Area Developer Hit With Massive Arbitration Award In Favor Of Franchisor

Fox Rothschild LLP

Fox Rothschild LLP

Franchisor obtains $2,064,735.75 arbitration award against failed area developer.

In an arbitration decision handed down by the American Arbitration Association, Rita’s Franchise Company, LLC obtained an award against a Washington state area developer for $2,064,735.75, consisting of damages of $738,892.27 to date of hearing, counsel fees of $1,012,565.92, and reimbursement of costs. The award also declared that Rita’s properly terminated the 2015 Area Development Agreement, the 2015 Franchise Agreement and the 2016 Express Agreement in the Washington territory.

The damage award is significant not only because of the quantum, but also because the claimant, Rita’s Franchise Company, LLC was not the franchisor from whom the Respondents purchased the franchise. The original franchisor was Rita’s Water Ice Franchise Corporation (“Old Rita’s), from whom the Claimant purchased the franchise assets in 2016. The Respondents claimed that its defenses against the Old Rita’s could be asserted against the Claimant, citing theories of de facto merger, sham transaction or other theories which could lead to successor liability.

The arbitrator heard expert testimony on the issues, examined the facts, and concluded that the claims and defenses against Old Rita’s could not be asserted against the Claimant. The award did not address the merits of the claims against Old Rita’s, which was not a party to this arbitration. The arbitrator considered the successor liability issue to be a seminal issue in deciding the award.

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