Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mo.: Attorney fee award to pharmacy franchisor in arbitration confirmed, (Mar 4, 2015)

By Linda O’Brien, J.D., LL.M.

An arbitrator’s award of attorney fees to a pharmacy franchisor on its counterclaim against a franchisee was not outside the scope of his authority where the franchisee failed to proceed with claims brought in arbitration, the federal district court in St. Louis has decided. The franchisor’s motion to confirm the arbitration award was granted, and the franchisees’ motion to vacate the award was denied (Medicine Shoppe International, Inc. v. Prescription Shoppes, LLC, March 3, 2015, Perry, C.).

Medicine Shoppe International, Inc. (MSI) grants licenses to franchisees to operate Medicine Shoppe System pharmacies. Prescription Shoppes is a franchise of MSI’s system and operates two MSI pharmacies in Florida. In December 2011, Prescription Shoppes filed a statement of claim with United States Arbitration and Mediation. In February 2012, MSI filed a response and asserted a counterclaim against Prescription Shoppes and its guarantor, Samir Amin. Subsequently, an arbitrator was appointed and confirmed. After two years of arbitration, Prescription Shoppes submitted a notice of voluntary dismissal of its claims. MSI then requested a default award.

The arbitrator found that Prescription Shoppes and Amin failed to proceed and allowed MSI to submit evidence supporting its counterclaims. After the arbitrator granted MSI’ motion for default, MSI sought attorneys’ fees and costs. The fee petition was supported by a sworn declaration of MSI’s attorney, which indicated the hours billed, hourly rates charged, and description of legal services provided. Although the franchisee’s request to examine the specific billing entries was denied, the arbitrator required MSI’s counsel to produce detailed time records for an in camera review.

In June 2014, the arbitrator rendered an award in favor of MSI, finding the franchisee liable for a total sum of $579,000, which consisted of damages, attorneys’ fees, and filing costs. MSI sought a judgment confirming the arbitration award. The franchisee moved to vacate the arbitration award as to the amount of attorneys’ fees either on the grounds of evident partiality, arbitrator misconduct, or the arbitrator’s actions constituted manifest disregard for the law.

Section 10 of the Federal Arbitration Act (FAA) authorizes the court to vacate an arbitration award where (1) the award was procured by fraud; (2) there was evident partiality in the arbitrators; (3) the arbitrators were guilty of misconduct; or (4) the arbitrators exceeded their powers, the court explained.

According to the court, the franchisee waived its argument as to evident partiality by failing to raise the issue with the arbitrator. The franchisee’s communications with the arbitrator, asserting that the arbitrator’s reliance on counsel’s reputation alone to support a substantial award of attorneys’ fees was unjustified, did not mention partiality. Therefore, the franchisee could not raise the argument for the first time in a motion before the court.

Additionally, the franchisees were not deprived of a fair hearing due to the arbitrator’s refusal to order MSI to produce detailed billing records because they were not entitled to be heard. The arbitrator had sole discretion to determine that the franchisee failed to proceed and to enter a default award. In this case, the arbitrator made a fee award based on his review of the detailed time records provided by MSI and with a direct understanding of the extent of the parties’ discovery and other efforts. Moreover, he allowed the franchisee to respond on why the detailed time entries should be produced and why the requested fees were unreasonable. The arbitrator’s conduct was not outside the scope of his authority in making the fee award, in the court’s view.

Finally, the franchisee’s argument that the arbitrator’s decision should be vacated based on “manifest disregard of the law” must also fail. The only grounds for vacatur of an arbitration award are those specifically enumerated in Section 10 of the FAA. Thus, the court concluded that the franchisee’s “manifest disregard” claim was not cognizable.

The case is No. 4:14-cv-1218.

Attorneys: Stephen J. O'Brien (Dentons U.S. LLP) for Medicine Shoppe International, Inc. Robert M. Einhorn (Zarco and Einhorn, PA) for Prescription Shoppes, LLC.

Companies: Medicine Shoppe International, Inc.; Prescription Shoppes, LLC

Cases: FranchisingDistribution MissouriNews