Careful Drafting of Arbitration Provisions in Franchise Agreements

A recent decision by the United States District Court for the Western District of Virginia, Roanoke Division, Devin Hamden v. Total Car Franchising Corp. d/b/a Colors on Parade, Case No. 7:12-cv-00003, underscores how important it is for franchisors to carefully draft any arbitration language used in their franchise agreement. In that case, a former franchisee filed suit attempting to establish that the post-termination covenant not to compete in the franchise agreement did not prevent it from engaging in another business, after termination of the franchise agreement. The franchisor disagreed and moved to arbitrate the dispute, pursuant to an arbitration provision in the franchise agreement. Notwithstanding that courts presumptively favor referring matters to arbitration, if arbitration is called for by the franchise agreement, in this case, the Court found that the way in which the arbitration provision was drafted indicated that the parties intended the arbitration provision to apply only to disputes between franchisees, and not to disputes between the franchisor and the franchisee. Accordingly, the Court denied the motion to compel arbitration. —Stephen E. Story