In NIACCF, Inc. v. Cold Stone Creamery, Inc., Case No. 12-20756-Civ-SCOLA, 2012 U.S. Dist. LEXIS 70256 (S.D. Fla. May 21, 2012), the United States District Court for the Southern District of California granted a franchisor’s motion to stay a lawsuit filed by an independent franchisee association, pending a motion to compel arbitration in an Arizona federal district court.
By way of background, the franchisee association had sued the franchisor in the federal district court seeking a declaratory judgment that the franchisor should disclose amounts paid by vendors into a marketing fund controlled by the franchisor, and the value of unredeemed gift cards. All of the franchisee members of the franchisee association had signed franchise agreements containing arbitration clauses. The franchisor filed a petition to compel arbitration, on the grounds that the association’s members had agreed to the mandatory arbitration of all disputes and controversies related in any way to their franchise agreements or the franchise relationship, and could not bring them individually, or as an association in court. The franchisee association claimed that because the association never agreed to arbitrate its claims with the franchisor and because it has ‘associational standing,’ it was free to pursue litigation on behalf of its members. ‘Standing’ is the right of a person to bring a claim.
While not directly addressing the issue of the franchisee association’s standing to sue the franchisor, the court found that regardless of whether the franchisee association agreed to arbitrate claims with the franchisor, the association should not be able to ‘end-run’ the arbitration agreements to which all of the franchisees were individually bound. The court further found that ‘an organization consisting of franchisees should not be permitted to do that which the individuals themselves cannot do.’ Accordingly, the franchisee association’s suit was stayed, pending arbitration of the claims of the individual franchisees named in the complaint.
In an earlier case, EA Independent Franchisee Association v. Edible Arrangements, International, Inc. 2011 U.S. Dist. Lexis 78008 (D. Conn. July 19, 2011), the United States District Court for the District of Connecticut declined to dismiss a complaint filed by a franchisee association against franchisor alleging breach of contract, breach of a duty of good faith and fair dealing, and violation of the Connecticut Unfair Trade Practices Act. The franchisor had filed a motion to dismiss the association’s complaint on the grounds that the association lacked standing because: (a) the complaint did not identify specific franchisees who suffered any injury; (b) the franchisees were attempting to circumvent the arbitration clause in their contracts; and (c) different franchisees had different experiences with the franchisor and operated under multiple forms of agreement.
The District Court declined to dismiss the case, noting that an association has standing if: (a) its members would otherwise have standing to sue; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claims asserted nor the relief requested requires the participation of individual association members in the lawsuit. The District Court found that the allegations of breach of contract and unfair and deceptive trade practices would certainly give the individual members of the association standing, and that the interests the association sought to protect were germane to its purpose. The Court also accepted the association’s argument that because the association had no obligation to arbitrate for the franchisees and had asserted that it would not need individual participation from its members to obtain relief, it had standing to sue the franchisor in Court.
In 2012, the same District Court found that the franchisor was entitled to compel arbitration of the association’s claims on the grounds that the arbitration agreement in the franchisees’ franchise agreements covered the asserted claims, and that the franchisor had expressed an intent to enforce the arbitration agreement. EA Indep. Franchisee Ass’n v. Edible Arrangements Int’l, Inc., 2012 U.S. Dist. LEXIS 166082 (D. Conn. Nov. 21, 2012).
Carl Zwisler, IDI franchising Country Expert for U.S.A. and Janaki J. Parmar, Gray Plant Mooty