Texas Court Reminds Franchisors of the Importance of Well-Crafted Fee-Shifting Provisions in Franchise Agreements

Texas franchisors wishing to shift the burden of all the attorneys’ fees they incur when arbitrating against franchisees should heed this advice: Ensure that your franchise agreements precisely define the legal fees to be shifted to the losing party, because even seemingly broad fee-shifting provisions can leave a prevailing party with an unexpectedly large attorneys’ bill. This advice is not new or novel. Late last year, however, a Texas federal court handed down an expensive reminder.

In Stockade Franchising, LP v. Kelly Restaurant Group, LLC, No. 1:18-cv-918-RP, 2019 WL 5773699 (W.D. Tex.), Stockade Franchises had just received a final arbitration award entitling it to $622,268 in damages, associated with its franchisees’ breach of certain franchise and guaranty agreements. The award included $312,911 in attorneys’ fees. As most franchisors with arbitration experience know, Stockade’s next step was to seek confirmation of the award in federal district court and issuance of a judgment. Stockade successfully secured that confirmation, but nearly eight months after receiving the award confirmation, Stockade returned to federal court, requesting an order awarding it $38,820.61 “in attorneys’ fees and costs it ha[d] incurred in seeking confirmation of the arbitration award in th[e] case.”

The court did not share Stockade’s belief that these fees and costs were warranted. The problem? The fee-shifting provision in Stockade’s franchise agreement did not account for fees incurred confirming an arbitration award. Instead, the agreement limited recoverable fees to those incurred in connection with “any action at law or in equity against the other party based entirely or in part on the terms of this Agreement.” Id. at *2 (emphasis added). Stockade’s most-recent request for fees was not “based entirely or in part on the terms” of its franchise agreement. Instead, Stockade sought fees associated with enforcing an arbitration award, so the court reasoned that Stockade was not entitled to these fees under the agreement. Thus, Stockade could not overcome Texas’s adherence to the rule that parties bear their own attorneys’ fees unless otherwise provided in contract or statute.

Key Takeaways

Moving forward, franchisors should review the fee-shifting provisions in their franchise agreements to confirm the provisions are broad enough to include post-arbitration confirmation proceedings. Even the most favorable arbitration awards can require court confirmation, and the fees associated with those proceedings are not insubstantial. To avoid footing that bill themselves, franchisors should utilize fee-shifting language that clearly and explicitly authorizes trial courts to award attorneys’ fees in post-award proceedings.