Federal Court Sends Franchisee-Franchisor Trade Secret and Breach of Contract Dispute To Arbitration

In a battle of competing noodle franchises, a federal district court in Arizona recently granted a franchisee’s motion to compel arbitration in a trade secret and breach of contract dispute with its franchisor.   

Apart from its colorful facts, the court’s ruling is significant.  First, it demonstrates that franchisors that include arbitration provisions in their franchise agreements may be precluded from obtaining immediate injunctive relief in court against their franchisees, particularly where they include provisions that only permit the franchisor to obtain injunctive relief outside the arbitration proceeding (at least under Arizona law). Next, it demonstrates that a nonsignatory to a franchise agreement may be permitted to compel arbitration in the Ninth Circuit where the signatory’s claim against the nonsignatory involves a dispute that is “intertwined with the contract providing for arbitration.” The decision is also a reminder that although binding arbitration with franchisees may be beneficial, franchisors must keep abreast of the ever-changing law in the governing jurisdiction(s) to ensure that arbitration rather than litigation in the courts is the appropriate dispute resolution forum for their business objectives.  Simply put, if a rogue franchisee’s actions put a franchisor’s system in jeopardy, a franchisor may not be willing to put the fate of its misappropriated intellectual property in the hands of an arbitrator. 

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