Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Tex.: Dickey’s Barbecue must arbitrate claims against franchisee, except injunction request, (Sep 23, 2013)

By Peter Reap, J.D., LL.M.

Pursuant to a broad arbitration clause in the parties’ franchise agreement, restaurant franchisor Dickey’s Barbecue Restaurants, Inc., was required to arbitrate its claims against a terminated franchisee for declaratory judgment, breach of contract, and fraudulent inducement, the federal district court in Dallas has decided (Dickey’s Barbecue Restaurants, Inc. v. Mathieu, September 18, 2013, Fish, A.). However, the franchisor was not required to arbitrate its claim for injunctive relief against the franchisee, Joseph J. Mathieu, because that claim fell under an exception to arbitration in the agreement. Thus, the franchisee’s motion to dismiss the franchisor’s suit was denied, and the franchisee’s motion to stay litigation and compel mediation/arbitration was granted as to the claims for declaratory judgment, breach of contract, and fraudulent inducement, and denied as to the claim for injunctive relief.

Background. On March 4, 2009, Dickey’s entered into a franchise agreement with the franchisee to operate a Dickey’s Barbecue Pit franchise location in Las Cruces, New Mexico. On November 7, 2012, Dickey’s and the franchisee entered into a termination agreement in which the franchisee would continue operating the restaurant in accordance with the franchise agreement until December 31, 2012, at which point the franchisee would sell the restaurant to Dickey’s. The franchisee subsequently informed Dickey’s that he would cease operation on December 31, 2012, and that he did not intend to proceed with the sale of the restaurant.

Dickey’s filed this suit against the franchisee, asserting claims for (1) declaratory judgment, (2) injunctive relief, (3) breach of contract, and (4) fraudulent inducement. The franchisee moved to dismiss Dickey’s claims or, in the alternative, to stay litigation and to compel mediation/arbitration.

Arbitrability. The franchisee initially argued that the decision about whether to arbitrate Dickey’s claims should be made by an arbitrator, not by the court. However, the Supreme Court has noted that the question of “arbitrability,” whether the parties have agreed to arbitrate a particular dispute, should be decided by the court, not an arbitrator, unless the parties “clearly and unmistakably provide otherwise,” AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649 (1986), the court noted.

In this case, the franchise agreement did not contain a clear indication that the parties intended for an arbitrator to decide the issue of arbitrability. As a result, the court would determine whether or not the parties were bound to arbitrate and what issues must be arbitrated based on the language of the contract.

Scope of the Arbitration Agreement

In this case, Dickey’s did not argue that the arbitration agreement was invalid; rather, Dickey’s argued that the claims at issue in this case fell within an exception to the arbitration agreement and were therefore outside of its scope. Dickey’s argued that its claims were properly before this court based on Article 27.3, which on its face provided exceptions to the requirements to mediate/arbitrate found in Articles 27.1 and 27.2. Dickey’s insisted that its claims fell within the exceptions for monies owed and injunctive relief.

On the other hand, Mathieu argued that the arbitration clause in the Franchise Agreement was “broad” and therefore must “’embrace all disputes between the parties having a significant relationship to the contract regardless of the label attached to the dispute.’”

The arbitration clause in this case was correctly characterized as “broad,” the court determined. However, broad arbitration clauses only created a particularly strong presumption in favor of arbitration “[i]n the absence of any express provision excluding a particular grievance from arbitration.” United Steelworkers, 363 U.S. at 584-85. In this case, Article 27.3 expressly excluded particular grievances from arbitration. Mathieu could not sidestep this provision merely because the arbitration clause was broad.

Mathieu further argued that the exceptions to mediation/arbitration in Article 27.3 did not apply in this case. Specifically, Mathieu pointed out that Article 27.2 of the Franchise Agreement stated that it is “[s]ubject only to Article 27.1 and 26.3.” As a result, Mathieu maintained, the exceptions in Article 27.3 did not apply to the arbitration provisions in Article 27.2.

Although Mathieu’s point was clear, the court could not accept this interpretation. Under Mathieu’s interpretation, Article 27.3, which provided for exceptions from arbitration, would not apply to the arbitration clause at all. Article 27.3 would be rendered meaningless as it applied to arbitration. Since the court could not conclude that the parties truly intended otherwise, the exceptions in Article 27.3 must apply to the arbitration agreement in Article 27.2. Since the exceptions to arbitration in Article 27.3 were applicable, the court would consider whether Dickey’s claims for (1) declaratory judgment, (2) injunctive relief, (3) breach of contract, and (4) fraudulent inducement fell within those exceptions.

