Franchisor 101: Dickey’s Arbitration Pit

Lewitt HackmanA federal appeals court upheld a lower court’s refusal to order arbitration against a franchisee who bought an existing franchise. This was despite a provision in the franchise agreement to arbitrate “most disputes.”

In Campbell Investments, LLC v. Dickey’s Barbecue Restaurants, Inc., the franchisee, “Campbell,” entered into a Development Agreement to open two new Dickey’s Barbecue Pit restaurants in Utah. Dickey’s and Campbell signed a franchise agreement for one of the new locations. The Development and Franchise Agreements both said “most disputes” were subject to arbitration.

Campbell did not develop any new Dickey’s restaurants. Instead, Campbell bought an existing franchise in South Jordan, Utah from a franchisee, using an Asset Purchase Agreement. The Asset Purchase Agreement said nothing about the franchise agreement between Dickey’s and the prior franchisee, which had the same provision to arbitrate “most disputes.” Dickey’s and Campbell did not sign a new franchise agreement for the South Jordan Restaurant.

The relationship deteriorated, with Campbell ceasing operations and suing Dickey’s. Dickey’s moved to compel arbitration.

The Federal Arbitration Act mandates that agreements to arbitrate be in writing. Dickey’s argued that Campbell was bound by the written franchise agreement—and standard arbitration provision—that governed the South Jordan Restaurant, because Campbell “assumed” the obligations of that agreement. Dickey’s also argued that Campbell’s conduct or course of dealing with Dickey’s showed its agreement to the South Jordan Franchise Agreement, and that Campbell knew, through Dickey’s FDDs and other documents that disputes with Dickey’s would be arbitrated.

The district court and Tenth Circuit disagreed. The simple question was whether Dickey’s and Campbell signed a written agreement—including an arbitration provision—that governed disputes over operating the South Jordan Restaurant. They had not. Dickey’s could not show that Campbell assumed the written obligations of the South Jordan franchise agreement. The fact that the parties entered into other agreements and Dickey’s disclosed arbitration in its FDD did not change the result: Absent a written arbitration agreement between the parties over the dispute at hand (the South Jordan Restaurant), arbitration could not be compelled.

Franchisors intent on arbitrating disputes with franchisees who buy existing franchises should confer with counsel to make sure a written arbitration agreement is in place with the new franchisee. As shown in this case, absent written assumption of the existing franchise agreement, the franchise agreement between the franchisor and prior franchisee will not automatically bind the new franchisee to the arbitration clause.

Source: Campbell Investments, LLC v. Dickey’s Barbecue Restaurants, Inc., Case No. 18-4055, --- Fed.Appx. ---- (10th Cir. Sept. 6, 2019) [2019 WL 4235345]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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