Court Watch

On appeal, the plaintiffs argued that they were not required to arbitrate because the Federal Arbitration Act (“FAA”) exempts transportation workers. The FAA does not apply to contracts of employment for workers engaged in “interstate commerce.” 9 U.S.C. ' 1. “Interstate commerce” has been interpreted in other cases to refer to transportation workers. The Eighth Circuit explained that this potential exemption from arbitration is a threshold question of arbitrability in this dispute. Parties can agree to have arbitrators decide threshold issues of arbitrability. In this case, the arbitration clauses in the Unit Franchise Agreements incorporated the Rules of the American Arbitration Association, which provide that the arbitrator has the power to determine threshold issues of arbitrability. As such, the parties agreed to have the arbitrator decide whether the drivers were exempt from arbitration under the FAA's provision, and the district court did not err in compelling arbitration.

The plaintiffs' second argument was that the district court erred in requiring that arbitration proceed on an individual, rather than a class, basis. The franchise agreements included a class action waiver, stating: “Any arbitration, suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff, consolidated, or similar basis.” The Eighth Circuit relied on the United States Supreme Court case AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which upheld a class action waiver in an arbitration provision. Like in Concepcion, the shuttle bus drivers in this case based their challenge on state law. This argument was rejected in Concepcion and also in this case, based on the FAA's pre-emption of state law. Therefore, the Eighth Circuit affirmed the district court's enforcement of the class action waiver.

Finally, the plaintiffs argued that the case should be stayed, rather than dismissed, pending arbitration. The appellate court first noted that it had not previously addressed the standard of review to be applied to this issue and determined that it should review the decision under an abuse of discretion standard. The court then considered the general requirement of the FAA that a case be stayed for arbitration, rather than dismissed. There is an exception to that general rule where it is clear that the entire controversy will be resolved in arbitration. In this case, however, the arbitrator may determine that it does not have jurisdiction under the transportation exemption in the FAA. If that happens, the statute of limitations may have run on the plaintiffs' claims, and they would be prejudiced by a dismissal. Therefore, the district court erred in dismissing the case rather than staying it pending arbitration.

Court Grants Preliminary Injunction, Compels Arbitration

A federal District Court in Pennsylvania also compelled arbitration recently, but only after granting the franchisor's motion for a preliminary injunction. AAMCO Transmissions, Inc. v. Dunlap, No. 11-4009, 2011 WL 3586225 (E.D. Penn. Aug. 16, 2011). In this case, the parties had entered into a franchise agreement for the operation of an AAMCO transmission repair center in 1981. The agreement had a 15-year term and provided that unless either party gave notice of its intention not to renew the agreement, it would renew for another 15-year term. The agreement also provided that if the parties renewed the agreement, the franchisee would execute a new franchise agreement.

The 1981 franchise agreement expired by its terms in 1996. Neither party expressed an intent to terminate the relationship at that time, nor did they execute a new franchise agreement. In 1998, AAMCO sent the franchisee a renewal franchise agreement which stated that it would be effective as of June 5, 1997 and would expire on June 4, 2012. There was no evidence that the 1998 renewal agreement was ever signed. Both the 1981 franchise agreement and the 1998 renewal agreement included an agreement to arbitrate, an agreement that the franchisee would cease all use of AAMCO's trademarks after termination, and a post-termination non-compete agreement.

In 2006, AAMCO notified Dunlap, the franchisee, that it was terminating the franchise agreement for failure to pay fees and submit sales information. In 2007, AAMCO sued Dunlap to enforce the termination and trademark and non-compete provisions. The parties settled and, as part of the settlement, rescinded the termination of the franchise agreement.

In June 2011, AAMCO informed Dunlap that his franchise agreement had expired and he no longer had the right to operate an AAMCO business. Dunlap continued operating his business despite these communications. AAMCO filed a lawsuit and moved for a preliminary injunction. In response, Dunlap moved the court to compel arbitration.

