Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDIowa: Federal Arbitration Act Preempts Iowa Law Restricting Out-of-State Arbitration, (Feb 6, 2013)

By Tobias J. Gillett, J.D., LLM.

Iowa residents alleging that a wine distribution franchisor breached agreements with them to distribute the franchisor’s wine must arbitrate their claims against the franchisor and its principal in North Carolina pursuant to arbitration clauses in the agreements, because the Federal Arbitration Act (FAA) preempted an Iowa franchising law voiding franchise agreement provisions requiring out-of-state arbitration, and because the claims against both the franchisor and its principal fell within the scope of the arbitration agreements, the federal district court in Cedar Rapids, Iowa has ruled (Cahill v. Alternative Wines, Inc., February 4, 2013, Reade, L.).

Alternative Wines, Inc., a North Carolina corporation, sold wine distribution rights and other goods and services to Iowa residents David and Tracey Cahill. As part of this exchange, the parties executed a purchase agreement and a services agreement. Both agreements contained provisions requiring disputes arising under the agreements to be submitted to binding arbitration in North Carolina.

The Cahills sued Alternative Wines and its principal, claiming that they breached both agreements, and asserting claims for breach of contract, violations of Iowa franchising law, and violations of Iowa law concerning business promotions and fraud. Alternative Wines moved to stay or dismiss the case pending arbitration.

The Cahills contended that the arbitration agreements were unenforceable under an Iowa franchising law specifying that a “provision in a franchise agreement restricting jurisdiction to a forum outside this state is void with respect to a claim otherwise enforceable under this section.” In response, Alternative Wines argued that the Federal Arbitration Act preempted the Iowa law, and therefore the court should enforce the arbitration agreements.

The court began its analysis by explaining that the FAA provides that an arbitration provision in a “contract evidencing a transaction involving commerce…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Eighth Circuit law established a two-part test, under which a court reviewing an arbitration clause must consider “(1) whether there is a valid arbitration agreement and (2) whether the particular dispute falls within the terms of that agreement.”

Enforceability under Iowa law. The court first considered whether the Iowa law rendered the arbitration agreements unenforceable. The court observed that courts addressing similar agreements had found that where state statutes only applied to one kind of agreement, such as franchise agreements, the statutes did not apply to “any contract,” and therefore the FAA preempted them and rendered the agreements enforceable.

Here, the Iowa code provision applied “specifically to franchise agreements,” and not “to contracts generally.” Since the Iowa law did not constitute “a generally applicable contract defense,” the law “violate[d] the Supremacy Clause because it directly conflict[ed] with §2 of the FAA,” in the court’s view.

Scope of arbitration agreements. Having concluded that the arbitration agreements were enforceable, the court proceeded to address whether the agreements covered the Cahills’ claims. Since the provisions in the services agreement and the purchase agreement applied to “[a]ny disputes or claims under this agreement or its breach” and to “a dispute over any provision of this Agreement” respectively, all of the claims against Alternative Wines fell “within the scope of the arbitration agreements.”

Moreover, the court found the claims against Alternative Wines’s principal also fell within the scope of the agreements. The court observed that “a nonsignatory can enforce an arbitration agreement if either: (1) the relationship between the signatory and the nonsignatory defendants is a close one; or (2) the plaintiffs’ claims against the nonsignatory rely on and presume the existence of the arbitration agreement.”

The court found both circumstances existed in this case. As President and CEO of Alternative Wines, the principal had a close relationship to the company. Moreover, the Cahills’ claims relied on the purchase and services agreements, the contracts which contained the arbitration clauses. Therefore, court found the arbitration agreements enforceable and applicable to the claims against both Alternative Wines and its principal, and dismissed the case.

The case is No. 12-CV-110-LRR.

Attorneys: William T. McCartan (Bradley & Riley) for David Cahill. Joshua M. Hiller (Hiller Law, PLLC) for Alternative Wines, Inc.

Companies: Alternative Wines, Inc.

Cases: FranchisingDistribution IowaNews