The Franchise Memorandum

A federal district court in Illinois granted a franchisor’s motion to confirm an arbitration award in Hyatt Franchising, LLC v. Shen Zhen New World I, LLC, 2017 WL 1397553 (N.D. Ill. Apr. 19, 2017). The hotel franchisor had been awarded over $10 million in damages and fees in an arbitration to enforce the termination of a California franchisee’s franchise agreement for repeated failure to meet its payment obligations and for failure to timely complete required renovations. The franchisee moved to vacate the arbitrator’s award on three grounds: (1) the arbitrator engaged in misconduct under section 10(a)(4) of the Federal Arbitration Act (“FAA”); (2) the arbitrator exhibited a manifest disregard for the law under the same section of the FAA; and (3) public policy supported vacating the award. The court found that none of the franchisee’s grounds were sufficient to vacate the award.

The franchisee argued that the arbitrator deprived it of fundamental fairness in the proceedings by failing to disqualify Hyatt’s counsel and refusing to permit the franchisee to develop evidence related to its claim that it did not have competent representation when the franchise agreement was formed because the transactional attorney who had represented it during the negotiation of the contract had recently moved to the corporate group of the firm whose litigation department now represented Hyatt. The arbitrator found that the firm had implemented a sufficient ethical screen to prevent conflicts and that there was no evidence that any conflict could affect whether the franchise agreement or property improvement plan was ambiguous or flawed at the time of contracting. The court also rejected the franchisee’s argument that it was prejudiced by its chairman’s inability to understand English. The court found that the franchisee was a sophisticated business entity, had retained multiple English-speaking employees in connection with the transaction, and had sufficient time to translate the relevant documents before executing the franchise agreement. Finally, the court found that it was not permitted to overturn an arbitrator’s interpretation of a contract between the parties and that it lacked authority to overturn the arbitrator’s decision on public policy grounds.