The court first considered the motion for a preliminary injunction and found that all four factors for preliminary injunctive relief had been met. Therefore, it enjoined Dunlap from continuing to use AAMCO's name or trademarks and from operating a competing business within 10 miles of his former franchised business. Of particular interest is the likelihood of success on the merits factor for injunctive relief. Dunlap argued that AAMCO could not succeed on the merits because, under the 1998 renewal agreement, the franchise agreement would not expire until June 2012. Although both parties had copies of a 1998 renewal agreement, neither party could produce a signed copy of the renewal agreement or present any evidence that either of them had signed the agreement. Instead, because the parties continued in their franchise relationship after the expiration of the 15-year 1981 agreement, the court deemed that agreement to have been automatically renewed for a second 15-year term, ending in 2011. Because the court found that the franchise agreement had expired, it went on to find a likelihood of success on the post-expiration trademark and non-compete provisions.

The court also considered whether it could issue an injunction that arguably altered the status quo in light of its accompanying decision to compel arbitration. It decided that it was not precluded from issuing the preliminary injunction and that the injunction was necessary to prevent prejudice to AAMCO that would be caused by the delay in sending the case to arbitration.

On the issue of whether to compel arbitration, AAMCO did not argue that the arbitration agreement was invalid; it argued that the franchisee had waived his right to assert the arbitration provision by not raising it in the 2007 litigation between the parties. Waiver of the right to arbitrate depends on whether the other party will be prejudiced if the case is sent to arbitration. Normally, waiver occurs only when the demand to arbitrate is made long after the case commenced and after discovery has been conducted. The court can also consider prior litigation between the parties. Because the current case was filed as a separate action from the 2007 case, the franchisee demanded arbitration early in the proceedings, and the court was granting a preliminary injunction, the court decided that AAMCO would not be prejudiced by enforcement of the arbitration provision.

Franchisor's Web Statements Not Protected from Defamation Claim By Litigation Privilege

The Florida Court of Appeals has decided that statements made by a franchisor on its website are not protected from defamation claims by the “litigation privilege.” Ball v. D'Lites Enterprises, Inc., 65 So.3d 637 (Fla. Ct. App. 2011). In this case, a group of franchisees commenced litigation against their franchisor regarding the nutritional content of its dietary ice cream products. The franchisees alleged that they had been induced into signing franchise agreements based on the franchisor's misrepresentations about nutritional content and false statements that the products were safe for diabetics.

After commencement of the lawsuit, the franchisor added a statement on its website stating that the plaintiffs were selling products under the D'Lites name that were not authorized and were “in fact a hoax.” The plaintiffs then amended their complaint to allege defamation based on the online statements of the franchisor. The franchisor moved to dismiss, arguing that the statement was protected by the “litigation privilege,” which provides absolute immunity to acts done in the course of a judicial proceeding, providing the act had some relation to the proceeding. The trial court applied the litigation privilege and dismissed the defamation claim.

On appeal, the court analyzed whether statements by a party on its website constituted a statement made in connection with a judicial proceeding. The court reasoned that statements on a website are analogous to statements made in a press conference or statements to newspapers or other media. Such statements to the press generally are not protected by an absolute privilege. The website statements were not made as part of the judicial proceedings and therefore fell within the general rule that they were not absolutely privileged. The Florida Court of Appeals therefore reversed the lower court's dismissal and reinstated the defamation claims.

Cynthia M. Klaus is a shareholder at Larkin Hoffman in Minneapolis. She can be contacted at [email protected] or 952-896-3392.

Eighth Circuit Requires Case Be Stayed for Arbitration

The Eighth Circuit in a case involving hot-button issues such as the classification of individuals as employees or franchisees and the enforceability of class action waivers in arbitration cases, recently upheld a decision that the action must proceed in arbitration. Green v. SuperShuttle Int'l, Inc. , 653 F.3d 766 (8th Cir. 2011). The plaintiffs were a group of airport shuttle drivers for a shuttle service owned by SuperShuttle. SuperShuttle classified the drivers as franchisees rather than employees, and the drivers signed Unit Franchise Agreements. Believing that they are employees and not franchisees, several shuttle bus drivers commenced a class action lawsuit in Minnesota state court, alleging violations of the Minnesota Fair Labor Standards Act.

