On Monday of this week, after stringing the parties along for five months, SCOTUS denied cert in a case involving the intersection between arbitration and franchise regulation. The petition was filed in November of 2015, and after the respondent initially declined to respond, the Court specifically requested a response, and conferenced the case twice, before denying the petition. This could be an indication that, without Scalia, the Court is less interested in arbitration issues, or at least less interested in those that will not garner five of the current eight votes.
The case is Chorley Enterprises Inc. v. Dickey’s Barbecue Restaurants, Inc., 807 F.3d 553 (4th Cir. 2015). [I admit that I did not blog about it when it initially came out last summer because it was complicated and messy and I was feeling lazy. But, today, I came up with a few Prince tie-ins, so I am taking it on.] Franchisees of the barbecue chain alleged the franchisor misrepresented costs and profits, and the franchisor alleged the franchisees were in breach for poor operation of the restaurants. The franchisor also demanded that the claims be arbitrated.
The problem is that the franchise agreement called for both arbitration and litigation in court. First there was an “Arbitration Clause” requiring arbitration of all claims related to the franchise agreement. Then, in a “Maryland Clause” required by the state of Maryland, the agreement said the franchisees retained their right to file a lawsuit under the Maryland Franchise Law in court. (Maryland franchise regulations make it illegal for a franchisor to require a franchisee to waive the franchisee’s right to file a court lawsuit under the franchise statutes.) The Fourth Circuit essentially enforced both provisions, by allowing the franchisees’ claims under the franchise statutes to proceed in court, while directing the franchisor’s contractual claims to proceed in arbitration.
In reaching its Solomonic decision, the court rejected arguments from both sides. It rejected the franchisees’ argument that the Maryland Clause completed trumped the Arbitration Clause, reasoning that the Maryland Clause only applies to claims under the franchise statutes, and finding that the franchisees could still raise affirmative defenses based on the franchise statutes in the arbitration. It reminded the parties that SCOTUS is just fine with piecemeal litigation, when it conforms with the parties’ contracts.
The Fourth Circuit also rejected the franchisor’s argument that the Maryland Clause was forced on it by state law in Maryland, and therefore the clause is preempted by the FAA. Its harsh assessment of the franchisor’s options follows:
Dickey’s was not forced to do anything…It could have simply declined to do business in Maryland. Or…it could have filed a declaratory action challenging the [state’s] position before including the Maryland Clause in its agreements.
This is a fascinating issue. Can state agencies that regulate franchisors preclude arbitration of franchise claims? Wouldn’t that be exactly the kind of state law that stands as an obstacle to the goals of the FAA and is therefore preempted under Concepcion? I look forward to another franchisor setting up a stronger record of state insistence on the arbitration waiver and taking another run at a preemption argument.
I’m sure Dickey’s serves ribs, unlike Prince (“ I don’t serve ribs / You better be happy that dress is still on/
I heard the rip when you sat down”). And before I was known for being an arbitration geek, I was known for being a Prince geek. As we are all mourning today in Minneapolis, I used some “purple” in today’s title and image. If you want a recommendation for a great song that is outside the usual Prince play list, try “How Come U Don’t Call Me Anymore?”