An Oregon federal court denied a franchisor’s motion to compel the principals and personal guarantors of a franchisee into arbitration because the parties did not sign arbitration agreements in the franchise documents.
The plaintiffs, two individuals and a trust, were owners or otherwise affiliated with franchisees of Black Rock Coffee Bar. Black Rock moved to compel six franchisee limited liability companies to arbitrate, but the motion did not include the plaintiffs.
During the arbitration, Black Rock asked the arbitrator for leave to amend its claims to add plaintiffs as additional parties. After the arbitrator granted Black Rock’s motion over the plaintiffs’ objection, the plaintiffs refused to participate in the arbitration and filed an action in federal court. The court determined no arbitration agreement existed between the plaintiffs and Black Rock, so the court could not compel the plaintiffs to arbitrate.
The court concluded there was no express arbitration agreement among the parties. Black Rock argued that plaintiffs were “Controlling Principals” of the franchisees as defined under the franchise agreements and therefore bound to the franchise agreements’ arbitration provisions. The court looked to the franchise agreements, which defined two types of principals: “Franchisee’s Principals” and “Controlling Principals.” The court rejected Black Rock’s argument as conflating these terms as the same because the specific provision had two conditions to be satisfied to be a Controlling Principal: (1) the person (or entity) must be a “Franchisee’s Principal” and (2) that person (or entity) also must be designated by Black Rock to be a Controlling Principal. The plaintiffs may have been “Franchisee’s Principals” but they were not designated as “Controlling Principals” by Black Rock.
The court also concluded there was no implicit agreement based on common law principals of agency. Black Rock argued the franchisee entities, acting as agents for plaintiffs, bound the plaintiffs to the arbitration agreements since all plaintiffs are listed as “Franchisee’s Principals.” Simply ownership interest did not create common-law agency relationship. Further, designation as “Franchisee’s Principal” under the franchise agreements did not grant powers or obligations of an agency relationship.
The court rejected Black Rock’s argument that plaintiffs as third-party beneficiaries, personal guarantors, and alter egos are bound by the terms of the franchise agreements. Under Oregon law, a third-party beneficiary to a contract is generally not bound to an arbitration clause in that contract. Finally, Black Rock had not sufficiently shown plaintiffs’ actual control over the franchisee entities and used that control to engage in improper conduct to Black Rock’s detriment.
Franchisors generally invoke and enforce arbitration agreements in franchise agreements and related contracts. Franchisees and their principals should consult franchise counsel to evaluate which parties may be bound to franchise agreements and/or arbitration provisions in advance of commencing litigation.
Goergen v. Black Rock Coffee Bar, LLC, 2023 U.S.Dist.LEXIS 19872 (D.Or. Feb. 6, 2023)
