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Decided: August 5, 2015  

The Fourth Circuit reversed the decision of the district court and held that the clear and unambiguous language of the provisions of the arbitration agreements require that the common law claims asserted by Dickey’s must proceed in arbitration, while the franchisees’ claims under Maryland Franchise Law must proceed in the district court of Maryland.

Dickey’s Barbeque Restaurants, Inc. (Dickey’s) is a restaurant chain that offers franchising opportunities. Both sets of plaintiffs were franchisees and previously operated Dickey’s restaurants in Maryland under franchise agreements. Shortly after opening, Dickey’s claimed that several of its franchisees breached their franchise agreements by running their restaurants poorly. The franchisees claimed that Dickey’s misrepresented the costs of running the restaurants in violation of Maryland Franchise Law and never gave them a chance to succeed in operating the restaurants. The franchisees wanted to bring suit in the district courts of Maryland, and Dickey’s wanted to arbitrate.

The arguments of the parties depend on the “interplay” between two provisions of the franchise agreements: (1) the dispute resolution provisions in Article 27 and (ii) the Maryland specific provisions in Article 29. Article 27 contains the Arbitration Clause and requires the parties to first mediate their claims before proceeding to arbitration. If mediation fails, either party is entitled to seek arbitration at the office of the American Arbitration Association nearest to Plano, Texas. The parties also agreed to arbitrate “all disputes, controversies, claims, causes of action and/or alleged breaches or failures to perform arising out of or relating to this Agreement (and attachments) or the relationship created by this Agreement.” The agreements also included “State Specific Provisions” in Article 29. In Article 29.1, the “Inconsistent Provision Clause” provided that Maryland law would control any inconsistent provisions. Also, Article 29.2(4), the “Maryland Clause” states that the “provisions of this Agreement shall not require you to waive your right to file a lawsuit alleging a cause of action arising under Maryland Franchise Law in any court of competent jurisdiction in the State of Maryland.” The Maryland Clause is similar to a Maryland regulation that states a franchisor violates the Maryland Franchise Law if it requires a franchisee to waive the franchisee’s right to file a lawsuit alleging a violation of Maryland Franchise Law in any court of competent jurisdiction in the state of Maryland.

The franchisees claimed that the Maryland Clause conflicts with the Arbitration Clause and renders the Arbitration Clause void, allowing the proceedings in district court. Dickey’s claimed the Maryland Clause is consistent with the Arbitration Clause because the Maryland Clause merely preserves the rights of the franchisees to bring an action under the Maryland Franchise Law in either arbitration or in court. In the alternative, assuming the interpretation provided by the franchisees, Dickey’s said the Federal Arbitration Act (FAA) preempted the Maryland Clause as an invalid prohibition on arbitration. The district court found the provisions to be conflicting and ambiguous and stated a jury must determine exactly which claims, if any, the parties agreed to arbitrate.

The Fourth Circuit determined that they had jurisdiction under 9 U.S.C. § 16(a)(1). That section of the FAA authorizes interlocutory appeals from a district court’s refusal to either stay litigation pending arbitration under Section 3 of the FAA or compel arbitration under Section 4 of the FAA. The district court expressly denied the motions to compel arbitration “without prejudice,” and that is all that is necessary to grant the Fourth Circuit appellate jurisdiction.

The court will compel arbitration under Section 4 of the FAA if: (1) the parties have entered into a valid agreement to arbitrate, and (2) the dispute in question falls within the scope of the arbitration agreement. The court must give the parties the intentions as expressed in the agreement. However, a party cannot be forced to arbitrate if it has not agreed to do so.

The franchisor’s breach of contract claims clearly “arise out or relate to” the Franchise Agreements, and thus fall within the Arbitration Clause. Additionally, the franchisor’s claim that the franchisees falsified sales reports falls within the Arbitration Clause because that claim arises directly from the franchise relationship created by the agreement. As to the common law claims, the Arbitration Clause is not contrary to the Maryland Clause.  Therefore, the franchisees agreed to arbitrate the franchisor’s common law claims.

However, the franchisees’ claims directly implicate the Maryland Clause, which states nothing in the agreements shall require the waiver of bringing a claim under the Maryland Franchise Law in a court in Maryland. By looking at its plain language, the Maryland Clause conflicts with the Arbitration Clause. The Fourth Circuit concluded that the Maryland Clause trumps the more general Arbitration Clause as to Maryland Franchise Law claims, allowing the franchisees to sue in Maryland court. By agreeing to this Maryland Clause, the parties agreed to litigate in Maryland and arbitrate all other claims in Texas.

Alternatively, Dickey’s claims that if the Maryland Clause does prohibit arbitration of the claims of the franchisees, then the Clause is preempted by the FAA. Where the state law prohibits the arbitration of a claim, the conflicting law is preempted by the FAA. However, the Fourth Circuit determined the Maryland Clause is not a state law prohibiting arbitration, but a contractual provision prohibiting arbitration. When a party to a contract voluntarily assumes an obligation to proceed under certain state laws, the traditional preemption doctrine does not apply to protect a party from liability for a breach of that agreement.

The Fourth Circuit realized that requiring the parties to litigate in two different forums was inefficient and could lead to conflicting results; however, this outcome is mandated by the Federal Arbitration Act, which requires piecemeal litigation when agreements call for arbitration of some claims, but not others. Therefore, the Fourth Circuit vacated the order of the district court and remanded for further proceedings.

Full Opinion

Austin T. Reed