The issue of whether a party waives its right to arbitrate by filing a lawsuit has been addressed by The United States District Court for the District of New Hampshire in Pla-Fit Franchise, LLC. V. Patricko, Inc., 2014 WL 2106555 (D. N.H. May 20, 2014). The case is noteworthy for franchisors or franchisees who wish to file for injunctive relief in state court without sacrificing their right to arbitrate pursuant to a franchise agreement.
In the case, two franchisees filed suit in the District of Massachusetts. The franchisor moved to compel arbitration based on the arbitration clauses in the franchise agreements between the parties, which was granted by the Court. The parties then stayed the action and settlement negotiations ensued. Ultimately, the franchisor terminated the franchise agreement. The franchisor then filed a complaint in the District of New Hampshire, requesting injunctive relief, a declaratory injunction and damages for breach of contract. The franchisees answered by asserting counterclaims. The franchisor moved to dismiss the counterclaims and to compel arbitration.
The Court held that while a party can waive its contractual right to arbitrate by implication, waivers “are not to be lightly inferred, and must be considered in light of the ‘strong federal policy favoring arbitration.’” The Court further held that a decision to sue in federal court does not automatically bar a plaintiff from invoking its right to arbitrate – a party may seek preliminary injunctive relief, as the franchisor in this case had done, without forfeiting its right to arbitration. The Court stated that a party must show prejudice to succeed on a claim that its opposition waived its right to arbitration, which the franchisees in this case were unable to do.
The Court stated that “an inquiry into prejudice involves a contextual examination of factors such as the length of delay, the litigation activities engaged in, and whether a party has been unfairly misled by the process.” Analyzing the facts at hand, the court held that the franchisees did not suffer prejudice and that the franchisor did not delay in demanding arbitration merely by seeking injunctive relief in federal court.