Court Watch

The decision in this case presents an interesting strategy that franchisors may want to consider in the event of termination. The use of an automated telephone answering system or a telephone interceptor, may allow a franchisor to protect its system, even without specific language in the franchise agreement assigning the telephone number to the franchisor upon termination.

Cynthia M. Klaus is a shareholder at Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. She can be contacted at [email protected] or 952-896-3392. Meredith A. Bauer is an associate in the same office. She can be contacted at [email protected] or 952-896-3263.

Hall Street Reasoning Interpreted By Missouri District Court

Since the U.S. Supreme Court's decision in Hall Street Associates, LLC v. Matel, Inc. , 128 S. Ct. 1396 (2008), involving the question of whether an arbitration award may be vacated or modified due to a “manifest disregard for the law,” courts and counsel have struggled to interpret the decision and determine the appropriate circumstances in which judicial review of an arbitration award should be employed. In Hall Street, the Supreme Court found that ” 10 and 11 of the Federal Arbitration Act (“FAA”) offer the exclusive bases for judicial review of an arbitration award.

In a recent case, Medicine Shoppe Int'l, Inc. v. Simmonds, Bus. Franchise Guide (CCH) 14,078 (Feb. 11, 2009), the federal district court for the Eastern District of Missouri determined that the Supreme Court decision also stands for the concept that manifest disregard for the law is not a basis on which an arbitrator's award may be vacated or modified under the FAA. The reasoning in this case contradicts that in other decisions, including the Ninth Circuit's recent decision in Comedy Club, Inc., et al, v. Improv West Associations, et al, Bus Franchise Guide (CCH) 14,055 (Jan. 29, 2009).

In Medicine Shoppe Int'l, arbitration proceedings were held on an underlying dispute pursuant to a license agreement between Medicine Shoppe International, Inc. (“MSI”), the franchisor, and Lee D. Simmonds (“Simmonds”), the franchisee. The arbitrator entered an award in favor of MSI, and MSI subsequently filed an action in federal district court claiming that the defendant failed to pay the award. MSI requested that the district court confirm the arbitration award and enter judgment in its favor. In response, Simmonds argued that the arbitrator knowingly disregarded material evidence during the arbitration proceedings, such as an alleged attempted unauthorized transfer of his franchise, and thus the arbitrator's conduct demonstrated a “blatant and manifest disregard for the law.” Accordingly, Simmonds argued that the district court should vacate the award of the arbitrator.

In considering its authority to vacate the arbitration award, the district court determined that the only bases on which a court may vacate an arbitrator's award are those specifically set forth in ” 10 and 11 of the FAA. The court relied on the Hall Street decision to determine that it could not engage in a general legal review of an arbitrator's award to search for an error. Sections 10 and 11 do not expressly permit the court to vacate an award based on manifest disregard of the law. Simmonds argued, however, that ' 10(a)(4) of the FAA, stating that an arbitration award may be set aside when “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made,” could be extended to include circumstances in which a manifest disregard of the law occurred.

The court adopted a strict and literal interpretation of the FAA and the Hall Street decision, and found that because the words “manifest disregard for the law” are not specifically set forth in the statute, it is not a prescribed basis on which an arbitrator's award can be vacated or modified. The decision even went so far as to state that courts have no authority to reconsider the merits of an arbitration award, and that the district court “will confirm the arbitrator's award even if we are convinced the arbitrator committed a serious error, so long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority.” (quoting Schoch v. InfoUSA, Inc. , 341 F.3d 785, 788 (8th Cir. 2003).

The decision in Medicine Shoppe departs from the reasoning of other lower courts that have applied Hall Street. For example, in Comedy Club, the Ninth Circuit found that the Supreme Court did not reach the question of whether a manifest disregard of the law constituted grounds to vacate an arbitration award. The Comedy Club court agreed that Hall Street held that ” 10 and 11 of the FAA are the exclusive regimes for review of an arbitration award, but then offered several differing interpretations of these sections. According to Comedy Club, the language of ' 10(a)(4) of the FAA is broad enough to include grounds for vacating the award due to a manifest disregard of the law.

