The Franchise Memorandum

A federal court in Tennessee has confirmed an arbitrator’s award of damages and rescission against a franchisor, Medex, and in favor of a franchisee. Altruist, LLC v. Medex Patient Transp., LLC, 2018 WL 1704111 (M.D. Tenn. Apr. 9, 2018). The franchisee had asserted various claims, including breach of contract, misrepresentation, and breach of the covenant of good faith and fair dealing against Medex, arising out of a failure to disclose a bankruptcy in the FDD and unfulfilled promises of “back door” services including a call center, dispatch, and route management. In seeking to vacate the arbitration award, Medex argued that the arbitrator manifestly disregarded the law.

The court found that, regardless of whether “manifest disregard of law” was an appropriate basis to overturn the award, Medex did “not come close to establishing the arbitrator acted in manifest disregard of the law.” Addressing the franchisee’s specific arguments, the court first determined that the fact that the arbitrator did not identify the standard of review in the award did not mean that he failed to apply it. Second, prior Tennessee cases demonstrated that an award of both rescission and damages was permissible. Third, the franchise agreement’s integration clause did not preclude the claims because the clause specifically permitted reliance on the FDD, where Medex’s alleged misrepresentations were contained. Fourth, the Tennessee Consumer Protection Act did apply because Medex made misrepresentations that goods and services were of a particular standard, quality, or grade. And fifth, Tennessee’s statutory code explicitly permits directors, owners, officers, and agents to be personally liable for their own acts, so Medex’s owners could be held jointly and severally liable. While the court confirmed the award, it went on to deny the franchisee’s request for an award of attorney’s fees incurred as a result of the confirmation proceedings.