A former franchisee successfully defeated a multi-count lawsuit launched by its former franchisor, due to multiple weaknesses in the franchisor’s case. The U.S. District Court for the Southern District of Florida refused to order arbitration because the nature of the franchisor’s claims against this franchisee was expressly excluded under the clear terms of the parties’ franchise agreement. The court also issued an order to dismiss in favor of the franchisee because the franchisor did not compose its complaint in a proper way to give the franchisee adequate notice of the case against it. The rulings offer some useful instruction on how to (and not to) structure arbitration clauses in franchise contracts, as well as how to (or not to) draft complaints.
The business relationship underlying this dispute was a relatively common one. South Florida-based Jewelry Repair Enterprises, Inc. ran a repair business called “Fast-Fix Jewelry and Watch Repairs.” It operated its business on a franchise model. Son Le Enterprises, Inc. was one of JRE’s franchisees, operating a Fast-Fix location in a mall south of Atlanta, for more than a decade. Son Le, however, eventually elected not to renew its relationship with JRE for a new term, and the agreement expired.
Some time after that, the franchisor sued the former franchisee. Son Le, the franchisor claimed, had committed numerous violations, including breach of contract, misappropriation of JRE’s trade secrets, unfair competition, trademark dilution, and trademark infringement. Son Le, the franchisor argued, was in violation of several elements of the post-termination obligations and restrictive covenants of the deal. Specifically, the franchisor accused the former franchisee of running a jewelry and watch repair business in the same kiosk in the same mall where it had run its Fast-Fix business, in violation of the franchise agreement’s non-compete provisions.
JRE’s pursuit of Son Le proved to be unsuccessful, however, with the franchisee securing two major victories in February 2016. The franchisor tried to obtain an order that would have compelled the two sides to arbitrate the dispute. This request failed, however, because of the language in the parties’ franchise agreement. The agreement said that the franchisor and a franchisee were obligated to arbitrate all disputes, but that clause carved out a few exceptions. Those exceptions related to trademark issues, confidential information, and a franchisee’s obligations following the expiration or termination of a franchise agreement.
The franchisor’s claims against Son Le fell neatly within the exact carve-outs to which the parties had agreed in the arbitration clause of the franchise agreement, since JRE’s claims against Son Le related to trademark issues, confidential trade secret information, and Son Le’s post-expiration obligations in general. The franchisor’s attempts to interpret the agreement in such a way that it did not exclude its case from arbitration was not persuasive to the court, where the judge categorized the arguments as “grasping at straws.” There was simply no getting around the plain language of the arbitration clause and the exception provisions.
Also in February, the court granted a motion to dismiss in favor of Son Le. The court granted Son Le’s motion because the franchisor’s complaint was what’s called a “shotgun pleading.” In this case, the court explained a shotgun pleading as one that “contains several counts, each one incorporating by reference the allegations of its predecessors, leading to a situation where most of the counts (i.e., all but the first) contain irrelevant factual allegations and legal conclusions.” When a plaintiff files a shotgun pleading, it is in violation of Rule 8 of the Federal Rules of Civil Procedure, which requires that plaintiffs’ complaints give the other side proper “notice of the claims against them and the grounds upon which each claim rests.”
In JRE’s case, its complaint incorporated each and every paragraph that came before it, including other paragraphs that related to completely unrelated claims. By inserting all of its factual allegations into each of its claims, the franchisor had made it next to impossible to deduce which allegations formed the basis of each claim. This amounted to an improper method for submitting a complaint and improper notice to the defense, which required dismissal.
Whether you are seeking to force or avoid arbitration, or you are seeking to pursue or defend your commercial litigation case at trial, the experienced Florida franchise litigation attorneys at Stok Folk + Kon are ready to help. Our attorneys have many years of aiding clients in their commercial litigation disputes and have the skills and resources to assist you too.
Contact us online or by calling (305) 935-4440 to schedule your consultation.
More blog posts:
Florida Business Owners Not Required to Arbitrate Due to Agreement’s Narrow Language, Florida Business Lawyers Blog, April 30, 2015
Staffing Firm’s Motion to Dismiss Did Not Create Waiver of Right to Compel Arbitration of Contract Dispute with Client, Florida Business Lawyers Blog, Oct. 16, 2014