There are some interesting cases today, but be sure to turn to the last page for a list of upcoming ADR conferences and continuing education opportunities. A lot is happening in our field, and these conferences provide a pleasant way to keep up to date.
Arbitration Agreement Does Not Bind Principal
Goergen v. Black Rock Coffee Bar, LLC, 2023 U.S. Dist. LEXIS 19872 (February 6, 2023)(Simon, J.), is a dispute between franchisor and franchisee, which arises in an unusual context. Goergen and the other plaintiffs are principals of or otherwise affiliated with six limited liability companies (the “BR Entities”) who signed franchise agreements with Black Rock. Alleging violations of the agreements, Black Rock commenced an arbitration against those entities. During the arbitration, Black Rock moved to add the principals as additional respondents; they objected on the ground that they were not signatories to or otherwise bound by the franchise agreement and arbitration clause. The arbitrator overruled the objection. The principals refused to participate in the arbitration and commenced this action to determine whether they are bound to arbitrate with Black Rock. Meanwhile, the arbitrator kept moving forward and entered an award of “tens of millions of dollars” against the respondents, including the named plaintiffs. (It is unclear from the opinion whether the plaintiffs had sought preliminary relief to enjoin the arbitration pending a judicial determination of its scope). In this decision, the court rules on Plaintiffs’ motion to enjoin enforcement of the award as to them.
The court first holds that it, not the arbitrator, decides the existence of an agreement to arbitrate. “’[P]arties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by “clear and unmistakable” evidence,’ but ‘before referring a dispute to the an arbitrator the court determines whether a valid arbitration agreement exists.’” (Emphasis in original; citations omitted). It, then, considers and rejects several potential grounds for binding the principals to the award, despite their not being signatories to the agreement. First, it holds that the agreement by its terms bound only “Controlling Principals.” Although an Attachment to the agreement listed persons owning an interest in the franchisee, it did not specifically list any of those persons as “Controlling Principals.” The court further holds that the BR Entities did not act as agents for the Plaintiffs and, therefore, did not bind them to the agreement. To so hold would be “the reverse of the principal/agent relationship between an LLC and its members and managers.” The court also rejects Black Rock’s claims of equitable estoppel, third-party beneficiary status, guarantees, and alter-ego. Judge Simon’s overall view is best summarized when he opines, “If Plaintiffs intended personally to be bound by the franchise agreements, why create the LLCs? And if Black Rock wanted Plaintiffs to be personally bound, as the drafter of the franchise agreements, Black Rock could easily have had Plaintiffs sign the franchise agreements in their individual capacity and make their personal obligations explicit.”
The lesson to drafters and those responsible for the execution of franchise agreements (who often are sales folk and not lawyers) is clear. If you want to avoid limiting your remedies to a potentially assetless LLC, be sure that there is a guarantee or other specific agreement that the franchisee’s principals are bound by the terms of the franchise and that such document is signed.
Arbitration of Defenses
Total Quality Logistics, LLC v. Traffic Tech, Inc., 2023 U.S. App. LEXIS 2951 (6th Cir. February 6, 2023), demonstrates why drafters need play through all the potential uses of arbitration. Total Quality Logistics (“TQL”) sued Traffic Tech and TQL’s former employee, Dugger, for violation of a Non-competition agreement and the settlement agreement of a previous dispute. Dugger defended based on the doctrine of unclean hands, arguing that TQL could not enforce his employment-related agreement because it had behave inequitably.
As part of his employment, Dugger had signed an Arbitration Agreement, which, per the court, “requires the arbitration of ‘Legal Claims,’ defined as ‘rights, causes of action, or claims’ arising out of Duggers’s employment.” Based upon this provision, TQL sought to compel arbitration of Dugger’s defense. The Court, with Chief Judge Sutton writing for himself and Circuit Judges Cole and Thapar, affirms the District Court’s denial of TQL’s motion to compel. “Although not defined in the agreement, ordinarily, ‘claim’ means ‘to ask for especially as a right’; ‘right’ means ‘something to which one has a just claim’; and ‘cause of action’ means ‘the grounds (such as violation of a right) that entitle a plaintiff to bring a suit.’” (Citation omitted). “It strains the common meaning of the words to read ‘defense’ into the Arbitration Agreement’s coverage provision.” The Court , then, reviews the contract language and finds that there is nothing to overcome that ordinary, dictionary meaning.
Again, as in Goergen, the court falls back on the language which the drafter chose, “We do not conclude that a defense is never arbitrable. Rather, Dugger’s defense here is not arbitrable because the Arbitration Agreement, by its plain terms, is not susceptible to an interpretation that makes it so.”(Emphasis in original).
