Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir.: Subway restaurant franchisor validly terminated its master franchise for restaurants in Russia, (May 14, 2025)

By Kenneth H. Ryesky, M.B.A., J.D.

At one point in time, the master franchisee had only five restaurants operating in Russia when master franchise agreement required it to have 110.

The Second Circuit has affirmed a New York City federal district court's confirmation of an arbitrator's award upholding the termination of the master franchise relationship between the Subway® restaurant chain's international franchisor and its master franchisee for Subway® restaurants in Russia. The arbitrator's rulings in favor of the franchisor's actions, whether by termination for default or nonrenewal of an existing franchise agreement were found to be valid, and were upheld by the courts (Subway International B.V. v. Subway Russia Franchising Co., No. 24-1702 (2d Cir. May 12, 2025)).

Background. The Subway® restaurant chain has grown since the early 1970's from a single establishment in Connecticut to a multibillion-dollar worldwide chain; it now is a group of related business entities, of which Subway International, B.V (SIBV) handles the franchising operations outside of the United States.

Beginning in 1993, SIBV entered into master franchise agreements (MFAs) with Subway Russa Franchising Company, LLC (Subway Russia) for exclusive development and operations of individual Subway® restaurants in Russia. The initial MFA was for a 20-year term, with Subway Russia having the right for unlimited renewals, subject to (1) giving timely renewal notice; and (2) being in compliance with all the terms of the MFA. The terms of the last MFA, which took effect in 2015 and was for a five-year period, included (1) a development schedule specifying the number of individual restaurants Subway Russia was required to have in operation on specified dates; (2) a so-called "McDonalds clause" requiring "Subway Russia to have at least as many restaurants in Russia as the fast-food chain with the most restaurants in Russia;" (3) a minimum weekly average gross sales per restaurant, referred to as average unit volume (AUV clause); and (4) an arbitration clause.

Renegotiations of master franchise agreements. From the beginning, Subway Russia was technically in default, often severely, of one or more of the MFA requirements, but Subway Russia and SIBV nevertheless negotiated renewals of the MFAs, with due regard to the adverse prevailing political and economic situation in Russia. During the renewal negotiations in 2019, there was a change in SIBV's management team to a group that took a less flexible stance than its predecessors had taken. Some disputes arose as the new management team continued the negotiations begun by its predecessors.

In 2020, the new management team decided to not renew the MFA. Subway Russia took the stance that various pronouncements by SIBV before its nonrenewal action were counteroffers, which, Subway Russia insisted, were accepted by it and therefore created a new MFA. SIBV then terminated the MFA on the basis of Subway Russia's chronic noncompliance with the MFA's provisions and requirements.

The arbitrations. The matter then went to arbitration. At the first round of arbitration, the arbitrator decided that Subway Russia did not have the right to automatically renew the MFA because it was in default of its provisions. SIBV filed a petition in federal district court to confirm the arbitrator's ruling, while Subway Russia cross-petitioned for vacatur of the arbitration award. On December 8, 2021, the district court confirmed the award to the extent of its finding that Subway Russia was in default of the 2015 MFA and therefore had no standing to receive an automatic renewal, but remanded the matter back to the arbitrator to determine whether, as Subway Russia contended, a binding agreement to cure Subway Russia's defaults had been created by a counteroffer from SIBV that was accepted by Subway Russia prior to the expiration of the 2015 MFA. The arbitrator, ruling in favor of SIBV, answered that question in the negative. The district court then granted SIBV's motion to confirm the arbitrator's second award and denied Subway Russia's cross-motion to vacate that award on May 28, 2024.

Subway Russia appealed the case to the Second Circuit.

Affirmation on appeal. Subway Russia made a number of arguments on appeal to the Second Circuit. It argues that the district court erred in confirming the two awards because SIBV’s second petition to confirm was untimely and that the district court erred in making a “substantive change” to its initial ruling thereby “issuing contradictory decisions.” Subway Russia also argued that the district court erred in confirming the Second Award in particular because the arbitrator exceeded her authority.

The Second Circuit affirmed the district court's confirmation of the arbitrator's awards. The district court's remand order of December 8, 2021 directed the arbitrator to make a "decision on Subway Russia's offer-acceptance claim" only, and not the issue of whether Subway Russia was in default of the 2015 MFA. The offer-acceptance claim had not been addressed in the first arbitration, so the district court's May 28, 2024 confirmation was not of two contradictory decisions by the arbitrator.

The district court's May 28, 2024 order noted some corrections of its previous December 8, 2021 order. These corrections of "oversight or omission" did not change the meaning of the previous order, and were valid effected within the court's powers [Fed. R. Civ. P. 60(a)]. The appeals court also held that SIBV's petition to confirm the arbitrator's second decision was not untimely.

The Circuit court also found that the arbitrator did not exceed her authority. The issues submitted to the arbitrator were sufficiently clear and were within the scope of the MFA's arbitration clause. Neither the circuit court nor the district court has the authority to "conduct a reassessment of the evidentiary record," especially given the general policy of court deference to valid arbitrator's decisions.

The Case is No. 24-1702.

Judge: Per curiam.

Attorneys: Nina Greene (Venable LLP) for Subway International B.V. Michael Conway (Lazare Potter Giacovas & Moyle LLP) for Subway Russia Franchising Co., LLC.

Companies: Subway International B.V.; Subway Russia Franchising Co., LLC

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