Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—1^st Cir.: Ruling that Coverall violated court order was abuse of discretion, (Sep 3, 2013)

By Peter Reap, J.D., LL.M.

In ruling that cleaning services provider Coverall N.A., Inc. violated a court order in a dispute with some of its franchisees by emailing an arbitrator a response to assertions made by the franchisees, the federal district court in Boston abused its discretion, the U.S. Court of Appeals in Boston has decided (Awuah v. Coverall, N.A., Inc., August 30, 2013, Howard, J.). Thus, there was no legitimate basis for the district court’s resulting sanction against Coverall that admitted to an ongoing class action certain individuals who had been pursuing their claims against Coverall in arbitration. The district court’s denial of Coverall’s motion to reconsider and stay proceedings pending arbitration was reversed and the dispute remanded.

Background. Coverall is a franchisor that provides cleaning services, and its franchisees do the cleaning. Several of its franchisees sued Coverall in the federal district court in Boston, asserting multiple claims. The district court certified a class, excluding those franchisees whose agreements with Coverall contained clauses expressly requiring arbitration under the rules of the American Arbitration Association (AAA). Those franchisees pursued arbitration.

While arbitration proceedings were underway, the district court issued a ruling that threatened to expand the class. At the request of Coverall, which wanted to research its options to appeal this ruling, the arbitrator imposed a 60-day stay of the arbitrations of ten of the AAA claimants, the appellees in this case.

In July 2012, while this stay was in effect, the district court issued a bench order (“the July Order”), ruling that “[a]ny motion to delay, prevent the actual arbitration of these matters must first be presented to the Court.” The July Order did not mention the existing 60-day stay.

The franchisees then emailed the arbitrator a copy of the July Order. The email made certain assertions regarding the July Order, including that “the judge ruled that all cases we have filed … must go forward without any further delay.” Coverall sent the arbitrator a response, disputing the franchisees’ characterization of the July Order.

After Coverall sent its response, the franchisees filed a “Notice to Court Regarding Coverall’s Ongoing Obstruction of AAA Arbitrations.” The notice characterized Coverall’s email as a “request for a delay” and argued that, pursuant to the July Order, such a request should have first been presented to the court.

The district court—concluding that Coverall’s email had violated the July Order “by seeking to continue a stay of arbitration for ten arbitration claimants”—sua sponte sanctioned Coverall by admitting to the class the ten claimants, relieving them of their obligations to arbitrate. Coverall filed a motion to reconsider the sanction, which the district court denied. The appeal of that decision was before the appellate court.

Analysis. By its terms, the July Order demanded that any motion to delay or prevent arbitration be approved by the district court. The AAA rules, in all relevant respects, used the term “request” instead of “motion,” the court noted.

Coverall’s email to the arbitrator neither moved for nor requested anything, the appellate court held. Rather, it responded to the franchisees’ claim that the July Order required lifting the arbitrator’s temporary stay, when, in fact, the July Order did not mention that stay.

If the district court had intended to prohibit Coverall from responding to assertions made by the franchisees, that prohibition should have appeared in the July Order in unambiguous terms, the appellate court reasoned. Since the July Order did not prohibit Coverall’s conduct, the district court’s determination that Coverall violated that order was an abuse of discretion. Without this improper determination, there was no legitimate basis for the sanction interfering with the ten claimants’ arbitral proceedings, and thus Coverall’s motion to stay the ten claimants’ judicial proceedings pending arbitration should have been granted, according to the First Circuit.

The case is No. 12-2495.

Attorneys: Norman M. Leon (DLA Piper LLP) for Coverall N.A., Inc. Shannon Liss-Riordan (Lichten & Liss-Riordan, P.C.) for Pius Awauh.

Companies: Coverall N.A., Inc.

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