Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDIll: Real Estate Brokerage Franchisee Unsuccessful in Vacating Arbitration Award, (Apr 22, 2013)

By Peter Reap, J.D., LL.M.

Several individuals and entities that entered into a real estate brokerage franchise agreement with franchisor Real Living Real Estate, LLC, were not entitled to the vacatur of an arbitration award in a dispute between the parties because the alleged fraud on the part of the franchisor was known to the franchisees’ attorney before the arbitration commenced, the federal district court in Chicago has ruled (Real Living Real Estate, LLC v. Chicago Agent Partners, LLC, April 18, 2013, Leinenweber, H.). Thus, Real Living’s petition to confirm the award was granted.

In 2010 the parties renewed their franchise agreement and each of the franchisees executed a promissory note as part of that renewal. Shortly thereafter, the franchisees notified Real Living that they intended to cease doing business as a Real Living franchise and refused to pay their respective notes.

The franchisor responded by seeking arbitration and an arbitrator found in favor of Real Living, awarding it $516,643. The award was split evenly among the franchisees. After the franchisor filed its petition to confirm the award, the franchisees filed objections. The franchisees contended that the award should be vacated because it was procured through fraudulent and undue means.

Under the Federal Arbitration Act (FAA), there are only four grounds that permit a court to set aside an arbitration award. Such instances are limited to circumstances where the award was procured through (1) corruption, fraud or undue means; (2) biased or corrupt arbitrators; (3) arbitrator misconduct in refusing to postpone the hearing upon sufficient cause shown, or any other prejudicial misbehavior; or (4) arbitrators who exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Here, the franchisees argued that the award should be vacated because Real Living procured the award through fraud or undue means. Specifically, the franchisees claim that Real Living failed to submit the requisite disclosures under Sections Five and Sixteen of the Illinois Franchise Disclosure Act.

The franchisees asserted that Real Living failed to disclose prior to their 2010 franchise renewal four civil suits that were filed against it between 2006 and 2009. The franchisees argued that this nondisclosure prevented them from making a fully advised determination as to the overall financial condition of Real Living. They claimed that, "at a minimum, it is substantially plausible to believe that they would not have renewed" their franchise agreement with Real Living in 2010 had they known of the lawsuits.

According to the Seventh Circuit, for a movant to vacate an arbitration award due to fraud or undue means, the movant must establish a respondent’s alleged fraud was: "(1) not discoverable upon the exercise of due diligence prior to the arbitration; (2) materially related to an issue in the arbitration; and (3) established by clear and convincing evidence." Envtl. Barrier Co., LLC v. Slurry Sys., 540 F.3d 598, 608 (7th Cir. 2008). All three requirements must be satisfied for the Court to vacate an award.

Here, the franchisees admitted that their attorney knew of the lawsuits against Real Living "a short time before the arbitration hearing commenced," the court noted. Thus, the franchisees’ demand to vacate the award was futile, because it was clear that they could not establish that Real Living’s alleged fraud was not discoverable prior to arbitration, the court held.

Moreover, to the extent the franchisees asked the court to second-guess the arbitrator’s decision to proceed with the arbitration or render an award to Real Living, the court refused to do so. The franchisees argued that the court should vacate the arbitration award for reasons the arbitrator heard and rejected. The wisdom of the arbitrator’s decision to reject such arguments was of no import here, according to the court. To hold otherwise, would simply give the franchisees a "second bite of the apple."

The case is No. 12 C 9262.

Attorneys: Kirstin Beth Ives (Williams Montgomery & John Ltd.) for Real Living Real Estate, LLC. Carmen David Caruso for Chicago Agent Partners, LLC.

Companies: Real Living Real Estate, LLC.; Chicago Agent Partners, LLC.

Cases: FranchisingDistribution IllinoisNews