Antitrust Law Daily Wrap Up, FRANCHISING & DISTRUTION—MDTenn: Franchise Agreement’s Dispute Resolution Provisions Survived Termination, Required Mediation, (Jan 23, 2013)

By Peter Reap, J.D., LLM

The dispute resolution provisions in several restaurant franchise agreements survived the termination of the agreements and required the parties to complete those procedures, including mediation, prior to the commencement of a legal action “arising out of or relating to” the franchise agreements by either party, the federal district court in Nashville has decided (Shoney’s North America LLC v. Vidrine Restaurants, Inc., January 22, 2013, Campbell, T.). Therefore, a motion filed by the franchisee, Vidrine Restaurants, Inc., to stay an action brought against it by restaurant franchisor Shoney’s North America, LLC, in accordance with the dispute resolution procedures set out in their agreements was granted.

The franchise agreements provided that an initiating party must give written notice to the other party in order to start the dispute resolution process. If the dispute was not resolved within 30 days after the date of the notice, any party could cease direct negotiations and submit the dispute to mediation in accordance with the mediation provisions of the agreement. Finally, the agreements stated the following: “The parties agree not to commence any legal action or seek other remedies prior to the expiration of seven days following the termination of the mediation process.”

Shoney’s argued that the parties did engage in the dispute resolution process, negotiations were abandoned, and none of the parties exercised its right to mediate under the franchise agreements. Shoney’s also argued that the franchise agreements were terminated on or before December 11, 2011, and the dispute resolution procedures did not survive termination. Finally, the franchisor maintained that Vidrine waited too late to exercise the dispute resolution process in its agreements and was merely using the provisions as tools for unnecessary delay.

Vidrine asserted in reply that the parties’ direct negotiations were unsuccessful in creating a global resolution and, in fact, the parties had not engaged in dispute resolution procedures (direct negotiation) at all with regard to two of the locations/franchises. Furthermore, Vidrine contended that the parties never mediated any of these disputes and that it had a contractual right to have this litigation stayed pending complete compliance with the dispute resolution procedures in their agreements.

Shoney’s argument that the dispute resolution provisions did not survive termination of the agreements was without merit, the court held. Under the Continuing Obligations section of the agreements, the dispute resolution provisions “by their nature” survived the expiration or termination of the agreements and continued in full force and effect subsequent to and notwithstanding their expiration or termination until they were satisfied in full or by their nature expired.

The agreements included dispute resolution provisions which expressly stated that the parties agreed to exercise those provisions prior to legal action, the court noted. There was no evidence in the record indicating that the parties completed those procedures, including mediation. Thus, Vidrine’s motion was granted and the action stayed.

The case is No. 3-12-0574.

Attorneys: James N. Bowen (Riley, Warnock & Jacobson) for Shoney's North America LLC. Roland W. Baggott, III (The Baggott Law Offices, LLC) for Vidrine Restaurants, Inc.

Companies: Shoney’s North America LLC; Vidrine Restaurants, Inc.

Cases: FranchisingDistribution TennesseeNews