Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—CDCal: Budget Blinds Franchisee Entitled to Arbitration Award after Competing Dealer’s Complaints Led to Termination , (Jan 18, 2013)

By E. Darius Sturmer, J.D.

The federal district court in Santa Ana, California, confirmed an arbitration award of $275,234 for the constructive termination of a Madison, Wisconsin, area franchisee by Budget Blinds, a nationally known franchisor of window covering businesses (Budget Blinds Inc. v. LeClair, January 16, 2013, Carter, D.).

The arbitration stemmed from claims by Budget Blinds that the franchisee, Josh LeClair, had breached his franchise agreement by selling outside of his territory without authorization and by running a separate business independent of Budget Blinds that cleaned and repaired blinds.

Constructive Termination

The arbitrator’s finding that Budget Blinds had constructively terminated the franchise agreement did not amount to a manifest disregard of the law or violate the company’s right to seek legal redress without incurring liability. The evidence presented to the arbitrator supported LeClair’s claims that Budget had failed to investigate the complaints of a competing Madison-area franchisee before filing for arbitration, as required by the Franchise Agreement and the Wisconsin law incorporated into that agreement, and had refused LeClair’s attempts to discuss the allegations to explore potential remedies. The franchisor’s own representative verified LeClair’s further allegations that Budget Blinds had shut down his access to the “B-Fast” record-keeping and management system and had redirected his leads to another dealer.

In addition, Budget Blinds presented no evidence to contradict LeClair’s position that the provision against selling into another franchisee’s territory was discriminatorily enforced against him. The same competing franchisee whose complaints led Budget Blinds to file its demand, Jeffrey Morris, had himself admitted to selling into other franchisees’ territory, and the arbitrator also relied on evidence that other franchisees were making similar sales.

The arbitrator did not abuse her discretion in finding that Budget Blinds had not complied with the notice or cure requirements of Wisconsin’s Fair Dealership Law. The statute provides that no grantor of a franchise “may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause.” It also states that a grantor must provide a dealer with 90 days prior written notice “of termination, cancellation, nonrenewal or substantial change in competitive circumstances,” and must provide a dealer with 60 days to cure any deficiency. Given the evidence in the record supporting LeClair’s assertion that Budget Blinds cut him off from nearly all contact with it and singled him out for alleged violations, it could not be seen as “completely irrational” or a “manifest disregard of the law” for the arbitrator to have found constructive termination.

The court rejected an argument by Budget Blinds that constructive termination was impossible so long as the company did not actually terminate the Franchise Agreement. Also without merit were Budget’s contentions that the arbitrator’s issuance of a preliminary injunction indicated that she did not think the Agreement had been terminated and that a declaratory relief action does not interfere with an underlying contract.

While a later date for the constructive termination finding than the day LeClair was served with the arbitration demand may have made more sense, in the sense that alleged actions such as shutting off LeClair’s B-Fast access came later and therefore could not have formed the basis of the arbitrator’s finding, it did not warrant reversal of the arbitration award. Even if that factual finding was an error, it would still remain within the broad range of allowable error that stopped short of an arbitrator acknowledging the correct law and manifestly disregarding it, the court stated.

Award of Damages

Budget Blinds failed to meet its burden for vacating the award, the court held. The company’s argument that the arbitrator disregarded the law by awarding LeClair speculative damages essentially sought to re-litigate the arbitrator’s factual findings and weighing of the evidence in a manner that was inconsistent with the limited scope of review for arbitration awards. What Budget Blinds characterized as the arbitrator “ignor[ing] LeClair’s burden to prove his damages with reasonable certainty” was a determination of the weight of evidence well within the arbitrator’s discretion, the court noted. There was “no gross error apparent on the fact of the award, nor reliable sign such error was committed with intent to nullify the law,” the court said.

The arbitrator had denied LeClair’s proposed damages calculated from sales in gray territories (those not assigned to any franchisee) as too speculative, granting damages calculated only from his assigned territory. LeClair introduced data from his time as a franchisee on the price and cost of goods sold, as well as monthly sales reports and his own bank statements, and prepared summaries derived from this data. He also testified that his calculations were an underestimate, given that he would have continued developing his business had had been permitted to continue as a franchisee. Budget Blinds presented no contradictory evidence. Its contention that the arbitrator did not discount a projection of five years of damage did not provide grounds to vacate the award.

Finally, the court found, the arbitrator did not exceed her authority by asking for submissions after the arbitration on the proper measure of damages. The JAMS rules governing the arbitration provided sufficient leeway for the arbitrator to accept the submissions of damage calculations. Moreover, Budget Blinds failed to show that the arbitrator willfully committed a blatant error through her action that was apparent on the face of the award, the court concluded.

The court reserved a ruling on LeClair’s motion for sanctions.

The case is No. SACV 12-1101 DOC (MLGx).

Attorneys: James M. Mulcahy (Mulcahy LLP) for Budget Blinds Inc.; Eric Allen Baker (Boardman and Clark LLP) for Josh James LeClair.

Companies: Budget Blinds Inc.

Cases: FranchisingDistribution CaliforniaNews