By Joyce Hanson

Law360 (May 7, 2020, 6:20 PM EDT) -- A New York federal judge on Thursday granted a bid by a franchisee of the KidZania child-based amusement parks to stop its Mexican franchisor from terminating a $3 million agreement that let it build U.S. facilities, saying the franchisee will suffer immediate harm if it can't arbitrate the dispute.

U.S. District Judge Andrew L. Carter Jr. in a telephone hearing allowed Texas-based franchisee E2W LLC's request for a preliminary injunction and ordered it to post a $1 million bond that will cover the franchisee's $750,000 settlement over the delayed opening of its first of 10 proposed facilities. The bond includes another $250,000 to protect KidZania Operations SARL of Mexico City against lost profits, according to the judge.

Judge Carter said E2W argued persuasively that KidZania should be prevented from terminating its franchise agreement with E2W based on communications between the parties in February and March, when the COVID-19 pandemic was reaching U.S. shores. The judge also noted that he was hitting the brakes on KidZania's termination plans because the franchisor has threatened to flip the U.S. projects to a new franchisee.

"I conclude that E2W has made a showing of imminent harm," the judge said. "KidZania has made it clear it would replace E2W absent an injunction."

At the hearing, E2W lawyer Leonard H. MacPhee of Polsinelli PC addressed his client's argument that the doctrine of equitable estoppel applied, saying KidZania knowingly granted numerous extensions for repayment of the $750,000 through March and promised that E2W was safe from the risk of losing the franchise. The doctrine prevents a party from acting unfairly by making false statements that cause another party injury.

"The concept of a new franchisee stepping in is incredible," MacPhee said. "We have proposed a $750,000 settlement. It's the amount we're prepared to pay and the amount due. It's an appropriate number."

A lawyer for KidZania, Christopher G. Caldwell of Caldwell Hammer LLP, countered at the hearing that E2W had failed to prove estoppel, saying KidZania was clear in asking E2W to make a timely settlement payment.

"There really aren't factual disputes here that would allow the injunction to be granted," Caldwell argued before Judge Carter handed down his ruling. "KidZania made the repeated statement that it must be paid."

E2W had asked the court on April 28 for a temporary restraining order and preliminary injunction, saying that the COVID-19 pandemic forced it to cease operations and that KidZania must agree to arbitrate their dispute over E2W's failure to build and open the first U.S. facility on time.

The parties' franchise agreement states that they will arbitrate disputes with the International Chamber of Commerce in accordance with the ICC Rules of Arbitration, according to E2W's court filings. Caldwell said at the hearing that the parties' pleadings are due before the ICC on June 4.

E2W said it will suffer irreparable harm if the court doesn't halt KidZania's termination of the franchise agreement based on E2W's alleged nonpayment of the $750,000 settlement to make up for its delayed opening of its first facility. That Frisco, Texas-based facility — a $33 million "themed replica of a realistic city environment" for children — was scheduled to launch in March 2018 but didn't open until November, according to E2W's April 6 complaint.

KidZania's sole basis for terminating the franchise agreement was E2W's nonpayment of the settlement, according to E2W. But the franchisor can't rely on that claim to end the agreement, because E2W is excused from paying under the pact's force majeure clause, which extends to the COVID-19 pandemic, E2W said. Force majeure events, often referred to as "acts of God," refer to events that fall outside of a party's reasonable control and prevent it from honoring the terms of a contract.

The franchisor claimed on April 20, in an opposition to E2W's bid for an injunction, that it learned last winter that the franchisee was over its head in debt. Not only was E2W unable to pay minimum guaranteed royalties to KidZania, but it was unable to pay its vendors and landlord and was facing $8 million in liens, it said.

"When Jan. 31 came and went without E2W paying the minimum guaranteed royalties, KidZania felt it had no choice but to initiate the termination process," the franchisor asserted, adding that it wasn't until April 3 that E2W for the first time claimed that E2W's performance was excused under the agreement's force majeure clause due to COVID-19.

E2W is represented by Leonard H. MacPhee, Gabriel Levinson, Darnell S. Stanislaus and Joyce Mazero of Polsinelli PC.

KidZania is represented by Christopher G. Caldwell of Caldwell Hammer LLP and Jeanne A. Fugate of King & Spalding LLP.

The case is E2W LLC v. KidZania Operations SARL, case number 1:20-cv-02866, in the U.S. District Court for the Southern District of New York.

--Editing by Jack Karp.

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