Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Wis.: Franchisee’s spouse must pay franchisor’s attorney fees after refusing to arbitrate termination, (Aug 4, 2015)

By Edward L. Puzzo, J.D.

A franchisee’s spouse was liable to pay a franchisor’s attorney fees and costs for refusing to submit her termination lawsuit to arbitration, as required by the franchise agreement, the federal district court in Green Bay, Wisconsin has ruled (Everett v. Paul Davis Restoration, Inc., August 3, 2015, Griesbach, W.).

In 2004, franchisor Paul Davis Restoration, Inc. (PDRI) entered into a franchise agreement with Matthew Everett and his limited liability company EA Green Bay, LLC (EAGB). Everett later transferred a 50 percent ownership share of EAGB to his wife, Renee Everett, without first obtaining the franchisor’s consent for the transfer of ownership and without having Mrs. Everett sign the franchise agreement in her individual capacity. Both steps were required by the terms of the franchise agreement.

In 2010, PDRI terminated the franchise agreement for cause for violation of the non-compete clause, and initiated arbitration. Mrs. Everett then sought a declaratory judgment, arguing that she was not bound by the arbitration clause, since she was not a signatory to the franchise agreement. PDRI countered that Mrs. Everett was estopped from avoiding arbitration under the direct benefits doctrine. PDRI won the arbitration, but when it sought confirmation of the arbitration award from the court, the district court ruled that Mrs. Everett’s benefits from the agreement were indirect and she was therefore not bound by the arbitration clause. PDRI appealed.

In its November 3, 2014 decision, the Seventh Circuit U.S. Court of Appeals framed the issue before it as whether an owner-operator of a franchise was obligated to arbitrate under a franchise agreement she did not sign, because she received direct benefits from the agreement. The court ruled that the doctrine of direct benefits estoppel did apply and reversed the ruling of the lower court, which then ruled in favor of PDRI.

Attorney fees. PDRI then moved for recovery of its attorney fees. Under the franchise agreement, the parties agreed to arbitrate their disputes, bearing their own fees. But the agreement further provided that any party that refused to arbitrate or abide by the decision of the arbitration panel was liable to the other party for all attorneys’ fees and costs incurred in enforcing the arbitration provisions of the agreement.

Mrs. Everett first argued that the point of her lawsuit was to establish whether she was a “party” under the franchise agreement, not whether she was specifically bound by the arbitration provision. But the court stated that hers was not an abstract question as to whether she was a party to a franchise agreement that merely happened to have an arbitration clause. Instead, while the “party” issue was part of the purpose of her lawsuit, the primary subject of the dispute was whether she was required to arbitrate and whether she had to abide by the results of the arbitration. By fighting arbitration, the court continued, she triggered the clause that required her to pay the other side’s attorneys’ fees and costs.

Mrs. Everett next argued that the attorney fee provision, generally calling for the parties to be responsible for their own attorney fees, was unenforceable because its language violated the Wisconsin Fair Dealership Law (WFDL). But the WFDL provision cited in support of that argument was inapplicable, the court stated, because PDRI was not asserting the attorney fees provision of the agreement; they were asserting the exception to that provision, which called for the party failing to comply with arbitration to become liable to the other party for all attorneys’ fees and costs incurred.

The court therefore granted franchisor PDRI’s motion for attorney fees.

The case is Civil Action No. 10-C-634.

Attorneys: David H. Weber (Law Firm of Conway Olejniczak & Jerry SC) for Renee Everett, and Building Werks of WI, LLC. Daniel M. Janssen (Quarles & Brady LLP) for Paul Davis Restoration, Inc.

Companies: Building Werks of WI, LLC; Paul Davis Restoration, Inc.

Cases: FranchisingDistribution WisconsinNews