Court Watch

In accordance with arbitration rules, each party was entitled to appoint one arbitrator, and then the two arbitrators chosen by the parties would choose the panel's neutral arbitrator, who would chair the panel and decide the issues in the arbitration. Mark Kowalsky was chosen as the neutral arbitrator. Nearly five years and 50 hearing days into the arbitration, Kowalsky announced to Kincade that the Whites and the Whites' advocate on the arbitration panel had each hired Kowalsky's firm for substantial engagements. Many irregularities followed, each of which favored the Whites. On May 9, 2008, the arbitration panel in a 2-1 decision (with the arbitrator chosen by Kincade dissenting) issued an “Interim Award” in which the Whites were awarded $567,300 in damages on their claims, and Kincade was denied recovery on its breach of contract claims. The Interim Award further provided that all claims that had not been expressly granted were denied.

Despite the foregoing, Kowalsky later ordered the parties to submit applications for fees and costs. Kincade objected, arguing that such an award would improperly modify the Interim Award. On Feb. 26, 2009, a Final Award was issued which, among other things, granted the Whites $487,000 in attorneys' fees. All told, the Whites' final award exceeded $1.4 million.

Kincade filed an action in the U.S. District Court for the Eastern District of Michigan seeking to vacate the Final Award. The district court vacated the Final Award because of Kowalsky's evident partiality. The Whites then appealed to the Sixth Circuit.

At the outset, the Sixth Circuit observed that “evident partiality or corruption” was an appropriate ground for vacating an arbitration award. To establish evident partiality, the challenging party must establish that “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 328 (6th Cir. 1998). “This standard requires a greater showing than an appearance of bias, but less than actual bias,” and to meet it, a party “must establish specific facts that indicate improper motives on the part of the Arbitrator.” Id. at 329.

In this case, the Sixth Circuit found that Kincade had established “a convergence of undisputed facts that, considered together, show a motive for Kowalsky to favor the Whites and multiple, concrete actions in which he appeared actually to favor them.” As to motive, the court was less than impressed with the disclosure, nearly five years into the arbitration and after nearly 50 hearing days, of Kowalsky's law firm being hired by the arbitrator chosen by the Whites and by the Whites for separate engagements that appeared to be substantial. Kowalsky's actions going forward only added fuel to the fire. These actions included: 1) allowing the Whites to rely on documents they had deliberately failed to produce to Kincade when requested four years earlier; 2) denying Kincade any relief on a straightforward breach of contract claim that was virtually uncontested; 3) failing to offer any response to the serious objections that Kincade had raised in the decisions he had rendered as an arbitrator; and 4) awarding the Whites nearly $500,000 in attorneys' fees, despite the plain terms of the Interim Award that provided the Whites' request for fees had been denied. These actions, when combined with the dealings of the Whites' arbitrator and the Whites with Kowalsky's firm, were, in the view of the Sixth Circuit, more than sufficient to show his evident partiality and resulted in its affirming the vacating of the Final Award.

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Pizza Restaurant Franchisor's Trade Dress Found to Be Unprotectable

Many businesses strive to protect the ornamental elements of the interior and/or exteriors of their business premises from copying by competitors through claims of “trade dress.” As a recent decision from the U.S. District Court for the Eastern District of Michigan establishes, such claims can be difficult to prove absent evidence establishing the protectability of the claimed trade dress and of confusion in the marketplace. Happy's Pizza Franchise LLC v. Papa's Pizza, Inc., No. 10-15174, 2013 WL 308728 (E.D. Mich. Jan. 25, 2013).

Happy's Pizza Franchise, LLC (“Happy's”) instituted an action against Papa's Pizza Restaurants (“Papa's”) primarily based on a claim that Papa's had copied the design of Happy's restaurants and allegedly used Happy's expansive menu. Happy's claimed that it had adopted “Unique D'cor Protocols” that distinguished the design of its restaurant from other restaurants and that had allegedly been copied by Papa's. These protocols included the following: 1) granite countertops and tabletops; 2) ceramic-tiled walls and faux-venetian plaster-finished walls; 3) extensive neon lighting; 4) ceramic floors; 5) large back-lit menu with faux-venetian plaster walls; 6) large, black, industrial-styled rugs; 7) back-lit pictures of menu items; 8) stainless steel shelving units behind the service counter; and 9) stacks of pre-folded pizza boxes and large coin-operated candy and bubble gum dispensers.

Happy's moved for partial summary judgment on its claims of trade dress infringement.

In order for Happy's to succeed on its claim, the court observed that it must prove that:

1. the trade dress in question was distinctive in the marketplace, thereby indicating the source of the good it dresses;
2. the trade dress is primarily non-functional; and
3. the trade dress of the competing good is confusingly similar.

