Non-Signatory Owner-Operator Bound to Franchise Agreement

11/12/2014 / Susan Tegt

Earlier this month, in Everett v. Paul Davis Restoration, Inc., Nos. 12-3407, 13-1036, 2014 U.S. ‎App. LEXIS 21059 (7th Cir. Nov. 3, 2014), the United States Court of Appeals for the Seventh ‎Circuit held that an owner-operator of a property damage restoration services franchise was ‎bound to the terms of a franchise agreement she had never executed because she received a ‎direct benefit from the franchise agreement. Everett follows the trend in other jurisdictions to ‎bind non-signatories to contractual provisions under the doctrine of equitable estoppel.‎

In Everett, the franchisor entered into a franchise agreement with Matthew Everett and EA ‎Green Bay, LLC (“EAGB”). EAGB was owned, controlled, and operated by Matthew Everett ‎and his wife, Renee Everett. At the time of signing the franchise agreement, Matthew Everett ‎indicated he was the 100% owner of EAGB, and the franchise agreement required consent from ‎the franchisor before ownership in EAGB could be transferred. Six years into the franchise ‎relationship, the franchisor terminated the franchise agreement for cause. Matthew Everett then ‎transferred his 50% ownership interest to Renee Everett and an EAGB employee. Renee Everett ‎then continued to operate EAGB under a new assumed name and continued to serve the same ‎customers from the same location, in spite of a provision in the franchise agreement prohibiting ‎the operation of a competitive business for a period of two years after the termination of the ‎franchise. The franchisor responded by initiating arbitration to enforce its covenant not to ‎compete, resulting in the issuance of a unanimous award against Renee Everett. The district ‎court, however, vacated the arbitration award finding that Renee Everett could not be bound to ‎the arbitration provision as a non-signatory under a theory of direct benefits estoppel. The ‎Seventh Circuit Court of Appeals reversed.‎

In finding Renee Everett was bound to the arbitration provision in the franchise agreement, and ‎therefore the arbitration award, the Court of Appeals noted that ordinary principles of contract ‎and agency may bind a non-signatory party to an arbitration agreement, including under the ‎doctrine of direct benefits estoppel. