Arbitration clauses are a staple of modern contract law.  As a plethora of cases show, public policy highly favors arbitration, and where the enforceability of an arbitration clause is at issue, courts will generally find in favor of arbitration.  In turn, arbitration clauses have become common in franchising agreements.  Through arbitration clauses, franchisors can require that disputes be resolved outside of court, in an often economical and expedient fashion.  Yet, despite the widely favored use of arbitration, it is essential that franchisors contemplate and utilize exceptions to arbitration when drafting franchising agreements.

wooden doorRecently, in Synergistic International LLC v. Monaghan, et. al., the District Court for the Central District of Illinois addressed the enforceability of an exception to an arbitration clause.    Franchisor Synergistic International LLC (“Synergistic”) entered into a franchising agreement with franchisee Vance Door Inc. (“Vance Door”). The franchising agreement contained an arbitration clause which obligated the parties to submit to binding arbitration for any dispute that could not be solved through mediation.  Yet, the franchising agreement also contained an exception to arbitration for disputes over Synergistic’s Trademarks or Service Marks (“Marks”), or for claims where irreparable harm or loss was alleged.

After termination of the franchising agreement, Synergistic alleged that Vance Door was using its Marks without authorization, and through doing so, was violating the franchising agreement’s ongoing non-compete covenants.  Seeking injunctive relief, money damages, and attorney fees, Synergistic filed suit for a variety of claims including (but not limited to) ongoing Federal Violations of Trademark and Service Mark laws, Breach of Franchise Agreement, Tortious Interference, and Unfair Competition.

The court noted that in franchising agreements, a franchisor has a need to ensure that (1) its trade secrets are protected, and (2) its franchisees are not competing directly or indirectly with the franchise itself.  In determining whether the claims could be arbitrated, the court broadly applied the arbitration exception so as to encompass any and all claims associated with Synergistic’s Marks, and found that the exception applied both to claims specifically alleging misuse of Marks, as well as claims related to the Marks, though not specifically alleging infringement.

What is the takeaway? Though public policy highly favors arbitration, courts will enforce unambiguous exceptions to arbitration clauses.  By inserting an exception into the arbitration clause, Synergistic enabled a court to enact emergency remedies for harms related to its Marks – allowing Synergistic the means to protect its franchise’s trade secrets and reputation. When drafting franchise agreements, it is essential that franchisors carefully consider areas of dispute that it would like to reserve for the courts, and embody those reservations through a carefully drafted exception.