The U.S. District Court for the District of North Dakota granted a franchisee’s motion to dismiss for failure to state a claim and its motion for Rule 11 sanctions, finding that franchisor ABC, Inc. improperly attempted to relitigate issues previously resolved by a final arbitration award. ABC, Inc. v. J.M. Johnson, LLC, 2026 WL 381124 (D.N.D. Feb. 11, 2026).
ABC and J.M. Johnson, LLC were parties to a franchise agreement that expired in May 2020. Although they did not sign a new agreement, the parties continued their relationship under an implied contract until February 2024. During this period, Johnson continued to pay royalties and provided ABC with the corresponding monthly royalty calculations. In June 2023, ABC presented Johnson with a new franchise agreement, which Johnson refused to sign, explaining that it intended to discontinue the franchise relationship. ABC subsequently issued an audit notice, asserting that Johnson had wrongfully refused to renew the franchise agreement while continuing to operate the franchise. Johnson responded that an audit was unnecessary because it had already provided complete monthly royalty calculations. ABC alleged that Johnson breached the parties’ implied contract; the parties arbitrated the claim before the American Arbitration Agreement under the terms of the expired franchise agreement.
The arbitrator dismissed ABC’s claims against Johnson on summary judgment. The arbitrator found that Johnson had properly paid ABC royalties through the February 2024 end of the implied contract, and that there was no evidence of inaccuracies in Johnson’s payment calculations. The arbitrator found that ABC “waived strict compliance” with the franchise agreement’s terms. The arbitrator further noted that ABC opted not to scrutinize Johnson’s finances through discovery, which would have permitted ABC to conduct an even more thorough review than the requested audit. The arbitrator specifically characterized the decision as a final award, and ABC did not move to vacate it. In June 2025, ABC filed a complaint in federal court alleging that Johnson failed to properly pay royalties. Johnson moved to dismiss for failure to state a claim and sought Rule 11 sanctions, arguing the claims were frivolous and barred by res judicata. Because the alleged royalty issues either were or could have been raised in the arbitration, the court concluded that they arose from the “same nucleus of operative fact” and were thus barred. Finally, because ABC advanced barred claims and failed to respond to Johnson’s Rule 11 motion, the court ordered ABC to pay Johnson $8,000 in reasonable attorney’s fees.