Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Paint products franchisee’s claims were subject to arbitration, (Apr 24, 2014)

By Linda O’Brien, J.D., LL.M.

Fraud and breach of contract claims by a former franchisee against a paint products franchisor for allegedly withholding and/or providing false financial information to induce the purchase of franchise and franchise assets were subject to an arbitration clause of their authorized dealer agreement, according to the federal district court in Cincinnati. Thus, the franchisor’s motion to compel arbitration was granted (SW Acquisition Co., Inc. v. Akzo Nobel Paints LLC, April 23, 2014, Weber, H.).

Akzo Nobel Paints produces decorative paints, paint coatings, and other specialty chemicals. In 2009, Miller Bros. Wallpaper Company entered into a written agreement with Akzo Nobel to be an authorized dealer of Akzo Nobel products. In conjunction with the agreement, Miller Bros. purchased from Akzo Nobel certain assets related to four stores. The parties executed an asset purchase agreement, promissory note, and authorized dealer agreement. The authorized dealer agreement contained a broad arbitration clause that expressly provided that any controversy or claim arising out of or relating to the agreement would be settled by binding arbitration.

In 2012, Miller Bros. filed for bankruptcy and SW Acquisitions purchased all of its assets. SW Acquisition filed suit against Akzo Nobel, alleging fraud, breach of contract, and damages. SW asserted that Akzo Nobel (1) withheld certain financial information and/or provided false information to fraudulently induce Miller Bros. to enter into the asset purchase and authorized dealer agreements; (2) failed to deliver on its profit percentage guarantee; and (3) intentionally sold products directly to customers within the protected dealership area. Akzo Nobel moved to compel arbitration.

The court determined that the franchisee’s claims were within the scope of the arbitration clause, since they related to the authorized dealer agreement. The Federal Arbitration Act (FAA) allows parties to an arbitration agreement to petition the court to enforce the arbitration provisions. In determining whether to compel arbitration under the FAA, a court should consider whether the parties agreed to arbitrate and the scope of the arbitration agreement.

The plaintiff acknowledged that its breach of contract and damages claims arose from or related to the authorized dealer agreement. In rejecting SW’s argument that the fraud claims were based on the asset purchase agreement, which did not contain an arbitration clause, the court noted that the asset purchase and authorized dealer agreements were integral parts of the same business deal. Moreover, SW alleged that Akzo Nobel made fraudulent representations regarding the level of profitability of Akzo Nobel products sold at the four stores which was an issue that related to the parties’ agreement to sell Akzo Nobel products at those stores as an authorized dealer, the court concluded.

The case is No. 1:13-cv-785-HJW.

Attorneys: Robert Gregory Kelly for SW Acquisition Co, Inc. Jennifer L Maffett (Thompson Hine) for Akzo Nobel Paints LLC.

Companies: SW Acquisition Co., Inc.; Akzo Nobel Paints LLC

Cases: FranchisingDistribution OhioNews