The Franchise Memorandum

In Mac Tools v. Diaz, U.S. Dist. LEXIS 56197 (S.D. Ohio Apr. 23, 2012), the U.S. District Court for the Southern District of Ohio enforced an arbitration provision against a distributor’s wife even though she did not sign the distribution agreement at issue. Although the wife did not sign the agreement, she did invest personal funds in her husband’s Mac Tools distributorship and participated in the acquisition and development of the business. When the distributorship failed, she brought suit against Mac Tools in state court, alleging that it had fraudulently induced her and her husband to purchase the business and had sold them an undisclosed franchise in violation of FTC regulations. After unsuccessfully attempting to remove the case to federal court, Mac Tools moved to compel arbitration pursuant to a clause in the distribution agreement. The distributor’s wife countered that as a nonsignatory to the distributorship agreement, she could not be compelled to arbitrate. She also claimed that Mac Tools had waived its right to arbitrate her claims in the state court action.

In granting Mac Tools’ motion, the district court found that the doctrine of equitable estoppel required the distributor’s wife to arbitrate her claims against Mac Tools. The court reasoned that she was closely involved in the acquisition of the business and expected to financially benefit from the contract. In addition, her claims were substantively the same as her husband’s potential claims against Mac Tools, and the evidence showed that she viewed the sale as a collective acquisition with her husband. Given these facts, the court held that it would be inequitable to permit her to litigate her claims in court when her husband would be bound to arbitrate those same claims. The court also held that Mac Tools had not waived its right to arbitrate by defending the state court lawsuit, as the manufacturer had moved expeditiously to have the claims against it moved to arbitration.