Litigants may be stuck with the choices they make in pursuing their rights under franchise agreements. In Breadeaux's Pisa, LLC v. Beckman Bros. Ltd., Breadeaux, a franchisor, and Beckman Brothers Ltd., a franchisee operating under the name Main Street Pizza, were in a franchise relationship. Under the franchise agreement, the parties' relationship was set to last for fifteen years with an option to renew for another fifteen years. When the first term expired in May 2021, Breadeaux decided not to renew the relationship.
The following month, Breadeaux sent a cease-and-desist letter to Main Street Pizza because Main Street Pizza continued to operate its pizzeria in violation of the franchise agreement's non-compete provision. The franchise agreement prohibited Main Street Pizza from operating a pizzeria in that same location for two years. In December 2021, Breadeaux sought a declaratory judgment that Main Street Pizza had breached the franchise agreement and injunctive relief from the U.S. District Court for the Western District of Missouri. The franchise agreement allowed the parties to enforce their rights by either filing a lawsuit for equitable relief or compelling mediation and then arbitration proceedings. Main Street Pizza filed two counterclaims: (1) Breadeaux breached the parties' agreement; and (2) the non-compete provision was unenforceable. Breadeaux moved to compel Main Street Pizza's counterclaims to mediation and arbitration.
Breadeaux asked the court to issue a preliminary injunction against Main Street Pizza, which the court denied. Main Street Pizza sent a first set of discovery requests to Breadeaux. Breadeaux objected to the discovery requests arguing the parties had consented to equitable relief in the franchise agreement. The court overruled Breadeaux's objection and ordered it to answer the discovery requests because in denying Breadeaux's preliminary injunction, the court had implicitly found discovery was necessary for Main Street Pizza to prove its alleged damages and determining the non-compete provision's enforceability.
Breadeaux then filed a demand for arbitration on its claims for injunctive relief and a declaratory judgment against Main Street Pizza. Breadeaux moved to stay the judicial proceedings while the parties mediated the case and then arbitrated in the event there was no settlement. The court denied Breadeaux's motion.
Main Street Pizza followed with another round of discovery requests. Breadeaux again objected, and the court again overruled the objection. Frustrated by the court's order, Breadeaux filed a notice of appeal and moved to stay the judicial proceedings pending its appeal under the Federal Arbitration Act (FAA). The court denied Breadeaux's motion to stay pending arbitration but granted its motion to stay during the appeal.
The U.S. Court of Appeals for the Eighth Circuit heard the appeal. Before the Eighth Circuit analyzed the merits of Breadeaux's claims, it noted, "Breadeaux is the plaintiff and elected to litigate in the district court below. Only after a series of adverse rulings did Breadeaux seek to stay the litigation in favor of arbitration." This statement set the tone for the Eighth Circuit's opinion.
First, the Eighth Circuit considered whether Breadeaux was entitled to a mandatory stay of the district court's judicial proceedings while it pursued arbitration. Section 3 of the FAA contains a mandatory stay provision requiring courts to stay proceedings when parties decide to arbitrate their dispute. However, the Eighth Circuit determined that the mandatory stay only applies when the defendant to the lawsuit seeks the stay. A plaintiff does not enjoy the same right. Therefore, Breadeaux could not invoke the mandatory stay.
The Eighth Circuit further found that Section 3 did not apply because it requires the issue involved to be referable to arbitration under a valid arbitration agreement. The Eighth Circuit was unpersuaded by Breadeaux's argument that the franchise agreement required arbitration for all the parties' claims except Breadeaux's request for injunctive relief. Further, the court determined that Breadeaux's claims were not referable to arbitration because Breadeaux first sought help from a traditional court rather than through arbitration.
Second, the Eighth Circuit found that even if Breadeaux's claims were referable to arbitration, Section 3's mandatory stay would not apply because Breadeaux was in default in proceeding with arbitration. The Eighth Circuit reasoned that a party who has waived its arbitration right is in default. The Eighth Circuit determined that Breadeaux had waived its arbitration right because it (1) knew about its existing right to arbitrate and (2) acted inconsistently with its right by pursuing a lawsuit rather than compelling its claims to arbitration.
The Eighth Circuit concluded that Breadeaux did not meet any of the requirements for Section 3's mandatory stay to take effect.
The Eighth Circuit then turned to Breadeaux's claim that the district court erred by deciding discovery disputes that were arbitration-related. Breadeaux contended that the district court's power was limited to determining if there was a valid arbitration agreement between the parties, i.e., the court could not analyze the merits of the parties' claims. However, the Eighth Circuit found that the district court was able to "peek" at the merits of the claims when "invited" by Breadeaux: "Breadeaux invited the district court to 'peek' at the non-compete provision when it incorporated it into its claims and sought a declaratory judgment that Main Street Pizza was in breach of the Agreement." The Eighth Circuit continued that Breadeaux's argument was moot anyway because it had waived its arbitration right.
The Eighth Circuit affirmed the district court's denial of Breadeaux's motion to stay pending the parties' arbitration under Section 3 and authority to rule on the discovery disputes.
The key takeaway is that the courts will hold parties to their chosen method of litigating a dispute when the franchise agreement allows for "either-or." Litigants in franchise cases should be aware that once they decide to pursue one way of vindicating their rights, they will not be able to change course.
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