Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—7th Cir.: Misfeasance by former franchisees’ attorneys did not justify setting aside default judgment, (Jul 8, 2015)

By Linda O’Brien, J.D., LL.M.

In an action against a former franchisee by a hotel franchisor that sought damages for breach of the franchise agreement, the U.S. Court of Appeals in Chicago has affirmed a district court’s denial of the franchisee’s motion to set aside a default judgment, finding that the franchisee’s attorneys’ misfeasance did not justify reopening the judgment (Choice Hotels International, Inc. v. Grover, July 7, 2015, Easterbrook, F.).

Background. In June 2006, hotel franchise chain Choice Hotels International entered into a franchise agreement with SBQI, Inc. to operate a Quality Inn hotel in South Bend, Indiana. Choice sent a notice of default to SBQI for failure to pay franchise fees under the agreement and terminated the franchise in December 2010. After SBQI continued to use the “Quality” trademarks, Choice filed suit against SBQI and several of its managers and investors, seeking damages for breach of the franchise agreement and trademark infringement.

One of the defendants, Tarranpaul Chawla, an attorney, represented the other defendants. Chawla failed to answer the complaint, which led to the entry of a default judgment. The defendants obtained another attorney, who took some steps in the litigation but failed to file essential responsive pleadings. Subsequently, the district court set damages at $430,000 and entered a final judgment in that amount. More than a year after the judgment was entered, the defendants hired a third counsel, who filed a motion to set aside the judgment. In denying the motion, the district court found that the defendants’ attorneys’ misfeasance was not “extraordinary circumstances” to justify setting aside the judgment under Federal Rule of Civil Procedure 60(b). The defendants appealed.

Judgment relief. To obtain relief under Rule 60(b), a movant must establish “extraordinary circumstances” that justify setting aside a final decision. Following the U.S. Supreme Court decision in Link v. Wabash R.R., 370 U.S. 626 (1962), the appellate court noted that litigants were bound by the acts and omissions of their attorneys and legal misconduct did not justify reopening a judgment. For civil litigants, monetary compensation via a malpractice action would be an adequate remedy for an adverse judgment.

Litigants who know or strongly suspect that their attorneys have failed to act or respond in the litigation must act to protect their own interests by hiring another attorney, the appellate court continued. In this case, the defendants recognized that Chawla and the second attorney were not protecting their interests. They could have consulted the court docket and learned that the attorneys did not file essential documents but they did not do so. Moreover, the defendants did not defend the litigation, either personally or by counsel, and failed to monitor the proceedings. Thus, the district court did not abuse its discretion in denying their motion for relief from the judgment.

The case is No. 14-3294.

Attorneys: Larry L. Barnard (Carson Boxberger LLP), and Calvert Sterling Miller (Rothberg, Logan & Warsco LLP) for Choice Hotels International Inc. Matthew James Anderson (Wruble & Associates) for Anuj Grover.

Companies: Choice Hotels International, Inc.; SBQI, Inc.

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