Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Wash.: Franchisor waived right to arbitration, (Apr 11, 2016)

By Michael Menzhuber, J.D., LL.M.

The federal district court in Seattle refused to dismiss a franchisee’s counterclaims based on the franchisor’s right to arbitration, determining that the franchisor waived its right to arbitrate by pursuing litigation conduct (Money Mailer, LLC v. Brewer, April 8, 2016, Lasnik, R.).

Wade Brewer entered into a franchise agreement with Money Mailer Franchise Corporation (MM-FC) to operate a direct mail advertising business. The franchise agreement required all franchisees to contract with Money Mailer LLC (MM-LLC) for printing, freight, and postage system services. The franchise agreement also required that any disputes be arbitrated. The MM-LLC standard agreement, which Brewer denied signing, did not require arbitration.

Although formed as separate entities, MM-FC and MM-LLC had the same senior managers for both companies and MM-LLC also collected fees on behalf of MM-FC. When Brewer failed to pay monies owed to MM-FC and MM-LLC, he received a notice of default on letterhead for both MM-FC and MM-LLC.

MM-LLC later filed an action for breach of contract and money due. Brewer responded by filing counterclaims against MM-LLC and MM-FC. MM-FC moved for summary judgment on the basis that Brewer was contractually obligated to pursue them in arbitration.

Brewer contended that MM-FC waived the right to arbitrate, for purposes of his counterclaim, because MM-LLC’s breach of contract claim included recovery of amounts owed to MM-FC for royalties and other charges.

The court noted the three element test for establishing waiver: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from inconsistent acts. MM-FC did not dispute the first element, but argued that it did not take any actions inconsistent with its right to arbitrate and that Brewer would not be prejudiced by any inconsistent acts.

The court disagreed, determining that Brewer adequately supported his claim that MM-FC acted inconsistently with its right to arbitration by showing the MM-LLC lawsuit sought an amount greater than the combined MM-LLC/MM-FC demand letter sent two months before filing suit. Further, Brewer would suffer prejudice by the defending claims of money owed to MM-FC in federal court while being forced to arbitrate other disputes with MM-FC.

The case is No. C15-1215RSL.

Attorneys: Erik R. Lied (Karr Tuttle Campbell) for Money Mailer, LLC. Daniel Andrew Brown (Williams Kastner) for Wade G. Brewer.

Companies: Money Mailer, LLC

Cases: FranchisingDistribution WashingtonNews