Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Ky.: Gutter system distributor must arbitrate contract claims, (Oct 13, 2015)

By Greg Hammond, J.D.

An “Englert LeafGuard Gutter System” distributor must arbitrate breach of contract claims against its manufacturer, according to the terms of its distribution agreement, the federal district court in Lexington, Kentucky, has decided. In partially granting the manufacturer’s motion to compel arbitration and stay the entire action pending arbitration, the court concluded that the distribution agreement is not procedurally or substantively unconscionable (LeafGuard of Kentuckiana, Inc. v. LeafGuard of Kentucky, LLC, October 9, 2015, Reeves, D.).

Englert, Inc. manufactures and sells a patented leaf-rejecting, seamless gutter system known as “Englert LeafGuard Gutter System.” LeafGuard of Kentuckiana, Inc. entered into a distribution agreement with Englert, allowing Kentuckiana to manufacture, sell, and install Englert’s LeafGuard gutter system in specific counties in Kentucky and Southern Indiana. After Kentuckiana failed to pay royalties or attain its annual sales target, Kentuckiana offered to sell its franchise to LeafGuard of Kentucky, LLC. Englert, believing it was required to approve the sale of the franchise, conditioned its approval on Kentuckiana relinquishing certain assets to pay off past due royalties, and advised that it would not renew the distributor agreement once the current two-year term ended. LeafGuard of Kentucky decided not to purchase Kentuckiana’s territory and assets, and Englert terminated the distributor agreement.

Kentuckiana filed suit against Englert and LeafGuard of Kentucky, alleging that Englert breached the distributor agreement, violated its duty of good faith and fair dealing, and interfered with the purchase agreement involving the sale of Kentuckiana’s distribution agreement to LeafGuard of Kentucky. In addition, Kentuckiana brought breach of contract claims against LeafGuard of Kentucky and sought injunctive relief. Englert moved to compel arbitration and stay the entire action pending completion of arbitration.

Jurisdiction, choice of law. Kentuckiana claims that the arbitration provision in the distribution agreement is unconscionable and, therefore, unenforceable. The court first concluded that it has jurisdiction over this issue because Kentuckiana challenges the validity of the arbitration agreement, not the contract as a whole. In addition, the court found that New Jersey state law applies in this case, pursuant to the choice-of-law provision in the distribution agreement because New Jersey has a substantial relationship to the parties; a reasonable basis exists for Englert—a company based in New Jersey—to choose New Jersey’s law to govern its franchise contracts; and both parties argued they would prevail regardless of which state’s law applies. Application of New Jersey law would therefore not undermine any fundamental policies inherent under Kentucky law, the court found.

Unconscionability. The court next determined that the arbitration agreement was neither procedurally nor substantively unconscionable. Despite claims that he signed the “adhesion contract” under economic duress, the court found that Kentuckiana’s owner—a sophisticated businessman who operates multiple businesses in the construction industry—“easily could have refused this one business venture.” In addition, Kentuckiana’s argument that the agreement is substantively unconscionable because it required Kentuckiana to forfeit its right to seek punitive damages, exemplary damages, and injunctive relief failed. The court found that the damages waiver was not one-sided because it applied to both Englert and Kentuckiana, and Kentuckiana was entitled to seek injunctive relief under certain circumstances. Englert’s motion to compel arbitration was consequently granted.

Stay. Lastly, Englert’s motion to stay pending arbitration was partially granted. The court found that because all of Kentuckiana’s claims against Englert are subject to binding arbitration, the motion could be granted to the extent it seeks a stay of those claims. The motion, however, was denied with regard to LeafGuard of Kentucky and its owner, because those claims are not dependent on the outcome of the arbitration.

The case number is 5:15-cv-00237-DCR.

Attorneys: Jessica Katherine Winters (The Getty Law Group, PLLC) for LeafGuard of Kentuckiana, Inc. William W. Allen (Gess, Mattingly & Atchison, P.S.C.) for LeafGuard of Kentucky, LLC. Adam M. Smith (Stites & Harbison PLLC) for Englert, Inc.

Companies: LeafGuard of Kentuckiana, Inc.; LeafGuard of Kentucky, LLC; Englert, Inc.

Cases: FranchisingDistribution KentuckyNews