Reinsurance Focus

This procedurally complicated dispute arises out of a franchise agreement for a Coffee Beanery cafe. As a result of disputes about the negotiation of the agreements for the café and its operation, the franchisee demanded arbitration, later withdrew the demand and filed suit in federal court, followed by the franchisor demanding arbitration and the Maryland Securities Commissioner issueing an Order to Show Cause, contending that the franchisor had violated the disclosure and anti-fraud provisions of the Maryland franchise act. An arbitration proceeded to a final award in favor of the franchisor. A request to vacate the award was denied, and an appeal followed.

The Sixth Circuit issued two opinions in this appeal. Both opinions held that because an officer of the Coffee Beanery failed to disclose a prior felony conviction for grand larceny, the agreement was in violation of the Maryland Franchise and Registration Act. As such, the court found that the arbitration award should be vacated because the arbitrator showed “a manifest disregard of the law.” The first opinion did not discuss Hall Street Associates LLC v. Mattel Inc., 28 S.Ct 1396 (2008). The amended opinion discusses Hall Street, finding that it did not clearly eliminate the manifest disregard of law doctrine. The opinion states that “[i]n light of the Supreme Court’s hesitation to reject the manifest disregard doctrine in all circumstances, we believe it would be imprudent to cease employing such a universally recognized principle.” The court found that since the franchisee was deprived of a statutorily required notification of prior felony convictions, it was fraudulently induced and not bound by the arbitration provision, and could pursue a claim to rescind the franchise agreement in its federal court lawsuit. Coffee Beanery, LTD v. WW LLC, No. 07-1830 (6th Cir. November 14, 2008).

This post written by John Black.