditions precedent. The court likewise found that the parties delegated to the arbitrator any questions about whether the parties satisfied conditions precedent.

Franchisors should consistently review the dispute resolution provisions contained in their franchise agreement with franchise counsel to ensure the provisions reflect the franchisor’s desired practice. Franchisors should also discuss how applicable state laws may affect the dispute resolution provisions in their franchise agreement with franchise counsel.

Jameson v. Ringside Development Company dba Bio One Colorado, Inc., Case No. 3:24-CV-08654-CRB (N.D. Cal. Feb. 20, 2025)

Franchisee 101: Suggestive Termination

An Arizona federal court dismissed a franchisee’s counterclaims for breach of contract, defamation, and injunctive relief against LeTip World Franchise, a professional networking franchisor.

After the franchise agreement was terminated, the franchisee began operating a competing networking business in the same area where he operated a LeTip franchised business. The franchisor sued, alleging that the franchisee breached the franchise agreement when (i) the franchisee’s owner affixed a sexually suggestive modified LeTip logo on his boat and failed to remove the modified logo at the franchisor’s request; and (ii) the franchisee began operating a similar networking business in breach of the post-termination provisions of the agreement.

The court granted the franchisor’s motion to temporarily enjoin the franchisee from operating the competing business.

The franchisee filed counterclaims, alleging that (i) the franchisor and an entity and individuals affiliated with the franchisor breached the franchise agreement by operating a company-owned chapter in New York near the franchisee’s franchised location and terminated the franchise agreement without cause; and (ii) the franchisor defamed the franchisee by calling the modification of franchisor’s logo as “sexually suggestive” and “vulgar.” The franchisee additionally sought to enjoin the franchisor’s enforcement of the franchise agreement’s noncompete clause.

The franchisor moved to dismiss the franchisee’s counterclaims, which the court granted. The court dismissed the breach of contract claim against the non-franchisor parties, holding that those specific parties could not be liable because only the franchisor entity was a party to the franchise agreement with the franchisee, and the franchisee failed to allege that a contractual relationship existed between the franchisor and the non-franchisor parties.

The court also dismissed the breach of contract counterclaim against the franchisor, finding that the franchise agreement did not prohibit the franchisor from competing directly with the franchisee, and that the franchisor’s termination of the franchise agreement was justified because the franchisee failed to timely remove the improperly modified LeTip logo.

With respect to the franchisee’s defamation counterclaim, the court determined that the franchisee failed to allege facts that indicated the franchisor’s statement about the modified LeTip logo was false or damaging. The court declined to stop the franchisor from enforcing the noncompete clause because injunctive relief is a standalone claim under Arizona law, and the franchisee’s delay in seeking a permanent injunction undermined the franchisee’s need for injunctive relief.

Franchisees should seek the advice of franchise counsel after the termination of the franchise agreement to ensure the franchisee understands both the franchisee’s and franchisor’s obligations on termination, including limitations on the franchisee’s operation of a competitive business and the franchisor’s ability to open company-owned stores in or near the franchised location.

LeTip World Franchise LLC v. Long Island Soc. Media Grp. LLC, No. CV-24-00165-PHX-KML (D. Ariz. May 20, 2025)