Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.H.: Preliminary injunction request did not waive franchisor’s right to arbitrate, (May 22, 2014)

By Greg Hammond, J.D.

The franchisor of Planet Fitness gyms did not waive its contractual right to arbitration when it filed suit against two franchisees and invoked the jurisdiction of the federal district court in Concord, New Hampshire. In reaching its decision to grant the franchisor’s motion to compel arbitration, the district court determined that a contractual right to arbitration is not automatically waived by seeking preliminary injunction to avoid or stop irreparable harm (Pla-Fit Franchise, LLC v Patricko, Inc., May 20, 2014, Barbadoro, P).

Background. Pla-Fit Franchise, LLC (Pla-Fit), the franchisor of Planet Fitness brand gyms, entered into franchise agreements with Patricko, Inc. and World Gym, Inc. (collectively, the franchisees). Shortly after entering into the agreements, there were various conflicts regarding the quality and condition of fitness equipment, how much the franchisees were required to contribute towards advertising campaigns, and whether the two gyms could still offer personal training. The franchisees subsequently filed suit, alleging conversion, breach of contract, and violation of the Massachusetts consumer protection statute. However, the court granted Pla-Fit’s motion to compel arbitration.

While the case was still pending, Pla-Fit terminated the franchises for uncured material defaults of the franchise agreements and required the two gyms to de-brand, by removing all Planet Fitness franchise signs and materials from the facilities. After the franchisees failed to remove their Planet Fitness signs and materials, Pla-Fit filed a complaint requesting injunctive relief, declaratory judgment that the franchisees operated competitive businesses in violation of the franchise agreements, and damages for breach of contract. During negotiations, the franchisees agreed to remove all materials associated with Planet Fitness, and Pla-Fit filed a motion to dismiss and to compel individual arbitrations. The franchisees objected to the motion to dismiss and to compel, arguing that Pla-Fit waived its contractual right to arbitration by filing suit and invoking the jurisdiction of the district court.

Contractual right to arbitration. Although the court agreed that a party could waive its contractual right to arbitration by implication, the court noted that such a waiver should not to be inferred lightly. Rather, courts should consider waivers in light of “strong federal policy favoring arbitration,” and any doubts should be resolved in favor of arbitration. In addition, the court noted that arbitration waiver claims are required to be judged on their own facts and all relevant circumstances.

In the instant case, according to the district court, Pla-Fit sought preliminary injunction in an otherwise arbitrable situation. However, because preliminary injunction was necessary to protect Pla-Fit from the alleged irreparable harm caused by the franchisees’ trademark infringements, the court concluded that Pla-Fit did not forfeit its right to arbitration. It reasoned that such a ruling would undermine the arbitration process and that parties facing immediate harm would be less likely to arbitrate their claims.

The franchisees also argued that the court should find that Pla-Fit waived its right to arbitrate because the franchisees were prejudiced by the complaint and resulting litigation. Specifically, the franchisees argued that they incurred unnecessary litigation costs resulting from being forced to: retain counsel, respond to Pla-Fit’s complaint, de-brand at an accelerated pace, file a pro hac vice motion, and file a joint proposed discovery plan due to Pla-Fit not invoking its right to arbitration earlier. The court considered three factors to determine whether the franchisees were prejudiced: (1) length of delay; (2) the litigation activities engaged in by the parties; and (3) whether the franchisees were misled by the process.

The district court found that the length of delay was minimal, because none of the parties began discovery when the motion to compel was filed and the trial date was more than a year away. In addition, the franchisees were informed of Pla-Fit’s willingness to arbitrate shortly after its preliminary injunctive relief needs were met. Although the franchisees argued they were prejudiced, the court found that their litigation costs would have been incurred anyway and that they were not misled by Pla-Fit, as they knew or should have known that Pla-Fit’s primary reason for the lawsuit was to protect its trademark rights by injunction. As such, it was determined that the franchisees were not prejudiced by Pla-Fit’s complaint.

The franchisees also attempted to allege: (1) Pla-Fit attempted to strong-arm the franchisees and (2) Pla-Fit’s complaint should be dismissed because common ownership of the two gyms should enable the franchisees to jointly resolve their claims. However, the court rejected both arguments, finding that the record did not support a claim that Pla-Fit acted in bad faith by seeking injunctive relief and filing a motion to compel arbitration, and that the franchisees could have negotiated the right to jointly resolve claims prior to signing their agreements. Consequently, the court granted Pla-Fit’s motion to compel with regard to arbitration, but denied the motion in all other respects.

The case is No. 13-cv-489-PB.

Attorneys: Arthur L. Pressman (Nixon Peabody LLP) for Pla-Fit Franchise, LLC. John Ferris Dow (Dow Law Group, LLC) for Patricko, Inc. and World Gym, Inc.

Companies: Pla-Fit Franchise, LLC; Patricko, Inc.; World Gym, Inc.

Cases: FranchisingDistribution NewHampshireNews