Thus, the Medicine Shoppe decision offers further confusion in the evolving standard for the circumstances in which arbitration awards may be vacated or modified by a court. The “manifest disregard for the law” doctrine as a basis for vacating or modifying an award is not consistently applied by courts, even in the wake of the Hall Street decision.

Court Employs Unique Approach to Post-Termination Use of Phone Numbers

In a challenging economy, with defaults and terminations on the rise, franchisors are well aware of the importance of protecting their systems after termination of their franchise agreements. The continued use of a telephone number by a former franchisee can be a subject of serious contention after the termination of a franchise agreement. In a recent case, Fido's Fences Inc. v. The Canine Fence Co., Bus Franchise Guide (CCH) 14,077 (Feb. 13, 2009), the Second Circuit presents a unique approach that franchisors should consider in such circumstances.

In Fido's Fences, Canine Fence Company (“Canine”), the exclusive distributor of Invisible Fence systems in New York, terminated a dealer of its Invisible Fence brand of electronic pet containment sets, Fido's Fences, Inc. (“Fido's”). The manufacturer of the systems was the Invisible Fence Company, which owned trademarks for the words “Invisible,” “Invisible Fence,” and “Invisible Fencing.” The terminated distributor agreement between the parties provided that, upon termination, Fido's would “immediately discontinue use of all Invisible Fence trade names, service marks, Proprietary Marks, signs and forms of advertising indicative of Invisible Fencing,” but did not specify other post-termination rights or obligations with regards to the use of telephone numbers.

During the term of the distributor agreement, each time Fido's installed an Invisible Fence brand system for a customer, Fido's put up a small blue sign with Fido's name and phone number set forth on it. Therefore, customers who desired to have their fence system serviced, or customers who wanted to purchase another fence system, would call Fido's telephone number as set forth on the sign. After the distributor agreement was terminated, Canine contacted customers to alert them that Fido's was no longer an authorized Invisible Fence dealer. Fido's then proceeded to send postcards to its customers providing the following:

BEWARE: The Canine Fence Company (Invisible Fence Brand distributor in Wilton, Connecticut) is currently being sued in Federal Court regarding allegations of Federal antitrust and unfair trade practices. We are strongly advising our customers to disregard any information they may provide and to continue to deal directly with Fido's Fences, Inc. to insure the proper maintenance and service of their pet system.

Canine moved for an injunction, specifically requesting that Fido's be enjoined from the use of any telephone numbers “previously or currently linked in advertising media to the Invisible Fence' trademark.” The federal district court issued a preliminary injunction, ordering that for a period of six months, a third-party automated voice mail service would receive incoming phone calls to Fido's and play the following automated message: “Press 1 for Fido's Fences; Press 2 for an authorized Invisible Fence Brand Dealer; If you wish to hear these options again, Press 3.”

Interestingly, the federal district court issued the preliminary injunction in the absence of specific language in the distributor agreement assigning the telephone number to Canine upon termination.

The Second Circuit recently affirmed the district court's decision to grant the injunction, finding that the language in the agreement requiring discontinuance of the use of the Invisible Fencing marks, signs, and advertisements was expansive. The court also found that even though Canine did not bring a counterclaim for trademark infringement, there was a high likelihood of consumer confusion that applied to this case, due to the signage placed in customer's yards setting forth Fido's telephone number, which was exacerbated by the postcard sent to customers by Fido's after the termination of the agreement. The court rejected as meritless Fido's assertion that the injunction threatened it with irreparable harm, because Fido's was a terminated dealer. Thus, Fido's had no right to customers who desire to purchase Invisible Fence brand products or services. Accordingly, the court did not require a bond in order to protect Fido's.

The decision in this case presents an interesting strategy that franchisors may want to consider in the event of termination. The use of an automated telephone answering system or a telephone interceptor, may allow a franchisor to protect its system, even without specific language in the franchise agreement assigning the telephone number to the franchisor upon termination.

Cynthia M. Klaus is a shareholder at Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. She can be contacted at [email protected] or 952-896-3392. Meredith A. Bauer is an associate in the same office. She can be contacted at [email protected] or 952-896-3263.