January 26, 2026|Franchise Frontlines
January 26, 2026 | United States District Court for the Eastern District of Wisconsin | Unpublished Opinion
Executive Summary
In an unpublished decision, the United States District Court for the Eastern District of Wisconsin denied a franchisee’s motion to dismiss a declaratory judgment action brought by a former franchisor executive and related corporate entities who sought to avoid arbitration under Verlo Mattress franchise agreements. Although the franchise agreements contained arbitration provisions incorporating AAA rules, the plaintiffs were not signatories to those agreements. After an arbitrator ruled that the non-signatories were properly joined in arbitration, the plaintiffs filed suit seeking a declaration that they were not bound to arbitrate. The court held that whether a non-signatory agreed to arbitrate is a threshold question of arbitrability for the court—not the arbitrator—to decide, absent clear and unmistakable evidence of consent. The court further concluded that plaintiffs did not waive judicial review by objecting to arbitrability before the arbitrator. The motion to dismiss was denied, allowing the declaratory judgment action to proceed.
Relevant Background
The dispute arises out of franchise agreements between Verlo Mattress and MKD Investment Holdings, LLC, a franchisee that agreed to open Verlo stores in Texas. The franchise agreements included arbitration provisions and incorporated American Arbitration Association rules.
Dirk Stallman, who had served as President of Verlo Mattress, signed the franchise agreements in his capacity as an officer. The Marcus Corporation and Marcus Investments—entities alleged to be related to Verlo—were not signatories to the franchise agreements.
In December 2024, MKD filed a demand for arbitration against Verlo Mattress, Stallman, Marcus Corporation, and Marcus Investments, asserting claims under Wisconsin and Texas statutes as well as negligent misrepresentation and fraudulent inducement. Stallman and the Marcus entities objected, arguing that they were not parties to the franchise agreements and therefore had not agreed to arbitrate.
The American Arbitration Association appointed an arbitrator to determine the limited issue of arbitrability. The arbitrator concluded that the non-signatories were properly joined in arbitration. Stallman and the Marcus entities then filed a federal action under the Declaratory Judgment Act seeking a declaration that they were not subject to the arbitration provisions and had no obligation to arbitrate with MKD.
MKD moved to dismiss the complaint under Rule 12(b)(6), arguing that the court should decline declaratory jurisdiction, that intermediate arbitration rulings are not reviewable, that incorporation of AAA rules delegated arbitrability to the arbitrator, and that plaintiffs waived judicial review by participating in arbitration.
Decision
The court first addressed whether it should exercise jurisdiction over the declaratory judgment action. Applying Seventh Circuit factors governing discretionary declaratory relief, the court concluded that adjudicating the dispute would settle the controversy regarding arbitrability and clarify the legal relations between the parties. The court rejected the argument that arbitration itself was a better or more effective alternative remedy, reasoning that arbitration cannot be compelled absent actual agreement.
The court then turned to the core issue: who decides whether non-signatories are bound to arbitrate.
Relying on United States Supreme Court precedent, the court emphasized that arbitration “is simply a matter of contract” and that questions of arbitrability are for judicial determination unless the parties clearly and unmistakably provide otherwise. The incorporation of AAA rules may, in certain circumstances, delegate arbitrability questions to the arbitrator. However, that principle presupposes that the party resisting arbitration agreed to the arbitration clause in the first place.
Here, the plaintiffs alleged that they never agreed to arbitrate at all. Because the existence of an agreement to arbitrate was itself in dispute, the court held that this threshold question must be decided by the court. A non-signatory cannot be bound to arbitrate solely because an agreement between other parties incorporates arbitral rules that delegate arbitrability. As the court explained, if the AAA rules alone answered the question, “any party, no matter how remote, may be dragged into arbitration simply based on the say-so of a contract the party never saw, much less agreed to.”
The court also rejected MKD’s waiver argument. Although plaintiffs had objected to arbitrability before the arbitrator, they did not proceed to litigate the merits of the underlying claims. Citing Supreme Court authority, the court explained that merely arguing the arbitrability issue to an arbitrator does not constitute clear consent to be bound by the arbitrator’s determination. Raising a jurisdictional objection in arbitration does not forfeit the right to seek judicial review of whether an agreement to arbitrate exists.
Because the complaint plausibly alleged that plaintiffs did not agree to arbitrate and that arbitrability was a judicial question, the court denied the motion to dismiss and allowed the declaratory judgment action to proceed.
Looking Forward
This decision provides a useful reminder for franchisors and franchisees alike: arbitration remains a creature of contract. Courts will not lightly presume that affiliates, officers, or parent entities agreed to arbitrate absent clear evidence of consent.
For franchisors, this case highlights the importance of precision in drafting arbitration clauses and defining the scope of “parties” covered by those provisions. If a franchisor intends for affiliates, officers, or related entities to benefit from or be bound by arbitration provisions, the agreement should address that explicitly. Reliance on incorporation of arbitral rules alone may not suffice where the threshold question is whether a non-signatory agreed to arbitrate at all.
At the same time, the decision underscores that objecting to arbitrability within the arbitration proceeding does not necessarily waive judicial review. Parties facing aggressive joinder strategies in franchise arbitrations may preserve their objections without forfeiting the right to seek a judicial determination on arbitrability.
The ruling does not resolve whether the non-signatories ultimately will be compelled to arbitrate; it simply confirms that the court—not the arbitrator—must decide that threshold issue when consent is contested. Franchise systems that rely heavily on arbitration provisions should view this decision as a reminder that enforceability depends not only on delegation language but on clear contractual foundations.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