SuperShuttle removed the case to federal court under the Class Action Fairness Act. It then moved to compel arbitration under arbitration clauses found in each of the franchise agreements. The district court granted SuperShuttle's motion and dismissed the federal action without prejudice based on the arbitration clauses. The plaintiffs appealed.

On appeal, the plaintiffs argued that they were not required to arbitrate because the Federal Arbitration Act (“FAA”) exempts transportation workers. The FAA does not apply to contracts of employment for workers engaged in “interstate commerce.” 9 U.S.C. ' 1. “Interstate commerce” has been interpreted in other cases to refer to transportation workers. The Eighth Circuit explained that this potential exemption from arbitration is a threshold question of arbitrability in this dispute. Parties can agree to have arbitrators decide threshold issues of arbitrability. In this case, the arbitration clauses in the Unit Franchise Agreements incorporated the Rules of the American Arbitration Association, which provide that the arbitrator has the power to determine threshold issues of arbitrability. As such, the parties agreed to have the arbitrator decide whether the drivers were exempt from arbitration under the FAA's provision, and the district court did not err in compelling arbitration.

The plaintiffs' second argument was that the district court erred in requiring that arbitration proceed on an individual, rather than a class, basis. The franchise agreements included a class action waiver, stating: “Any arbitration, suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff, consolidated, or similar basis.” The Eighth Circuit relied on the United States Supreme Court case AT&T Mobility LLC v. Concepcion , 131 S.Ct. 1740 (2011), which upheld a class action waiver in an arbitration provision. Like in Concepcion, the shuttle bus drivers in this case based their challenge on state law. This argument was rejected in Concepcion and also in this case, based on the FAA's pre-emption of state law. Therefore, the Eighth Circuit affirmed the district court's enforcement of the class action waiver.

Finally, the plaintiffs argued that the case should be stayed, rather than dismissed, pending arbitration. The appellate court first noted that it had not previously addressed the standard of review to be applied to this issue and determined that it should review the decision under an abuse of discretion standard. The court then considered the general requirement of the FAA that a case be stayed for arbitration, rather than dismissed. There is an exception to that general rule where it is clear that the entire controversy will be resolved in arbitration. In this case, however, the arbitrator may determine that it does not have jurisdiction under the transportation exemption in the FAA. If that happens, the statute of limitations may have run on the plaintiffs' claims, and they would be prejudiced by a dismissal. Therefore, the district court erred in dismissing the case rather than staying it pending arbitration.

Court Grants Preliminary Injunction, Compels Arbitration

A federal District Court in Pennsylvania also compelled arbitration recently, but only after granting the franchisor's motion for a preliminary injunction. AAMCO Transmissions, Inc. v. Dunlap, No. 11-4009, 2011 WL 3586225 (E.D. Penn. Aug. 16, 2011). In this case, the parties had entered into a franchise agreement for the operation of an AAMCO transmission repair center in 1981. The agreement had a 15-year term and provided that unless either party gave notice of its intention not to renew the agreement, it would renew for another 15-year term. The agreement also provided that if the parties renewed the agreement, the franchisee would execute a new franchise agreement.

The 1981 franchise agreement expired by its terms in 1996. Neither party expressed an intent to terminate the relationship at that time, nor did they execute a new franchise agreement. In 1998, AAMCO sent the franchisee a renewal franchise agreement which stated that it would be effective as of June 5, 1997 and would expire on June 4, 2012. There was no evidence that the 1998 renewal agreement was ever signed. Both the 1981 franchise agreement and the 1998 renewal agreement included an agreement to arbitrate, an agreement that the franchisee would cease all use of AAMCO's trademarks after termination, and a post-termination non-compete agreement.