As to the first factor, the court noted that Happy's offered only one theory of distinctiveness, i.e., that its trade dress was inherently distinctive based on its arbitrary use of each element constituting the Unique D'cor Protocols. The court held that this showing was insufficient to establish distinctiveness, particularly in view of the fact that each of the individual items comprising the Unique D'cor Protocols was generic. The court added that although the decision by Happy's to use these generic elements may be arbitrary, this fact alone did not create protectable trade dress.

The court also found that Happy's claimed trade dress was primarily functional. Although Happy's asserted its expansive menu, black industrial-style rugs, granite countertops, back-lit images and menu, ceramic-tiled walls and floors, stainless steel shelving, and stacked pizza boxes were non-functional because the “total package” was allegedly unique to Happy's restaurants, Happy's failed to establish that these elements were not commonly used in the industry and that there were other alternatives for Papa's to use in conducting its business.

Finally, the court found evidence provided by Happy's of alleged customer confusion to be lacking. Happy's relied solely on an affidavit of a manager of a Happy's restaurant, which stated that “customers have frequently expressed confusion over the phone and in person to me ' between Happy's and Papa's Pizza Restaurant.” The court found this to be insufficient because no customer statements or particularity regarding the confusion was provided. Moreover, the manager's affidavit failed to tie any of the confusion customers may have been experiencing to the alleged similarity in the d'cor between Happy's and Papa's.

Because Happy's failed to provide sufficient evidence to establish the essential elements of a trade dress claim, its motion for partial summary judgment was denied.

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Franchisee Successfully Pleads a Fraud Claim

As law students, we were taught at the very beginning of our legal education that fraud claims were different from all other claims. For whatever reason, courts have historically been reluctant to allow fraud claims to proceed to judgment, perhaps because claims of fraud impugn defendants' character, just by the mere filing of such claims. Thus, courts have created barriers to fraud claims moving quickly through the judicial system. Under modern pleading rules, courts will permit claims other than fraud claims to proceed with bare-bones allegations of facts. In contrast, fraud claims must be pled with particularity ' that is, a more detailed presentment of the facts supporting the claim must be included in the complaint.

A recent decision from the U.S. District Court for the District of Maryland, Raymond v. Hanley, Bus. Franchise Guide (CCH) ' 18,018 (D. Md. Feb. 25, 2013), is a good example of a different principle: Courts will bend over backward to allow a fraud claim to proceed when the case has been properly pleaded to the court. In Hanley, the court denied the defendants' motion to dismiss for failure to state a claim on which relief could be granted, following a recent trend in case law to allow fraud claims to proceed at least past the motion to dismiss, and also found that the waivers were void under Maryland law. (See Randall v. Lady of America Franchise Corp., 532 F.Supp.2d 1071 (D. Minn. 2007) and Long John Silver's, Inc. v. Nickleson, __ F.Supp.2d __, 2013 WL 557258 (W.D. Ky. Feb. 12, 2013). The case is somewhat complicated, but in essence, the defendants argued that the plaintiff's alleged misrepresentations were, in fact, opinions or estimates, not statements of fact, and these could not be the basis for a fraud claim. The defendants also pointed to various waivers in the plaintiff's franchise agreement as grounds for denying the plaintiff the right to proceed with his fraud claim. The defendants argued that the plaintiff's reliance on representations made outside of the franchise disclosure document and franchise agreement, in light of the plaintiff's express waiver of reliance on this extrinsic information,
was unreasonable.

The court, however, found that the plaintiff's claims of misrepresentation and omissions of facts necessary to make statements by the defendants not misleading were plausible under the circumstances. While the plaintiff in Hanley was, for the most part, allowed to proceed on his claims, Hanley must be viewed with suspicion. The published decision related to a motion to dismiss, and, as is so often the case, once discovery has been conducted, the strength of the fraud claim may vaporize.

Chris Bussert is a partner in the Atlanta office of Kilpatrick Townsend & Stockton LLP. He is co-chair of the firm's Franchise Practice Team, and he can be contacted at 404-815-6545 or [email protected].

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Arbitrator Bias Established

It is relatively rare for an arbitration award to be vacated and even more rare for an award to be vacated as a result of arbitrator bias. Recently, however, the Sixth Circuit in Thomas Kincade Co. v. White, et al., 2013 WL 1296238 (6th Cir. April 2, 2013) vacated an arbitration award as a result of the actions of the “neutral” arbitrator on a three-person arbitration panel.

