The district court referred to it as “gamesmanship.” That characterization may be an understatement given the position of the franchisee’s counsel in Ice Rak v. Rita’s Franchise, No. 8:23-cv-2659 (M.D. Fla., Mar. 14, 2024). Ultimately, the case was stayed pending arbitration over termination of the franchise, even though Ice Rak was not a signatory to the franchise agreement.

Rita’s Franchise Co. LLC had terminated the frozen dessert franchise operated by Ice Rak’s managers individually in Lakeland, Florida. The principals had operated the Rita’s business since 2021, having signed in their personal names but decided to operate the business and sign the lease under their subsequently established limited liability company, Ice Rak LLC. Rita’s had requested that the managers transfer the franchise agreement signed by the managers to Ice Rak, LLC as the franchise agreement allows such transfers for convenience to a business entity. The managers never transferred the franchise agreement. They did, however, sign a collateral assignment of the lease in the name of Ice Rak, LLC also signed by the landlord acknowledging that upon termination of the lease, Rita’s would have step-in rights. The collateral assignment contained an acknowledgement by Ice Rak LLC that it was a franchisee of Rita’s.

Rita’s ultimately had a dispute with the franchisee that resulted in Rita’s issuing a termination of the franchise and demanding liquidated damages from the individual franchisees. Ice Rak then brought this declaratory judgment contending that it is neither a franchisee, nor beholden to the duties and responsibilities of a franchise agreement executed between Rita’s and Ice Rak’s managers. Rita’s conversely maintains that Ice Rak must arbitrate this dispute even as a nonsignatory to the same franchisee agreement.

The district court provides a perhaps a partial explanation why Ice Rak brought this declaratory judgment in the first place. Ice Rak had brought numerous defamation-like claims against customers for bad reviews in state court, and several of the defendant customers had defended on the basis that Ice Rak lacked standing as a Rita’s franchisee because it never signed a franchise agreement. Ice Rak’s position that it was a franchisee of Rita’s for defamation purposes seemed directly contrary to the position that it was not a franchisee for the purpose of arbitration for liquidated damages in its dispute with Rita’s. Rita’s took the position that the arbitration clause was broad enough to encompass Ice Rak, even though it had not signed the franchise agreement containing the clause. Before the district court was the simple issue whether this declaratory judgment action should be stayed pending arbitration given the position of the parties.

The district court first embarked on a contractual analysis as arbitration clauses are creatures of contract. Both parties agreed that the issue of whether a nonsignatory can be bound by an arbitration clause was a matter of state law. Both parties argued that Florida law should apply, even though the franchise agreement called for the application of Pennsylvania law. The court analyzed the issue under both Florida and Pennsylvania law.

The franchise agreement signed by the managers contained this language, “The term “franchisee” for purposes of this arbitration clause, shall include the shareholders, owners, guarantor(s)(defined below), principals, members, or partners of the franchisee, or any person or entity claiming by or through any of the foregoing.” Based on this language, the district court found that the language of the contract would bind Ice Rak to arbitration.

The district court further found that Ice Rak was equitably estopped from disclaiming the arbitration clause because it took the benefits of the contract and would not be allowed to avoid the burden of the arbitration clause in the contract. Ice Rak took the position that it was an authorized franchisee of Rita’s for some purposes but refused to accept all of the obligations as a franchisee. Instead, Ice Rak took the position that it had an oral franchise agreement, but could not explain at the hearing the terms and conditions of that oral franchise agreement. The court concluded that such an oral agreement would have violated the statute of frauds as it could not be performed within a year; accordingly, the court confidently ruled that equitable estoppel prevented Ice Rak from avoiding the arbitration clause.

Ice Rak continued to argue that the termination dispute was not subject to the arbitration clause. The court had little difficulty concluding that based on the signed documents with the landlord, the dispute was within the clause, although it was really an issue for the arbitrator.

Not content with these arguments, Ice Rak claimed the arbitration clause was waived. The court noted that most claims of arbitration waiver arise from a party’s use of the litigation machinery rather than using the contractual mandated arbitration provision. The court found there was no evidence that Rita’s used litigation before seeking arbitration so as to cause a waiver. The mere fact that Rita’s waited until there was a dispute to arbitrate did not constitute a waiver.

Reprinted with permission from the June 14, 2024 issue of The Legal Intelligencer© 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.