Arbitration clauses in franchise agreements are common but are not automatically available to the parties. A recent District Court case in Arizona underscores some of the procedural requirements of resolving franchise disputes by arbitration (Noodles Development, LP v. Latham Noodles, LLC et al., 2009 WL 2710137 (D. Ariz.)).

In this case, Noodles Development, LP sued a franchisee for breach of contract, trademark infringement and trade secret misappropriation. The franchisee argued that the franchise agreement’s arbitration clause required that disputes be submitted to arbitration rather than litigated in the court. Initially, the Court agreed, and compelled the parties to submit to arbitration and stayed the litigation.

Arbitration clauses customarily require each side to pay its share of the arbitration fees and costs. Arbitrators set their fees, and these fees, along with any Arbitration Association fees, must be paid in part before the arbitration commences. In this case, although the franchisor demanded arbitration and paid its fees, some of the franchisee-defendants did not answer the demand for arbitration nor pay their share of the arbitration fees. One franchisee-defendant, who did respond but did not initially pay his share of the arbitration costs, tried to prevent the franchisor from reopening the case in the District Court.

Looking at the possibility that litigation would proceed and that he could lose his right to arbitration, only then did this defendant pay up and say he was now ready to arbitrate. By not timely paying his arbitration fees, the Court held that this defendant waived his right to arbitration as did all the other defendants who failed to respond to the arbitration demand. The Court said he had expressed his preference to arbitrate, then refused to participate when the franchisor demanded arbitration. By failing to timely pay, the Court ruled the franchisor was prejudiced by delay and extra costs (Noodles Development, LP v. Latham Noodles, LLC et al., 2011 WL 204818 (D. Ariz.)).

If you want to arbitrate, you must pay up or you will get shut out.