Thomas Kincade Company (“Kincade”) and David and Nancy White (the “Whites”) entered into several agreements pursuant to which the Whites became “Signature Dealers” of Kincade's artwork. The parties' agreements included an arbitration provision. In 2002, the parties commenced an arbitration in which Kincade claimed that the Whites failed to pay for artwork it provided, and the Whites counterclaimed that they had been fraudulently induced into becoming Signature Dealers.

In accordance with arbitration rules, each party was entitled to appoint one arbitrator, and then the two arbitrators chosen by the parties would choose the panel's neutral arbitrator, who would chair the panel and decide the issues in the arbitration. Mark Kowalsky was chosen as the neutral arbitrator. Nearly five years and 50 hearing days into the arbitration, Kowalsky announced to Kincade that the Whites and the Whites' advocate on the arbitration panel had each hired Kowalsky's firm for substantial engagements. Many irregularities followed, each of which favored the Whites. On May 9, 2008, the arbitration panel in a 2-1 decision (with the arbitrator chosen by Kincade dissenting) issued an “Interim Award” in which the Whites were awarded $567,300 in damages on their claims, and Kincade was denied recovery on its breach of contract claims. The Interim Award further provided that all claims that had not been expressly granted were denied.

Despite the foregoing, Kowalsky later ordered the parties to submit applications for fees and costs. Kincade objected, arguing that such an award would improperly modify the Interim Award. On Feb. 26, 2009, a Final Award was issued which, among other things, granted the Whites $487,000 in attorneys' fees. All told, the Whites' final award exceeded $1.4 million.

Kincade filed an action in the U.S. District Court for the Eastern District of Michigan seeking to vacate the Final Award. The district court vacated the Final Award because of Kowalsky's evident partiality. The Whites then appealed to the Sixth Circuit.

At the outset, the Sixth Circuit observed that “evident partiality or corruption” was an appropriate ground for vacating an arbitration award. To establish evident partiality, the challenging party must establish that “a reasonable person would have to conclude that an arbitrator was partial to one party to the arbitration.” Andersons, Inc. v. Horton Farms, Inc. , 166 F.3d 308, 328 (6th Cir. 1998). “This standard requires a greater showing than an appearance of bias, but less than actual bias,” and to meet it, a party “must establish specific facts that indicate improper motives on the part of the Arbitrator.” Id. at 329.

In this case, the Sixth Circuit found that Kincade had established “a convergence of undisputed facts that, considered together, show a motive for Kowalsky to favor the Whites and multiple, concrete actions in which he appeared actually to favor them.” As to motive, the court was less than impressed with the disclosure, nearly five years into the arbitration and after nearly 50 hearing days, of Kowalsky's law firm being hired by the arbitrator chosen by the Whites and by the Whites for separate engagements that appeared to be substantial. Kowalsky's actions going forward only added fuel to the fire. These actions included: 1) allowing the Whites to rely on documents they had deliberately failed to produce to Kincade when requested four years earlier; 2) denying Kincade any relief on a straightforward breach of contract claim that was virtually uncontested; 3) failing to offer any response to the serious objections that Kincade had raised in the decisions he had rendered as an arbitrator; and 4) awarding the Whites nearly $500,000 in attorneys' fees, despite the plain terms of the Interim Award that provided the Whites' request for fees had been denied. These actions, when combined with the dealings of the Whites' arbitrator and the Whites with Kowalsky's firm, were, in the view of the Sixth Circuit, more than sufficient to show his evident partiality and resulted in its affirming the vacating of the Final Award.

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Pizza Restaurant Franchisor's Trade Dress Found to Be Unprotectable

Many businesses strive to protect the ornamental elements of the interior and/or exteriors of their business premises from copying by competitors through claims of “trade dress.” As a recent decision from the U.S. District Court for the Eastern District of Michigan establishes, such claims can be difficult to prove absent evidence establishing the protectability of the claimed trade dress and of confusion in the marketplace. Happy's Pizza Franchise LLC v. Papa's Pizza, Inc., No. 10-15174, 2013 WL 308728 (E.D. Mich. Jan. 25, 2013).

Happy's Pizza Franchise, LLC (“Happy's”) instituted an action against Papa's Pizza Restaurants (“Papa's”) primarily based on a claim that Papa's had copied the design of Happy's restaurants and allegedly used Happy's expansive menu. Happy's claimed that it had adopted “Unique D'cor Protocols” that distinguished the design of its restaurant from other restaurants and that had allegedly been copied by Papa's. These protocols included the following: 1) granite countertops and tabletops; 2) ceramic-tiled walls and faux-venetian plaster-finished walls; 3) extensive neon lighting; 4) ceramic floors; 5) large back-lit menu with faux-venetian plaster walls; 6) large, black, industrial-styled rugs; 7) back-lit pictures of menu items; 8) stainless steel shelving units behind the service counter; and 9) stacks of pre-folded pizza boxes and large coin-operated candy and bubble gum dispensers.