Declaratory judgment claim. Dickey’s first asked the court for a declaratory judgment that the franchisee “materially violated the Franchise Agreement and is in default pursuant to the terms of the Franchise Agreement.” Dickey’s argued that this claim was exempt from mediation/arbitration because it was a claim for “monies owed.”

A declaratory judgment was, by definition, not a claim for monies owed, the court noted. A claim for declaratory judgment was not a claim for monies owed merely because it could lead to money damages in a different proceeding.

Dickey’s could not escape the wide breadth of its own arbitration agreement merely because it would be more convenient to litigate the claims in this particular case. Dickey’s factual allegations related to the franchisee’s violation of “system standards” and provisions of the franchise agreement, not the franchisee’s failure to pay monies owed. Dickey’s claim for declaratory judgment must be submitted to mediation/arbitration, the court ruled.

Injunctive relief. Dickey’s next asked the court for an injunction to prevent Mathieu from “displaying or utilizing the Dickey’s name or Marks and from operating any barbeque style restaurant in the subject area of Las Cruces, New Mexico.” Article 27.3 of the Franchise Agreement explicitly exempted actions for injunctive relief from the mediation/arbitration requirements.

The franchisee argued that the request for injunctive relief was moot because he was no longer operating the restaurant or using Dickey’s marks. However, “[a] discontinuance of wrongful conduct does not alone warrant denial of injunctive relief, for the appropriateness of granting an injunction against now-discontinued acts depends upon the bona fides of the expressed intent to comply, the effectiveness of the discontinuance, and, in some cases, the character of past violations.” Petersen v. Talisman Sugar Corporation, 478 F.2d 73, 78 (5th Cir. 1973).

The franchisee further submitted in an affidavit that he had no intention of operating a barbeque restaurant in Las Cruces in the future. However, even considering the affidavit, the request for injunctive relief was not moot, the court held. The franchisee’s mere disclaimer of intention to revive the wrongful conduct did not moot Dickey’s request. As a result, Dickey’s request for injunctive relief was not moot and could not be submitted to mediation/arbitration.

Breach of contract. In its third cause of action, Dickey’s alleged that the franchisee breached a number of terms of the Franchise Agreement. Dickey’s alleged that it has been harmed by the franchisee’s breaches of contract and was entitled to money damages.

Dickey’s argued that its breach of contract claims were exempt from mediation/arbitration as claims for “monies owed.” Again, the language of the Franchise Agreement explicitly contemplated that breaches would be submitted to arbitration. This language would be rendered meaningless if each breach of contract claim fell under the exception for “monies owed.” As mentioned, there must be a distinction between actions for “monies owed” under the contract and actions for “damages.” Otherwise, the exception for “monies owed” would swallow the broad mediation/arbitration provisions.

Dickey’s breach of contract claim relating to the franchisee’s failure to make payments did fall within the “monies owed” exception to mediation/arbitration, the court determined. However, Texas law favored the joint resolution of multiple claims to prevent multiple determinations of the same matter. As a result, claims that were factually intertwined with arbitrable claims must be arbitrated. In this case, each breach of contract claim would depend on shared factual information regarding the expectations set by the franchise agreement, how those expectations were modified by the termination agreement, and the franchisee’s performance relative to those expectations. Therefore, Dickey’s breach of contract claims must be sent to mediation/arbitration.

Fraudulent inducement. Finally, Dickey’s alleged that the franchisee made knowingly false representations regarding his intent to sell the restaurant to Dickey’s. Again, Dickey’s attempted to cast this action as one for “monies owed,” the court noted. The franchisee’s broken promise that he would sell the restaurant to Dickey’s could have damaged Dickey’s, but it did not deprive Dickey’s of “monies owed.” Dickey’s fraudulent inducement claim was subject to mediation/arbitration, the court held.

Stay or Dismissal

Dismissal was only appropriate when all of the issues in a case must be submitted to arbitration. Since this court could not submit Dickey’s request for injunctive relief to mediation/arbitration, dismissal was inappropriate. As a result, the court ordered a stay of proceedings as to the arbitrable claims for declaratory judgment, breach of contract, and fraudulent inducement. The stay would not apply to the claim for injunctive relief because it was not subject to arbitration.

The case was Civil Action No. 3:12-CV-5119-G.

Attorneys: Bradley E. Chambers (Baker Donelson Bearman Caldwell) for Dickey’s Barbecue Restaurants Inc. Robert R Feuille (Scott & Hulse PC) for Joseph J. Mathieu.

Companies: Dickey’s Barbecue Restaurants Inc.

Cases: FranchisingDistribution TexasNews