Multi-Unit Franchisee’s Failure to Sign both Franchise Agreements Contemplated by its Development Agreement Leaves its Dispute with its Franchisor Dickey’s Outside the Scope of any Mandatory Arbitration Provision
By: Jeffrey M. Goldstein
In a recent decision by the United States Circuit Court for the Tenth Circuit, a franchisee’s (Campbell’s) case against its franchisor (Dickey’s), for various business torts was permitted to remain and proceed in federal court after the circuit court affirmed the district court’s decision that Dickey’s could not identify a valid written agreement that expressed a mutual intent to arbitrate the dispute. Campbell Invs., LLC v. Dickey’s Barbecue Rests., Inc., 2019 U.S. App. LEXIS 26980 *; __ Fed. Appx. __; 2019 WL 4235345 (10th Cir. 2019). The franchisee, Campbell Investments, a Utah-based company, purchased and briefly operated a Dickey’s Barbecue franchise in South Jordan, Utah. The business relationship quickly deteriorated, and Campbell sued Dickey’s.
Although Dickey’s argued that a franchise operating agreement requires arbitration to resolve disputes between the parties. Campbell contended that it never signed an operating agreement when it purchased the restaurant from a former franchisee. The district court ruled in favor of Campbell, denying Dickey’s motion to force the case out of court and into arbitration. Even though it was clear, and both parties agreed, that they had been conducting the franchise business pursuant to some form of operative understanding, the district court held that Dickey’s could not identify a written agreement that contained an arbitration requirement. Making matters somewhat murky on this issue was that Campbell had purchased two franchises directly from former franchisees, and signed only one, not two, franchise agreements.
In early 2014, Campbell started exploring potential franchise opportunities with Dickey’s, and Campbell’s formal franchise application was approved in August 2014. After approval, Dickey’s and Campbell signed a Development Agreement, which detailed plans to open two new locations—the first in Ogden, Utah and the second in nearby South Jordan – and a franchise agreement that would govern the operation of the Ogden Restaurant. Both agreements contained standard provisions to arbitrate most disputes.
The record was clear that neither of the restaurants envisioned in the Development Agreement had opened. Instead, Campbell purchased an existing franchise in South Jordan, which had operated for a few years by a prior unrelated franchisee. Campbell purchased the operating franchise in September 2014, and to effectuate that transaction, signed an Asset Purchase Agreement with the prior franchisee. The Asset Purchase Agreement, however, did not reference the prior or any proposed franchise agreement; further, although the prior franchisee’s franchise agreement (South Jordan Franchise Agreement) included an arbitration provision, Dickey’s and Campbell never executed any franchise agreement regarding operation of the South Jordan Restaurant. For two years, Campbell operated the South Jordan Restaurant without signing a new franchise agreement for the location. The franchise relationship deteriorated, and in July 2015 Dickey’s provided Campbell with notice of default against the South Jordan Franchise Agreement. Shortly thereafter, in November 2016, Campbell closed the restaurant.
The Court identified Dickey’s three arguments in favor of requiring arbitration as follows: “(1) Campbell assumed the obligations of the South Jordan Franchise Agreement—including the arbitration provision—when it acquired the South Jordan Restaurant through the Asset Purchase Agreement; (2) Campbell manifested its consent to the South Jordan Franchise Agreement through its conduct; and (3) Campbell knew—through other documents received from Dickey’s—that disputes would be subject to arbitration.” Dickey’s arguments required the Court to examine three agreements, including: (1) the South Jordan Franchise Agreement; (2) the Development Agreement; and (3) the Franchise Disclosure Documents. The Court examined each agreement individually to determine whether Campbell had assented to arbitrate its disputes with Dickey’s.
With regard to the South Jordan Franchise Agreement (signed with Dickey’s only by the prior selling franchisee), Dickey’s argued that it governed the dispute because Campbell assumed all obligations thereunder—originally consummated between Dickey’s and the prior franchisee—when acquiring the South Jordan Restaurant “through the Asset Purchase Agreement.” Dickey’s argued that even if Campbell had not signed a new franchise agreement, it nevertheless continued to do business with Dickey’s ‘as if’ it had been governed by such an agreement. The Court quickly rejected this argument stating that “Dickey’s cannot demonstrate—through recourse either to the text of the Asset Purchase Agreement or evidence presented to bolster its “course of dealing” theory—that Campbell ever assumed the written obligations of the South Jordan Franchise Agreement.” Further, the Court pointed out that the Asset Purchase Agreement (signed by the prior franchisee and Campbell) failed in any way to refer to the South Jordan Franchise Agreement. “To the contrary, Section 3.02(e) expressly states that ‘purchaser acknowledges that it shall be solely responsible for obtaining franchise approval from Dickey’s Barbecue Pit franchise and for meeting all continuing obligations of the same.’” And, Campbell simply had not signed a new written franchise agreement from the franchisor. The Court also based its conclusion on language from the former franchisee’s franchise agreement which stated that the former franchisee was prohibited from transferring the franchise interest “without the prior written consent of Dickey’s.” As the Court stated, “the absence of such written consent—coupled, once again, with an integration clause that requires any amendment to come in writing—compels the conclusion that Campbell did not assume the terms of the South Jordan Franchise Agreement.”
The Court next addressed Dickey’s argument engineered to catapult over the lack of evidence. “Dickey’s seeks to overcome this absence of evidence by contending Campbell accepted all terms of the South Jordan Franchise Agreement through conduct or course of dealing.” Specifically, as explained by the Court, “Dickey’s points primarily to a “Default Warning Notice,” mailed in July 2015, that threatened imminent default against Campbell’s obligations under the South Jordan Franchise Agreement.” The Court also noted that for several years Campbell paid royalties and used proprietary marks in a manner consistent with the terms of the South Jordan Franchise Agreement.
Although acknowledging that Dickey’s assertions “suggest the existence of some operative understanding,” the Court rejected the argument stating that “we must remain mindful of the FAA’s mandate that any agreement to arbitrate a given dispute must come in writing.” Accordingly, “absent any evidence that Campbell had assented to the written terms of the South Jordan Franchise Agreement—and its arbitration provision, in particular—we must reach the same conclusion as did the district court [that Campbell had not agree to the arbitration clause].”
Turning next to the Development Agreement, the Court evaluated Dickey’s argument that “the Development Agreement provides an alternative avenue with which to recognize the parties’ mutual intention to arbitrate this dispute.” After recognizing that “the Development Agreement created an ongoing relationship between the parties, with both rights and obligations by each,” the Court pointed out that “the Development Agreement likewise delineates clear boundaries for what relationship its execution does and—more tellingly—does not create: ‘This Agreement is not a franchise agreement and does not grant to you any right or franchise to operate a Restaurant or any right to use or any interest in the Proprietary Marks or the System.’” Based on the distinction between operation and development of the South Jordan Restaurant, and the undisputed fact that the case involved operation and not development of the South Jordan Restaurant, the Court ruled that it “will not override the preferences manifested by both parties to create one of these relationships while expressly disclaiming the other.”
The third, and last, potential agreement examined by the Court were the model franchise and development agreements provided by Dickey’s to Campbell before it signed either of its agreements. The Court quickly rejected that although these documents reiterate Dickey’s general policy in favor of arbitration, “nowhere do they purport to create the specific operating relationship at issue here.”
In sum, the Court ruled that “the record presents no evidence that both parties manifested an intention through written agreement to arbitrate disputes arising from the operation of the South Jordan Restaurant.” Although the Court’s rationale was limited to implying an arbitration agreement, it does appear sufficiently malleable to encompass other substantial provisions, such as the personal guaranty and post-term covenant not to compete.