Happy's moved for partial summary judgment on its claims of trade dress infringement.

In order for Happy's to succeed on its claim, the court observed that it must prove that:

1. the trade dress in question was distinctive in the marketplace, thereby indicating the source of the good it dresses;
2. the trade dress is primarily non-functional; and
3. the trade dress of the competing good is confusingly similar.

As to the first factor, the court noted that Happy's offered only one theory of distinctiveness, i.e., that its trade dress was inherently distinctive based on its arbitrary use of each element constituting the Unique D'cor Protocols. The court held that this showing was insufficient to establish distinctiveness, particularly in view of the fact that each of the individual items comprising the Unique D'cor Protocols was generic. The court added that although the decision by Happy's to use these generic elements may be arbitrary, this fact alone did not create protectable trade dress.

The court also found that Happy's claimed trade dress was primarily functional. Although Happy's asserted its expansive menu, black industrial-style rugs, granite countertops, back-lit images and menu, ceramic-tiled walls and floors, stainless steel shelving, and stacked pizza boxes were non-functional because the “total package” was allegedly unique to Happy's restaurants, Happy's failed to establish that these elements were not commonly used in the industry and that there were other alternatives for Papa's to use in conducting its business.

Finally, the court found evidence provided by Happy's of alleged customer confusion to be lacking. Happy's relied solely on an affidavit of a manager of a Happy's restaurant, which stated that “customers have frequently expressed confusion over the phone and in person to me ' between Happy's and Papa's Pizza Restaurant.” The court found this to be insufficient because no customer statements or particularity regarding the confusion was provided. Moreover, the manager's affidavit failed to tie any of the confusion customers may have been experiencing to the alleged similarity in the d'cor between Happy's and Papa's.

Because Happy's failed to provide sufficient evidence to establish the essential elements of a trade dress claim, its motion for partial summary judgment was denied.

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Franchisee Successfully Pleads a Fraud Claim

As law students, we were taught at the very beginning of our legal education that fraud claims were different from all other claims. For whatever reason, courts have historically been reluctant to allow fraud claims to proceed to judgment, perhaps because claims of fraud impugn defendants' character, just by the mere filing of such claims. Thus, courts have created barriers to fraud claims moving quickly through the judicial system. Under modern pleading rules, courts will permit claims other than fraud claims to proceed with bare-bones allegations of facts. In contrast, fraud claims must be pled with particularity ' that is, a more detailed presentment of the facts supporting the claim must be included in the complaint.

A recent decision from the U.S. District Court for the District of Maryland, Raymond v. Hanley, Bus. Franchise Guide (CCH) ' 18,018 (D. Md. Feb. 25, 2013), is a good example of a different principle: Courts will bend over backward to allow a fraud claim to proceed when the case has been properly pleaded to the court. In Hanley , the court denied the defendants' motion to dismiss for failure to state a claim on which relief could be granted, following a recent trend in case law to allow fraud claims to proceed at least past the motion to dismiss, and also found that the waivers were void under Maryland law. ( See Randall v. Lady of America Franchise Corp. , 532 F.Supp.2d 1071 (D. Minn. 2007) and Long John Silver's, Inc. v. Nickleson , __ F.Supp.2d __, 2013 WL 557258 (W.D. Ky. Feb. 12, 2013). The case is somewhat complicated, but in essence, the defendants argued that the plaintiff's alleged misrepresentations were, in fact, opinions or estimates, not statements of fact, and these could not be the basis for a fraud claim. The defendants also pointed to various waivers in the plaintiff's franchise agreement as grounds for denying the plaintiff the right to proceed with his fraud claim. The defendants argued that the plaintiff's reliance on representations made outside of the franchise disclosure document and franchise agreement, in light of the plaintiff's express waiver of reliance on this extrinsic information,
was unreasonable.

The court, however, found that the plaintiff's claims of misrepresentation and omissions of facts necessary to make statements by the defendants not misleading were plausible under the circumstances. While the plaintiff in Hanley was, for the most part, allowed to proceed on his claims, Hanley must be viewed with suspicion. The published decision related to a motion to dismiss, and, as is so often the case, once discovery has been conducted, the strength of the fraud claim may vaporize.

Chris Bussert is a partner in the Atlanta office of Kilpatrick Townsend & Stockton LLP. He is co-chair of the firm's Franchise Practice Team, and he can be contacted at 404-815-6545 or [email protected].

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