The Franchise Memorandum

The Third and Eighth Circuits recently affirmed arbitration awards in favor of franchisors, despite similar arguments by franchisees. Most recently, in Paul Green School of Rock Music Franchising, LLC v. Smith, 2010 U.S. App. LEXIS 16082 (3d Cir. August 2, 2010), the Third Circuit sidestepped the question of whether “manifest disregard of the law” remains a ground to vacate an arbitration award after the Supreme Court’s decision in Hall Street Associates, L.L.C. v. Mattel, Inc. Describing a “circuit split” on that question, the Third Circuit simply ruled that the law was not manifestly disregarded, so it did not have to address whether manifest disregard would be a proper basis for vacating an award. The arbitrator’s award in favor of the franchisor for more than $400,000 and other relief was upheld.

In the Eighth Circuit decision, Medicine Shoppe Int’l, Inc. v. Turner Inv., Inc., 2010 U.S. App. LEXIS 14960 (8th Cir. July 21, 2010), the court affirmed an arbitration award that provided for future royalties and other damages in favor of franchisor Medicine Shoppe.  At issue was whether the arbitrator had disregarded Missouri law, which requires that lost future royalties be proven with reasonable certainty. The franchisee closed the shop, leading the franchisor to file an arbitration claim. The franchisee on appeal contended that the franchisor had failed to prove lost future profits and that the arbitrator had disregarded the law in ruling in favor of the franchisor and awarding $472,164.42 in damages.

The Eighth Circuit, following the Supreme Court’s decision in Hall Street, held that an arbitrator’s award under the Federal Arbitration Act could be overturned only in four circumstances:  if the award was procured by fraud, corruption, or undue means; where there was evident partiality or corruption by the arbitrator; where the arbitrator was guilty of misconduct in refusing to postpone the hearing or other misbehavior; or where the arbitrator exceeded his or her powers. Finding that the franchisee had not alleged that these acts had occurred on appeal and that the arbitrator had acted within the scope of his authority, the award was affirmed.