A Florida district court granted a motion to stay court proceedings pending arbitration between a franchisor and a third-party, non-signatory to a franchise agreement, containing an arbitration clause.
Rita’s Franchise Company (“Franchisor”) entered into a franchise agreement with two individuals for the operation of a Rita’s frozen dessert shop in Florida. The franchise agreement provided for arbitration in the event of a dispute. The individual franchisees were also managers of Ice Rak, LLC (“Ice Rak”), which entered into a lease for a premises the individuals personally guaranteed. Ice Rak and the landlord entered into a lease rider identifying Ice Rak as franchisee, that the premises could only be used for the operation of a Rita’s shop, and on termination of the franchise agreement, all rights to the premises would be transferred to Franchisor.
After the franchise agreement was terminated, Franchisor demanded liquidated damages, which the individuals refused to pay. As a result, Franchisor demanded arbitration pursuant to the franchise agreement. Subsequently, in a state lawsuit filed by Ice Rak to invalidate the lease rider, Ice Rak asserted it was a not a franchisee of Franchisor and not bound by the franchise agreement. Franchisor moved to compel arbitration. Ice Rak disputed that it agreed to arbitrate its claims, because the individuals agreed to arbitrate in the franchise agreement prior to Ice Rak’s incorporation. Franchisor contended that a non-signatory to a contract can be compelled to arbitrate under principles of equitable estoppel.
The court found the franchise agreement broadly defined “franchisee” to include shareholders, owners, guarantors, principals, members, or partners of franchisee and held that the franchise agreement’s definition includes Ice Rak as franchisee. Therefore, Ice Rak was required to arbitrate.
Additionally, the court found that the principles of equitable estoppel applied because Ice Rak represented to the public that it was “an independent franchisee” of Franchisor, sold Franchisor’s products, marketed and advertised itself on social media using Franchisor’s trademark, and held insurance in its name for the franchise. The court held that non-signatories may be estopped from disclaiming arbitration provisions where the non-signatory knowingly exploits the agreement containing the arbitration clause despite having never signed the agreement.
When signing a franchise agreement, franchisees should assess whether the identified franchisee is one or more individuals, an entity formed for the purpose of operating the franchised business, or both. Where an entity has consistently held itself out to be a franchisee regardless of who signed the franchise agreement, it may be estopped from claiming otherwise, even if the entity was not yet formed or otherwise in existence at the time of the franchise agreement’s execution.
Ice Rak, LLC v. Rita’s Franchise Co., LLC, No. 8:23-cv-2659-WFJ-TGW, 2024 U.S. Dist. LEXIS 44917 (M.D. Fla. Mar. 14, 2024)
