The Franchise Memorandum

A Pennsylvania federal court has confirmed an arbitrator’s award for the franchisor despite one of the co-franchisees’ claims that he did not receive notice of the arbitration. In AAMCO Transmissions, Inc. v. Sally, 2008 WL 5272449 (E.D. Pa. Dec. 17, 2008), two individuals signed the franchise agreement together, but one franchisee left the day-to-day business operations entirely to his co-franchisee son-in-law. Soon thereafter, AAMCO discovered that the franchisees collectively had underreported sales and committed other breaches of the franchise agreement. Consequently, it served a single arbitration demand at the contractually agreed-upon location of the franchise. The son-in-law, however, failed to notify his father-in-law about the arbitration demand. Instead, the son-in-law hired a lawyer to represent both of them at the arbitration. Ultimately, the arbitrator found in favor of AAMCO and awarded damages in excess of $260,000. When AAMCO filed its petition to confirm the arbitration award in federal court, the son-in-law, for the first time, notified his father-in-law of the arbitration and award and filed a petition to vacate or modify the award, or in the alternative, for a rehearing. 

The court held that AAMCO complied with the notice requirements of the franchise agreement and the American Arbitration Association’s Commercial Arbitration Rules by sending a single arbitration demand to the business address of the franchise. The court also noted that AAMCO’s counsel and the arbitrator both made repeated attempts to contact the father-in-law personally. Further, the court held that even if the father-in-law failed to receive notice, this was not the fault of AAMCO or the arbitrator and, therefore, it could not be said that the arbitrator exceeded his powers or otherwise engaged in “misconduct” or “misbehavior” warranting an order to vacate the award. 

Additionally, in response to the franchisees’ claims that they had meritorious defenses to present to the court, the district court held that its role was not to “re-weigh” the evidence; the proper forum for those defenses was the arbitration.