In 2006, AAMCO notified Dunlap, the franchisee, that it was terminating the franchise agreement for failure to pay fees and submit sales information. In 2007, AAMCO sued Dunlap to enforce the termination and trademark and non-compete provisions. The parties settled and, as part of the settlement, rescinded the termination of the franchise agreement.

In June 2011, AAMCO informed Dunlap that his franchise agreement had expired and he no longer had the right to operate an AAMCO business. Dunlap continued operating his business despite these communications. AAMCO filed a lawsuit and moved for a preliminary injunction. In response, Dunlap moved the court to compel arbitration.

The court first considered the motion for a preliminary injunction and found that all four factors for preliminary injunctive relief had been met. Therefore, it enjoined Dunlap from continuing to use AAMCO's name or trademarks and from operating a competing business within 10 miles of his former franchised business. Of particular interest is the likelihood of success on the merits factor for injunctive relief. Dunlap argued that AAMCO could not succeed on the merits because, under the 1998 renewal agreement, the franchise agreement would not expire until June 2012. Although both parties had copies of a 1998 renewal agreement, neither party could produce a signed copy of the renewal agreement or present any evidence that either of them had signed the agreement. Instead, because the parties continued in their franchise relationship after the expiration of the 15-year 1981 agreement, the court deemed that agreement to have been automatically renewed for a second 15-year term, ending in 2011. Because the court found that the franchise agreement had expired, it went on to find a likelihood of success on the post-expiration trademark and non-compete provisions.

The court also considered whether it could issue an injunction that arguably altered the status quo in light of its accompanying decision to compel arbitration. It decided that it was not precluded from issuing the preliminary injunction and that the injunction was necessary to prevent prejudice to AAMCO that would be caused by the delay in sending the case to arbitration.

On the issue of whether to compel arbitration, AAMCO did not argue that the arbitration agreement was invalid; it argued that the franchisee had waived his right to assert the arbitration provision by not raising it in the 2007 litigation between the parties. Waiver of the right to arbitrate depends on whether the other party will be prejudiced if the case is sent to arbitration. Normally, waiver occurs only when the demand to arbitrate is made long after the case commenced and after discovery has been conducted. The court can also consider prior litigation between the parties. Because the current case was filed as a separate action from the 2007 case, the franchisee demanded arbitration early in the proceedings, and the court was granting a preliminary injunction, the court decided that AAMCO would not be prejudiced by enforcement of the arbitration provision.

Franchisor's Web Statements Not Protected from Defamation Claim By Litigation Privilege

The Florida Court of Appeals has decided that statements made by a franchisor on its website are not protected from defamation claims by the “litigation privilege.” Ball v. D'Lites Enterprises, Inc. , 65 So.3d 637 (Fla. Ct. App. 2011). In this case, a group of franchisees commenced litigation against their franchisor regarding the nutritional content of its dietary ice cream products. The franchisees alleged that they had been induced into signing franchise agreements based on the franchisor's misrepresentations about nutritional content and false statements that the products were safe for diabetics.

After commencement of the lawsuit, the franchisor added a statement on its website stating that the plaintiffs were selling products under the D'Lites name that were not authorized and were “in fact a hoax.” The plaintiffs then amended their complaint to allege defamation based on the online statements of the franchisor. The franchisor moved to dismiss, arguing that the statement was protected by the “litigation privilege,” which provides absolute immunity to acts done in the course of a judicial proceeding, providing the act had some relation to the proceeding. The trial court applied the litigation privilege and dismissed the defamation claim.

On appeal, the court analyzed whether statements by a party on its website constituted a statement made in connection with a judicial proceeding. The court reasoned that statements on a website are analogous to statements made in a press conference or statements to newspapers or other media. Such statements to the press generally are not protected by an absolute privilege. The website statements were not made as part of the judicial proceedings and therefore fell within the general rule that they were not absolutely privileged. The Florida Court of Appeals therefore reversed the lower court's dismissal and reinstated the defamation claims.

Cynthia M. Klaus is a shareholder at Larkin Hoffman in Minneapolis. She can be contacted at [email protected] or 952-896-3392.