Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Ill.: Glass repair franchisor’s claims against former franchisee not subject to arbitration or mediation, (Oct 11, 2013)

By Tobias J. Gillett, J.D., LL.M.

A glass repair franchisor did not have to arbitrate or mediate its claims that a former franchisee violated the franchise agreement’s non-compete and cessation of trademark use provisions, as well as other provisions of that agreement and related agreements, following the agreement’s expiration, the federal district court in Springfield, Illinois has ruled (Synergistic International, LLC v. Monaghan, October 10, 2013, Myerscough, S.).

Synergistic International, Inc. is a franchisor of automotive, residential, and business glass repair services under the name Glass Doctor. On June 26, 2002, Synergistic entered into a franchise agreement with Vance Door, Inc., with Becky Monaghan as its principal. Monaghan also signed as guarantor of the franchise’s obligations to comply with the franchise agreement. Vance Door later assigned the franchise agreement to Glass Rx, Inc., a company Monaghan also owned. Michael Monaghan also entered into a confidentiality agreement that included a covenant not to compete. On June 26, 2012, the franchise agreement expired, and Glass 1 One, Inc., a company owned by Michael Monaghan, purchased the assets of Glass Rx.

On November 9, 2012, Synergistic filed suit against the Monaghans and their companies, alleging that they had failed to abide by the non-compete and cessation of trademark use provisions of the franchise agreement by diverting business from the former Glass Doctor business to a new business; by using the Glass Doctor service marks, or substantially indistinguishable versions of them, in connection with that business; and by falsely informing customers that the former Glass Doctor franchise had merged with and operated in combination with the new business.

Synergistic asserted claims for federal service mark counterfeiting and infringement, federal unfair competition and false designation of origin, common law trademark and service mark infringement and unfair competition, breach of the non-compete provisions of the franchise agreement, breaches of the franchise agreement’s terms regarding the return of franchise-provided materials and affiliated telephone numbers, tortious interference with contract or business relationship, breach of guaranty agreements, and breach of Michael Monaghan’s confidentiality agreement. The defendants filed a motion to compel arbitration and/or mediation and to dismiss or stay proceedings pending its completion.

The court initially determined that the question of whether the franchise agreement’s alternative dispute resolution provision applied was one to be decided by the court. The court explained that “unless the arbitration agreement is clear and unmistakable that an issue of arbitrability is for the arbitrator, the issue should be resolved by the court.” Here, the franchise agreement did not clearly state that the arbitrator should determine whether the dispute resolution provisions applied to Synergistic’s claims.

The court rejected the defendants’ argument that Synergistic had to follow the franchise agreements’ mediation and arbitration processes for its federal service mark counterfeiting and infringement, federal unfair competition and false designation of origin, and common law trademark and service mark infringement and unfair competition claims because Synergistic had failed to allege any irreparable loss or damage associated with those claims. The court observed that under both Texas and Illinois law a court will not look to parole evidence and will interpret a contract according to its plain meaning if its language is unambiguous. Here, the franchise agreement specifically provided that the parties to the agreement could forego alternative dispute resolution if a dispute arose “relating to the Marks,” and could seek money damages, injunctive relief, and other relief. Synergistic’s claims related to the Marks, and therefore Synergistic did not have to go through the alternative dispute resolution processes.

Similarly, Synergistic’s claim that Michael Monaghan and Glass 1 One tortiously interfered with a contract or advantageous business relationship or expectancy by attempting to divert business from Synergistics to Glass 1 One through the use of Synergistic’s marks and telephone numbers also related to the Marks, and therefore Synergistic did not have to proceed through the dispute resolution processes for that claim either.

Synergistic’s claims for breach of the non-compete provisions of the franchise agreement, breaches of the franchise agreement’s terms regarding the return of franchise-provided materials and affiliated telephone numbers, and breach of guaranty agreements also did not have to undergo alternative dispute resolution. The alternative dispute resolution requirement did not apply to “a situation in which Franchisor will suffer irreparable loss or damage unless Franchisor takes immediate action,” including conduct in violation of the franchise agreement’s limits on the defendants’ ability to compete with the Synergistic following termination of the agreement and its requirement that the defendants must return franchise-provided materials and cease use of certain affiliated telephone numbers. Since claims regarding that conduct did not have to go through the alternative dispute resolution processes, Synergistic’s claims were properly before the court.

Finally, Michael Monaghan was not a party to the franchise agreement, and the confidentiality agreement he signed did not contain an alternative dispute resolution provision. Therefore, Synergistic’s claim for breach of the confidentiality agreement did not have to undergo alternative dispute resolution.

Although Michael Monaghan “briefly noted” that the choice-of-law provision in the confidentiality agreement provided that the claim for breach of that agreement should belong in a Texas court, he did not develop that argument or request a dismissal of the claim or transfer of it to a Texas court. Therefore, the court declined to address whether the claim should be dismissed or transferred based on the choice-of-law- provision.

The case is No. 12-3299.

Attorneys: Christopher P. Bussert (Kilpatrick Townsend & Stockton LLP) for Synergistic International, LLC. Charles R. Schmadeke (Hinshaw & Culbertson) for Becky S. Monaghan, Glass Rx, Inc. and Glass 1 One, Inc.

Companies: Synergistic International, LLC; Glass Rx, Inc.; Glass 1 One, Inc.

Cases: FranchisingDistribution IllinoisNews