Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Wis. App.: Arbitration clause requiring peer-review by restoration services franchisees could not be swept away, (Oct 2, 2015)

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

A Wisconsin circuit court order requiring a residential and commercial restoration services franchisee to submit franchise-related claims to arbitration, as required by the franchise agreement, was affirmed by the Wisconsin Court of Appeals in Madison. The appeals court concluded that the franchisee’s concern about the fairness of the arbitration process was insufficient to permit anticipatory judicial intervention. Dismissal of the franchisee’s unconscionability claim was also affirmed because the franchisee did not demonstrate procedural or substantive unconscionability (Building Werks Holdings, LLC v. Paul Davis Restoration, Inc., September 29, 2015, per curiam).

Background. Paul Davis Restoration, Inc. operated a national franchise network of businesses providing residential and commercial restoration services. Matthew Everett, a former Paul Davis executive, was the owner of the franchise rights to three of Paul Davis’ Wisconsin territories. Each franchise agreement, which had a five-year renewable term, contained: (1) an arbitration provision requiring that disputes be resolved by a panel of other Paul Davis franchisees; (2) post-termination non-compete provisions; and (3) several choice-of-law provisions, including a Wisconsin Addendum providing that the franchise agreement would be governed by the Wisconsin Fair Dealership Law (WFDL).

In 2009, Everett began negotiating with Paul Davis for the renewal of one of his franchises. When the parties were unable to reach an agreement, Everett escrowed franchise payments that it owed Paul Davis. Paul Davis terminated Everett’s franchise. In response, Everett transferred his interest in one of his other franchises to his wife. The business, which was renamed Building Werks Holdings, LLC continued to provide the same services, out of the same location, with the same employees. Paul Davis obtained an arbitration award against Everett, his wife, and Building Werks for violating the franchise agreement’s post-termination non-compete provisions. After receiving the arbitration ruling, Paul Davis terminated Everett’s remaining two franchises.

Building Werks brought an action in circuit court against Paul Davis that alleged: (1) violations of the WFDL; (2) intentional misrepresentation and fraud in the inducement; and (3) violations of the Wisconsin Franchise Investment Law (WFIL). Building Werks also alleged that its claims were not subject to arbitration because: (1) the entire franchise agreement was invalid and rescinded as induced by fraud and (2) the arbitration clause was unconscionable.

Arbitration Clauses. The court granted Paul Davis’ motion to compel arbitration after it concluded that the arbitration provisions in the franchise agreements were not procedurally or substantively unconscionable. Building Werks contended that it would be pointless to submit its claims for arbitration because the claims would be heard by a biased panel composed of fellow franchisees, with conflicts of interest, who would ignore applicable law and render a decision in Paul Davis’ favor. It argued that the circuit court erred in concluding that federal law applies to its claims and federal courts, as opposed to Wisconsin courts, would blindly uphold the arbitration decision. The appeals court, however, noted that Building Werks contractually agreed to whatever the Paul Davis arbitration system would decide. If the concerns that Building Werks had regarding arbitration occurred, it could not imagine that any court, Wisconsin or federal, would uphold the arbitration decision.

Building Werks also argued that the arbitration panel member’s affidavit, that he feared retaliation if he ruled in Everett’s favor, was conclusive proof that it could not receive a fair hearing and would lose in arbitration for reasons other than the merits. The court, however, determined that Building Werks’ argument was based on speculation and predictions about what might happen. It also determined that, even if the statements in the arbitration panel member’s affidavit were true, they were merely anecdotal and insufficient to avoid the plain contract language requiring arbitration.

The court noted that the only way that Building Werks could avoid arbitration was by showing that it did not agree to arbitrate the particular claims at issue in the first place. Building Werks did plead fraud in the inducement and had asserted that this claim must be tried before the court rather than submitted to arbitration, per the Wisconsin Addendum, because of a conflict between federal law and Wisconsin law regarding the validity of an arbitration clause where fraud in the inducement is pleaded as to the entire agreement. The court, however, determined that: (1) there was no conflict between Wisconsin and federal law and (2) Building Werks had reached its conclusion that Wisconsin and federal law conflicted on the proper forum for resolving a fraud claim through an incorrect reading of Wisconsin Law.

Unconscionablity. Building Werks argued that its claim that the arbitration provisions were unconscionable only targeted the validity of the arbitration provision, not the franchise agreements as a whole, and it was a proper matter for judicial review. The court noted that, to establish unconscionability, Building Werks was required to show that the arbitration provisions were both procedurally and substantively unconscionable.

The court determined that the arbitration provisions were not procedurally unconscionable because: (1) Everett was a “savvy businessperson” who had worked for several years as a Paul Davis franchise executive, participated as a Paul Davis arbitration panel member after having signed his first franchise agreement, and signed two more franchise agreements after his participation as an arbitration panel member and (2) the disparity in bargain power, evidenced by the fact that the arbitration provisions were standard, non-negotiable provision drafted by Paul Davis, was—by itself—Insufficient to establish procedural unconscionability.

Building Werks did not argue that the arbitration provisions were, on their face, commercially unreasonable. Instead it argued that the actual practice of the arbitration provisions tilted the entire dispute resolution process in favor of Paul Davis. Therefore, according to Building Werks, the arbitration provisions were commercially unreasonable and substantively unconscionable. The court disagreed. It determined that the facts alleged in the arbitration panel member’s affidavit, and Everett’s own affidavit and evidence, did not overcome the facial commercial reasonability of the arbitration provisions.

The case is No. 2014AP1849.

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

Companies: Building Werks Holdings, LLC; EA Restoration, LLC; Everett Foytik, LLC; Paul Davis Restoration, Inc.

Cases: FranchisingDistribution WisconsinNews