Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Mich. App.: Enforceability of Subway restaurant franchise agreements was an issue for arbitration, (Oct 9, 2013)

By Tobias J. Gillett, J.D., LL.M.

The issue of the enforceability of franchise agreements between the franchisor of Subway restaurants and a former franchisee must be determined by an arbitrator, but an oral agreement between the parties to arbitrate “all of the issues” between them would be the governing arbitration agreement in the arbitration, rather than an arbitration clause in the franchise agreements, a Michigan appellate court has held in an unpublished decision (Namari v. Subway Real Estate Corp., October 1, 2013, per curiam). The trial court erred in holding that the franchise agreements were unenforceable against the former franchisee; however, the trial court’s decision was affirmed in all other respects.

In 2003, Said Namari and Abraham Nunu entered into franchise agreements with Doctor’s Associates Inc. (DAI) to open 14 Subway restaurants in the Detroit area, and Subway Real Estate Corp. (SREC) entered into sublease agreements with the franchisees. The franchise agreements contained an arbitration clause and termination clauses permitting DAI to terminate the agreements for cause and “without prejudice to any of DAI’s rights or remedies provided under” the agreements.

According to Namari, Nunu sued Namari, ultimately resulting in a split of the restaurants between the franchisees. However, DAI then terminated Namari’s franchise agreements and sued Namari and Nunu. SREC also terminated Namari’s subleases, and sued Namari to recover possession of the premises and for damages. Counsel for SREC and DAI and Namari’s counsel then entered into an oral agreement on record in the 36th District Court (“the 36D Agreement”), agreeing “to take all the issues and lump them into an arbitration.”

However, before the arbitrator scheduled a hearing Namari demanded a three-member panel of arbitrators, and when the arbitrator refused he filed the present lawsuit. The trial court eventually entered orders providing for arbitration before a single arbitrator; holding that the franchise agreements were terminated and unenforceable against Namari and that the 36D Agreement to arbitrate would be the only legally controlling agreement during the arbitration proceedings; and dismissing Namari’s lawsuit with prejudice. The defendants appealed.

The appellate court found that the district court erred in holding that the franchise agreements were unenforceable because that issue should have been left to the arbitrator. The court explained that the Michigan courts applied a three part test to determine the arbitrability of an issue, under which “a court must consider (1) whether there is an arbitration provision in the parties’ contract, (2) whether the disputed issue is arguably within the arbitration clause, and (3) whether the dispute is expressly exempt from arbitration by the terms of the contract.” All conflicts should be resolved in favor of arbitration.

With respect to the first prong of the test, the court found that the parties had entered into an oral contract to arbitrate in the 36th District Court, and that the contract “clearly encompassed all of the issues not only between SREC and plaintiff, but also the issues between DAI and plaintiff.” The language of the agreement and later filings indicated that the parties had intended to submit “all of the issues” between Namari, SREC, and DAI to arbitration, according to the court. The agreement also fell within the scope of the arbitration clause, as required by the test’s second prong, because the parties agreed to arbitrate “all of the issues” between them. Finally, nothing in the agreement or the rest of the record suggested that the parties had intended to exempt the issue of the enforceability of the franchise agreements from arbitration, as required by the third prong, and even if there had been some dispute the Michigan courts applied a presumption of arbitrability unless the arbitration clause was “not susceptible of an interpretation that covers the asserted dispute.”

The court rejected Namari’s argument that a prior arbitration award resulting in the division of the stores between Namari and Nunu had “somehow nullified the franchise agreements’ joint and several liability clause,” rendering the franchise agreements no longer enforceable against Namari. The court noted that Namari had not provided any documentary support for this contention, and found that it could not hold that the district court was correct in finding the agreements unenforceable in the absence of documentary evidence that the parties agreed to disregard the substantive provisions of the franchise agreements. Moreover, the court declined to follow Namari’s argument that the trial court had taken judicial notice of the case history, finding the issue of whether the parties previously agreed that the provisions of the franchise agreements would not be enforced in arbitration was “subject to reasonable dispute,” and was neither “generally known within the territorial jurisdiction” nor “capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonable questioned.”

The appellate court found the trial court did not err in finding that the 36D Agreement was the governing arbitration agreement. The agreement covered “all of the issues” between the parties, and had “precipitated the underlying arbitration proceeding because before the agreement, none of the parties filed a demand to arbitrate the current disputes.” Further, SREC’s presence in the arbitration demonstrated that the parties were operating under the 36D Agreement because the franchise agreements had specifically excluded sublease issues from the arbitration clause.

The case is No. 308384.

Attorneys: Mohammed Acdrabboh for Said Namari. Paul T. O’Neill (Bowman and Brooke LLP) for Subway Real Estate Corp.

Companies: Subway Real Estate Corp.; Doctor’s Associates Inc.

Cases: FranchisingDistribution MichiganNews