Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Arbitration awards enjoin ex-franchisee from using franchisor trademarks, enforce noncompetition pacts, (Sep 8, 2014)

By John W. Arden, J.D., LL.M.

The federal district court in Camden, New Jersey confirmed two arbitration awards in favor of Doctor’s Associates, the franchisor of Subway sandwich shops, requiring the former franchisee of four shops to stop using Subway trademarks, to refrain from engaging in a sandwich business within three miles of any Subway restaurant for a period of one year, and to pay arbitration fees. The arbitration awards were held to apply to the franchisee’s alter ego, JAI Santoshima, Inc., even though the corporation was not a party to the arbitrations (Doctor’s Associates Inc. v. Patel, September 5, 2014, Kugler, R.).

In 2004, Doctor’s Associates entered into franchise agreements with Rakesh B. Patel for the operation of three Subway shops in New Jersey. The agreements were all amended in April 2005, when Patel signed a franchise agreement for the operation of a fourth franchise. The franchise agreements contained provisions requiring arbitration of disputes pursuant to the Federal Arbitration Act.

Due to Patel’s alleged failure to operate the first three franchises in accordance with the franchise agreements, Doctor’s Associates brought two arbitration proceedings. One arbitration award, dated January 14, 2013, required Patel to deidentify one of his franchises, stop using Subway trademarks, and refrain from engaging in any sandwich business within three miles of any Subway restaurant for a period of one year. Patel was also required to pay $250 per day until he complied with the award, $1,229 in arbitration fees, and $2,500 in the arbitrator’s compensation. Even after receiving the award, Patel continued to use the Subway trademarks until April 24, 2013, when he vacated the premises.

A second arbitration award, entered in favor of Doctor’s Associates, similarly required Patel to deidentify two other restaurants, to stop using Subway trademarks, to refrain from engaging in the sandwich business within three miles of any Subway restaurant, and to pay $250 per day until compliance with the award and arbitration fees. Patel failed to comply with the award and continued to use the Subway trademarks until September 1, 2013, when he was evicted from the premises.

On March 18, 2013, Doctor’s Associates filed a nine-count complaint against Patel, seeking confirmation of both arbitration awards. Subsequently, the court entered a default against Patel and dismissed the case. The court later vacated the dismissal of the action, thus reinstating the matter, and entered a default. Patel and his alter ego corporation were served with a motion to default on February 13, 2014.

While default judgments are generally inappropriate to confirm an arbitration award, the district court confirmed the arbitration awards on a finding that the arbitrators were not shown to have exceeded their powers or to have failed to execute them appropriately. Doctor’s Associates asked the court to confirm the awards against both Patel and JAI Santoshima, Inc., even though the corporation was not a party to the arbitrations.

Generally, an action to confirm an arbitration award cannot be used to impose liability against a nonparty, even where the nonparty is alleged to be the alter ego of a party to the arbitration, the court observed. However, this rule does not apply when defendants have failed to enter an appearance in a lawsuit.

The district court decided to pierce the corporate veil and assert alter ego liability under New Jersey law, since (1) Patel was alleged to have created JAI for the sole purpose of operating Patel’s franchises and/or administering Patel’s duties with regard to the franchise and (2) most or all payments made by Patel to Doctor’s Associates were made by checks or funds transfers from JAI. As Patel refused to appear in this case, and likely hoped to avoid having to pay a judgment by hiding behind JAI, the court believed that an alter ego finding was appropriate.

The case is Civil No. 13-1611 (RBK/AMD).

Attorneys: Forrest Scott Turkish (Law Office of Forrest Scott Turkish) for Doctor's Associates Inc.

Companies: Doctor's Associates Inc.; JAI Santoshima, Inc.

Cases: FranchisingDistribution NewJerseyNews