The Franchise Memorandum

A Minnesota federal court recently confirmed an arbitrator’s award despite a clarification to which the losing former franchisee objected. In Wakeman v. Aqua2 Acquisition, Inc., 2011 U.S. Dist. LEXIS 14672 (Feb. 14, 2011), in which Gray Plant Mooty represented the franchisor of the AutoQual system, the franchisor had sought to prevent the former franchisee from operating a competing business in violation of his franchise agreement’s post-termination restrictive covenant. AutoQual commenced an arbitration proceeding to enforce that restrictive covenant, and it prevailed. After the arbitrator issued his award, however, Wakeman advised AutoQual that he intended to continue operating his competing business by transferring nominal ownership of that business to his sister. He contended that the arbitrator’s award (which referenced only Wakeman and not his family members or agents) did not prohibit such a transfer.

AutoQual presented the issue to the arbitrator and asked the arbitrator to clarify the award to prohibit expressly Wakeman’s threatened conduct. The arbitrator agreed and clarified the original award to extend not just to Wakeman, but also to a defined group of people working in concert with him, as the franchise agreement itself provided. Wakeman asked the federal court to vacate, contending that the arbitrator was prohibited from clarifying his original decision if that clarification substantively expanded the original award rather than just correcting it. The court disagreed and granted AutoQual’s cross-motion to confirm the clarified award. The court found that the clarification did not reexamine the merits of the controversy, but instead remedied a latent ambiguity in the original award. It found the clarified award consistent with the arbitrator’s stated intent in the memorandum accompanying his first award.