Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Arbitration Decision Upholding Termination of Hotel Franchise, Awarding Damages Confirmed, (Nov 30, 2012)

By John W. Arden, J.D., LLM.

An arbitration award—upholding the termination of a hotel franchise for the franchisee’s change of ownership without the franchisor’s consent and assessing damages owed to the franchisor—was confirmed by the federal district court in Greenbelt, Maryland (Choice Hotels International, Inc. v. Yami, Inc., November 29, 2012, Chasanow, D.). A default judgment was entered against the franchisee, which failed to respond to the franchisor’s application for confirmation.

Franchisor Choice Hotels International entered into a franchise agreement with Yami, Inc. in 2007 for the operation of a hotel in South Boston, Virginia. In 2009, the franchisee changed ownership of the hotel without the prior consent of the franchisor, contrary to the requirements of the franchise agreement. This change without consent constituted a breach of the agreement, justifying termination of the franchise, according to the arbitrator, who awarded the franchisor $19,183 in unpaid franchise fees and interest, $57,962 in liquidated damages for lost profits, and $1,975 in costs associated with the arbitration.

The franchisor made an application for confirmation in the federal district court. Although the franchisee was properly served, it failed to respond within the requisite time period, and the franchisor moved for a default judgment, which was entered July 9, 2012.

Upon entry of a default, the well-pled allegations in a complaint as to liability are taken as true, but the allegations of damages are not, the court observed.

In reviewing the application for confirmation, the district court found that the franchise agreement contained a provision requiring arbitration of “any controversy or claim arising out of or relating to this Agreement, or the breach of this Agreement.” Such controversy or claim “will be sent to final and binding arbitration” and “[j]udgment on the arbitration award may be entered in any court having jurisdiction.” The provision went on to require that arbitration proceedings be conducted in Maryland and apply the substantive law of Maryland.

The federal district court in Greenbelt, Maryland held that it had jurisdiction to confirm the arbitration award, since the parties appeared to be diverse and the amount in controversy satisfied the jurisdictional minimum. There was no question that the franchisor filed its application within one year after the arbitration award was issued.

If there is a valid contract between the parties providing for arbitration and the dispute resolved in arbitration was within the scope of the arbitration provision, then substantive review is limited to grounds set forth in Section 10 of the Federal Arbitration Act, the court held. This section allows vacatur of an award only: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone a hearing or in refusing to hear pertinent evidence or in any other misbehavior that may have prejudiced the rights of a party; or (4) where the arbitrators exceeded their powers or executed them so imperfectly as to not make a mutual, final, and definite award.

In addition, a court may overturn a legal interpretation of an arbitration panel if it is in manifest disregard for the law. Mere misinterpretation of a contract or an error of law does not suffice to overturn an award, the court noted.

Choice Hotels established that there was a valid contract between the parties, requiring arbitration of “any controversy or claim arising out of or relating to this Agreement,” the court found. The record clearly reflected that its arbitration demands arose from Yami’s breach of contract. Thus, the court was satisfied that the claims were within the scope of the parties’ arbitration agreement. There was no showing of any of the narrow grounds listed in the Federal Arbitration Act for vacatur of the arbitration award nor was there any suggestion that the arbitrator acted in manifest disregard for the law.

The franchisor’s request for the costs of the action in the amount of $350 was denied because costs were not requested in the complaint, the court ruled. In all other respects, the franchisor demonstrated entitlement to confirmation of the arbitration award.

The case is Civil Action No. DKC 11-2354.

Stuart M. Kreindler for Choice Hotels International.

Cases: FranchisingDistribution MarylandNews