A restaurant franchisor, World of Beer Franchising ("WOB"), recently lost an appeal to enforce a post-termination restriction against a franchisee launching a competing business. Both the trial and appellate court ruled against WOB.
WOB lost because it ignored the franchise agreement requirement to submit the dispute to mediation at the same time as it sought injunctive relief.
WOB and Evan Matz were parties to three franchise agreements to operate World of Beer restaurants. After mutual termination of the agreements, Matz reopened the former franchised locations as competing restaurants. WOB sought to enjoin Matz from using its marks, confidential information, and trade dress and from violating the post-termination non-compete covenant.
A federal district court denied WOB's request on the basis that the franchise agreements required the parties to first mediate their dispute. WOB appealed, arguing that the district court misinterpreted the agreements' dispute resolution provisions.
The dispute resolution clauses each said that a preliminary injunction may be sought, as long as the dispute was submitted for arbitration at the same time. But the agreements required nonbinding mediation before bringing arbitration. Another provision said that all disputes, except those concerning the marks, had to be arbitrated. Harmonizing these provisions, the district court ruled that the franchisor was required to submit its grievance with Matz to mediation and arbitration, at the same time as its motion for an injunction.
The Court of Appeals agreed that the provisions required the parties to mediate first, regardless of whether the dispute was arbitrable. The provisions could be reasonably read as requiring contemporaneous submission of the injunction request to both arbitration and mediation, followed by arbitration under the agreements' injunction clause, if mediation did not resolve the dispute.
The franchisor argued that the dispute was not subject to arbitration, and therefore was also exempt from mediation, because the claim concerned the marks. The courts disagreed, finding that the franchisor's claims extended beyond the marks. The franchisor alleged infringement, but also claimed violation of the non-compete covenant and use of confidential information and trade dress. The court was likewise unmoved by the franchisor's attempts to initiate mediation under the dispute resolution clauses.
WOB contended Matz ignored inquiries about whether he preferred mediating through the American Arbitration Association or a private mediator. The franchise agreement expressly required mediation under AAA Commercial Mediation Rules, which permitted the franchisor to submit the dispute to AAA mediation unilaterally, without Matz's cooperation.
Post-termination covenants are often the franchisor's last remnant of control over former franchisees. It is preferable for a franchise agreement's dispute resolution clause to provide a clear path to enforcing the post-termination covenants.
Read: World of Beer Franchising, Inc. v. MWB Development I, LLC
