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Stockade Companies, LLC v. Kelly Restaurant Group, LLC

United States District Court, W.D. Texas, Austin Division

May 11, 2017

STOCKADE COMPANIES, LLC AND STOCKADE FRANCHISING, LP
v.
KELLY RESTAURANT GROUP, LLC

          ORDER

          ANDREW W. AUSTIN UNITED STATES MAGISTRATE JUDGE

         Before the Court are Defendant's Opposed Motion to Compel Arbitration (Dkt. No. 7) and Plaintiffs' Response (Dkt. No. 9). Defendant did not file a Reply brief. On April 5, 2017, the District Court referred the motion to the undersigned for resolution pursuant to 28 U.S.C. § 636(b)(1)(A), Fed.R.Civ.P. 72 and Rule 1(c) of Appendix C of the Local Rules.[1]

         I. GENERAL BACKGROUND

         Plaintiffs Stockade Companies, LLC and Stockade Franchising, LP (together “Stockade”) own and license the proprietary trademarks for Sirloin Stockade, Coyote Canyon, and Montana Mike's restaurants. On June 4, 2014, Stockade entered into fifteen separate franchise agreements with Kelly Restaurant Group, LLC (“Kelly”). All of the franchise agreements have identical substantive terms and grant Kelly a non-exclusive franchise to operate a restaurant at the designated location and to use the appropriate Stockade system and proprietary marks. In return, Kelly agreed to maintain the restaurants at or above minimum quality standards, pay royalties and fulfill other obligations. The Franchise Agreements also contain an arbitration clause and an exception to the arbitration clause for certain actions initiated by Stockade seeking injunctive relief.

         Stockade alleges that beginning in May 2016 and continuing through the present, Kelly has failed to pay royalties to Stockade in violation of the Franchise Agreements. Stockade contends that Kelly's failure to cure the defaulted payments automatically terminated the Franchise Agreements. Stockade's suit argues that by continuing to operate the restaurants with Stockade's branding after the termination, Kelly is infringing on Stockade's trademark rights, and is in breach of the noncompetition covenant. Stockade seeks a preliminary and permanent injunction enjoining Kelly from using or otherwise infringing on any of its Proprietary Marks and seeks attorney's fees and costs.

         In the motion before the Court, Kelly argues that the arbitration clause contained in the franchise agreements requires Stockade to arbitrate the claims raised in this lawsuit, and seeks an order compelling arbitration and staying the case pending arbitration.

         II. STANDARD OF REVIEW

         The FAA directs courts to place arbitration agreements on equal footing with other contracts, but it “does not require parties to arbitrate when they have not agreed to do so.” Volt Info. Sci., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989). “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” United Steelworkers of Am. v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960). As a result, courts analyze whether a party can be compelled to arbitrate using a two-step process. “First, we ask if the party has agreed to arbitrate the dispute.” Sherer v. Green Tree Serv. L.L.C., 548 F.3d 379, 381 (5th Cir. 2008). “While there is a strong federal policy favoring arbitration, the policy does not apply to the initial determination whether there is a valid agreement to arbitrate.” Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004). Instead, courts “apply ordinary state-law principles that govern the formation of contracts.” Webb v. Investacorp, Inc., 89 F.3d 252, 258 (5th Cir.1996). If the party opposing arbitration has agreed to arbitrate, courts “then ask if ‘any federal statute or policy renders the claims nonarbitrable.'” Sherer, 548 F.3d at 381 (quoting JP Morgan Chase & Co. v. Conegie, 492 F.3d 596, 598 (5th Cir. 2007)).

         III. ANALYSIS

         Kelly argues that the arbitration clause contained in the franchise agreements requires Stockade to arbitrate the claims in this case. Kelly also contends that an arbitrator, not the Court, should determine whether Stockade's claims are subject to arbitration. Stockade responds that the parties did not agree to defer the arbitrability decision to an arbitrator, and, on the merits, the franchise agreement contains a carve-out provision explicitly permitting Stockade to seek temporary or injunctive relief in court to protect its trademarks and other rights.

         A. The Arbitration Clause

         The parties do not dispute that their agreements contain an agreement to arbitrate most disputes that arise out of their franchise relationship. Nor do they dispute that there is a clause carving out of this general agreement a subset of claims on which Stockade has the right to file suit for injunctive relief in a court. The general language of the arbitration clause states:

21.01 Duty to Arbitrate. . . .[T]he parties agree that any and all controversies, claims and disputes between them arising out of or related to this Agreement that cannot be amicably settled shall be finally resolved by submitting such matter to the American Arbitration Association (“AAA”) in either Denver, Colorado or Austin, Texas, in Franchisor's sole discretion, for binding arbitration under the AAA's Commercial Arbitration Rules . . .

Dkt. No. 7-2 at 45, § 21.01 (hereinafter “Arbitration Clause”). The next section of the ...


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