Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DColo: Claims Asserted by Halloween Shop Franchisees Against Franchisor Were Dismissed for Improper Venue, (Mar 20, 2013)

By Peter Reap, J.D., LLM

Venue for the claims asserted by two Colorado Halloween shop franchisees, Crazy Willy’s, Inc. and Jack’s Halloween, LLC, and by Brian Veatch, the owner of Jack’s Halloween (collectively, the “plaintiffs”) against franchisor Halloween Express, LLC, was proper only in Summit County, Ohio, pursuant to the broad terms of a choice of venue provision in the parties’ agreements, the federal district court in Denver has decided (Crazy Willy’s, Inc. v. Halloween Express, LLC, March 18, 2013, Blackburn, R.). Thus, those claims were dismissed with prejudice because they were filed in the improper venue of the Colorado federal district court.

In addition, the claims asserted by the plaintiffs against Morris Costumes, Inc., and its owner, Scott Morris, were within the scope of the arbitration provision in the security agreements that Crazy Willy’s and Veatch both had with Morris Costumes. Thus, the plaintiffs and defendants Morris Costumes and Morris—the owner—were ordered to proceed to arbitration on those claims.

Background. In 2011, Jack’s Halloween suffered significant losses on three stores it had purchased from fellow franchisee Crazy Willy’s. In late 2011, the proceeds of a liquidation of the costume inventory of Jack’s Halloween were paid to Morris Costumes and Halloween Express to satisfy amounts owed to those entities by Jack’s Halloween. However, Jack’s Halloween still owed Crazy Willy’s about $200,000, which, according to the agreements between the franchisees, was to be satisfied when Jack’s Halloween returned to Crazy Willy’s the inventory Crazy Willy’s had sold to Jack’s Halloween as part of the purchase of the three stores. None of the proceeds from the Jack’s Halloween inventory liquidation were paid to Crazy Willy’s; instead, as noted, it went to satisfy amounts owed to Halloween Express and Morris Costumes.

The plaintiffs alleged that Morris, Morris Costumes, and Halloween Express took possession of and sold the inventory of Jack’s Halloween in which Crazy Willy’s held a security interest. According to the plaintiffs, Morris, Morris Costumes, and Halloween Express held no interest in this inventory.

Plaintiffs Jack’s Halloween and Veatch assigned all of their claims and remedies to plaintiff Crazy Willy’s. Crazy Willy’s apparently relied on its rights as an assignee of Jack’s Halloween and Veatch. The plaintiffs asserted nine claims related to Halloween Express’s performance under the franchise agreements and to the alleged conversion of the costume inventory in which Crazy Willy’s held a security interest, including claims of conversion, tortious interference, and unjust enrichment.

Venue. Both franchise agreements between the parties contained the same venue provision: “17.2 Any controversy or claim between Franchisee and Franchisor will be resolved by arbitration in Akron, Summit County, Ohio pursuant to applicable Ohio law, enforceable by the Summit County, Ohio courts, and Franchisee hereby submits to that exclusive jurisdiction and venue.”

The venue provision of the franchise agreements covered “(a)ny controversy or claim between Franchisee and Franchisor,” the court noted. Here, the claims asserted against Halloween Express by Crazy Willy’s and Jack’s Halloween were between franchisees and the franchisor. Moreover, all of the claims were tied closely to the franchise agreements and business conducted under those agreements.

The plaintiffs’ arguments that somehow the broad terms of the venue provision were not applicable to the claims of Crazy Willy’s and Jack’s Halloween against Halloween Express were without merit, the court held. None of the other bases on which a forum selection clause could be found to be invalid were established in the record. Thus, venue for the claims of Crazy Willy’s and Jack’s Halloween against Halloween Express was proper only in Summit County, Ohio. Those claims were dismissed without prejudice because they were filed in an improper venue.

Arbitration. Crazy Willy’s and Veatch, owner of Jack’s Halloween, each had separate security agreements with Morris Costumes. Both agreements included the same arbitration provision: “10. BINDING ARBITRATION. Any and all controversies or claims of any nature whatsoever arising out of or relating to this Agreement shall be settled by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules.”

Because the venue provision of the franchise agreements limited venue for any arbitration to Summit County, Ohio, venue for a determination of what claims were covered by the arbitration clause was proper only in Summit County, Ohio, the court determined. The court thus declined to make a binding determination of which of the claims asserted in this case were covered by the arbitration clause of the franchise agreements. However, this applied only to the claims of Crazy Willy’s and Jack’s Halloween against Halloween Express.

The arbitration provision of the Morris Costumes security agreements covered “(a)ny and all controversies or claims of any nature whatsoever arising out of or relating to this Agreement.” The claim that Morris Costumes converted costume inventory in which Crazy Willy’s held a security interest was a claim related to the security agreement between Veatch, owner of Jack’s Halloween, and Morris Costumes, the court held. Ultimately, resolution of that claim required a determination of the scope and operation of the security agreement.

In a similar way, each of the plaintiffs’ other claims against Morris Costumes was related to the security agreement between Veatch and Morris Costumes. By accepting from Veatch an assignment of his claims, Crazy Willy’s was also subject to the terms of the arbitration provision to the extent the assigned claims fell within that provision.

Facially, the claims asserted against Morris did not fall within the scope of the arbitration provision of the Morris Costumes security agreement because Morris was not a party to those agreements. However, the plaintiffs alleged that Morris Costumes was liable for the actions of Morris under the doctrine of respondeat superior. Thus, in reality, the claims asserted against Morris were also asserted against Morris Costumes, the court ruled. The claims against Morris were related to the Morris Costumes security agreement, and those claims fell within the scope of the arbitration provision. The plaintiffs and defendants Morris Costumes and Morris were ordered to proceed to arbitration on those claims.

The case is Civil Action No. 12-cv-01496-REB-MJW.

Attorneys: Daniele William Bonifazi (Inderwish & Bonifazi, P.C.) for Crazy Willy's, Inc. David William Walulik (Frost Brown & Todd, LLC) for Halloween Express, L.L.C.

Companies: Crazy Willy's, Inc.; Halloween Express, L.L.C.; Jack’s Halloween, LLC.

Cases: FranchisingDistribution ColoradoNews