Service of a Motion to Vacate an Arbitration
Agrasanchez v. Agrasanchez, 2022 US. Dist. LEXIS 237672 (C.D. Cal. December 29, 2022)(Fischer, J.), addresses the requirements for service of an application to vacate an award. Section 12 of Federal Arbitration Act establishes the requirements for service. If an adverse party is a resident of the district within which the award issued, such service is made upon the adverse party or its counsel as provided for service of a motion in that court. If the adverse party is a non-resident, service is made “by the marshal in any district within which the adverse party may be found in like manner as other process of the court.” The petitioner must serve any such motion within three months of the date of the award, FAA Section 12. The Respondents in Agrasanchez were non-residents of the applicable district. The International Centre for Dispute Resolution issued an award in the parties’ dispute on July 13, 2022. On October 13, 2022, Petitioners filed a Motion to Vacate and made service “in the days following October 13, 2022.” They also “initiated” service of process under the Hague Convention on those respondents who were residents of Mexico. The court holds that service was improper, although it rejects Respondents’ contention that the U.S. Marshal must make service. Rather, it holds that FAA Section 12’s use of the term “in like manner as other process” allows service under Fed. R. Civ. P. 4. However, service was still untimely. Although Petitioner sent a copy of the motion to Respondents’ counsel by email on October 13th, which was within the three-month window, Fed. Rule 4 only allows email service by order of the court or when the state in which the court is located or where service is made permits it. The District Court made no such order in this case. Texas law only allows email service upon motion and a showing that the applicant has tried unsuccessfully to make service by normal means; Respondents did not make such a motion or showing. Nor was service on the Mexican residents under the Hague Service Convention timely, as Respondents were not served until October 17th, October 22nd, October 25th, and December 2nd, respectively. Therefore the court “finds that Petitioners failed to timely serve Respondents within the three-month period set out in Section 12 of the FAA.”
The court also rejects a claim that the time requirements were equitably tolled. Such tolling is only appropriate “in the rare case” when “despite all due diligence, the party invoking equitable tolling is unable to obtain vital information bearing on the claim.” (Citation omitted). Here, even if Petitioners did not learn of the fraud upon which they base their application to vacate until September 26, 2022, they did not establish that they could not have made service before the cut-off date about three weeks later.
On the merits, in what is probably dictum after resolution of the timeliness issue, the court rejects Petitioners’ request to set aside the award for fraud. Based on the record in the arbitration, the court finds that Petitioners “do not identify any steps they took to resolve the issue during arbitration proceedings.” “Petitioners cannot legitimately claim the fraud was not discoverable before or during the arbitration.” Accordingly, Judge Fischer grants Plaintiffs’ application for an injunction against enforcement of the award as to them.
Lesson – Service of process is subject to Murphy’s Law – what can go wrong will go wrong. While litigators and trial lawyers are always balancing a number of balls, when filing an action or making service, leave yourself enough time to repair any missteps before the clock strikes midnight on your deadline.
Upcoming programs –
There are a number of important and useful ADR conferences on the horizon.
The Academy of Court-Appointed Neutrals will hold its annual meeting in San Diego on March 10th to March 12th. Registration closes on February 24th, so act quickly. Registration is available on-line at Registration (memberclicks.net). Merril Hirsh and his team have done a terrific job in organizing the Academy and this program. The meeting is open to non-members of the Academy.
The New York State Bar Association will be holding an all-day program at Fordham Law School on March 13th, centered on “Fulfilling the Promise – Getting Matters Resolved in a Timely and Efficient Way in Today’s World.” There will be representatives of several major arbitral institutions, including AAA-ICDR, JAMS, FINRA, CPR and ICC. I don’t have registration information, but you can probably find it on the New York State Bar’s Website.
For anyone interested in learning more about international arbitration, I recommend the Chartered Institute of Arbitrators’ program, “Virtual Introduction to International Arbitration,” which begins on March 16th. I have taken a CIArb course and can vouch that the materials and instructors are terrific. Register by March 1st at CIArb – Virtual Introduction to International Arbitration 2023.
The largest gathering of the Arbitration World in the U.S. has long been the spring meting of the ABA’s Dispute Resolution Section. It is several days of presentations by the best-known and most talented arbitrators and mediators, along with terrific networking opportunities. This year it will be held from May 10th to May 13th in Las Vegas. Unfortunately, I have a long-scheduled arbitration those days, but, if the case settles, I’ll be there and hope to meet some readers. More information is available at Welcome – 25th Annual Dispute Resolution Spring Conference (cvent.com)
Another group gathering is the American Arbitration Association’s Annual Panel Conference, another great chance to improve your skills and to meet other arbitrators and AAA professionals. It will be held in Rancho Mirage, California on March 24th and 25th. Registration is available at AAA Education Services – 2023 AAA/ICDR/AAA Mediation.org Panel Conference and closes on March 3rd.
The ABA Dispute Resolution Section is also sponsoring the 2023 Arbitration Training Institute in New York on March 9 and 10. This is a program designed for counsel and both new and experienced arbitrators who want to improve their skills. Again, it’s a great opportunity to meet other practitioners in the field. Registration closes on March 3rd and is available at Welcome – 2023 Arbitration Training Institute (cvent.com). I will be there, so please reach out for a hello and cup of coffee.
Have a good week. It reached 60 degrees in New Haven Friday, so Spring may finally be in sight.
David A. Reif, FCIArb
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