Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Md.: Jury must ascertain parties’ intent in franchise agreement’s arbitration clause, (Aug 7, 2014)

By Edward L. Puzzo, J.D.

In a dispute between franchisees and a restaurant franchisor over the effect of the Maryland Franchise Law on the arbitration clause of their franchisee agreement, the intent of the parties must be determined by a jury because of ambiguities in the clause, the federal district court in Greenbelt, Maryland has ruled (Trouard v. Dickey’s Barbecue Restaurants, Inc., August 1, 2014, Grimm, P.).

Plaintiffs Justin Trouard and Jessica Chelton entered into a franchise agreement with Dickey’s Barbeque Restaurants in 2012. Separately, Matthew Chorley and Carla Chorley entered into a franchise agreement with Dickey’s. Both franchise agreements contained an arbitration clause providing for both mediation and arbitration for the resolution of disputes between franchisor and franchisee.

In 2014, both franchisees, who had incurred debt operating their respective restaurants, sought mediation with Dickey’s. However, Dickey’s filed demands for arbitration against both franchisees, seeking over $600,000 in damages for breach of contract and fraud from each. The franchisees responded with this lawsuit, alleging that the arbitration clause in the franchise agreements violated the Maryland Franchise Law and seeking injunctive relief from the pending arbitration.

Intent of the parties. The court explained that it would apply contract law to determine the validity of the arbitration clause. When the terms of a contract were unambiguous, the court would look within the four corners of the agreement. However, when a bona fide ambiguity was determined to exist, extrinsic evidence was used to determine the intent of the parties. The contractual language at issue involved waiver, or the voluntary relinquishment of a known right.

In the franchisees’ view, the arbitration clause of the franchise agreement called for a mandatory two-step dispute resolution process: non-binding mediation, followed by binding arbitration. They viewed the arbitration portion as void because it conflicted with the Maryland Franchise Law, which prohibited the waiver by the franchisee of its right to file claims arising under that law.

A state anti-waiver regulation was incorporated by reference into the franchise agreement. The regulation prohibited the franchisor from requiring the franchisee to waive its right to bring claims against the franchisor, while permitting the franchisee to waive this right voluntarily, to agree to arbitrate, or to agree to pursue arbitration before litigation. Consequently, the franchisees did not establish that the arbitration clause of the agreement was void. Nevertheless, that did not mean that the arbitration clause was necessarily valid either.

Ambiguous language. When the arbitration clause was read in conjunction with Maryland law, the language was susceptible to multiple meanings to a reasonably prudent person. Under the interpretation favored by Dickey’s, a franchisee generally had the right to file suit in Maryland and could not be forced to relinquish that right but the franchisees voluntarily waived that right and consequently were bound by the arbitration clause. Under this interpretation, the arbitration clause was valid. Under the interpretation favored by the franchisees, the arbitration clause was boilerplate language trumped by the state law, and the franchisees, who otherwise would be bound by the arbitration clause, consequently were not bound. Read as such, the arbitration clause was not valid. In short, the contract language was ambiguous, the court concluded.

Both interpretations were consistent with the Maryland Franchise Law, as interpreted by the 1994 Maryland appellate court in Holmes v. Coverall North America, 336 Md. 534, the court stated. Because the parties favor different interpretations of ambiguous language, a significant factual dispute existed regarding the intent of the parties regarding the arbitration cause. The ambiguity in the franchise agreement and the development agreement as to whether the parties intended to arbitrate as opposed to litigate franchise claims arising under the Maryland Franchise Law, and whether the franchise agreement required such claims to be brought in Texas or Maryland, must be resolved through a jury trial, the court ruled. Pending this determination, the court allowed a consent order to not proceed further with arbitration to remain in effect.

The case is Civil Action Nos. PWG-14-1703 and GLR-14-1650.

Attorneys: Andrew K. Wible (Cohen Mohr LLP) for Justin Trouard. Precious Murchison Gittens (Greenberg Traurig LLP) for Dickey's Barbecue Restaurants, Inc.

Companies: Dickey's Barbecue Restaurants, Inc.

Cases: FranchisingDistribution MarylandNews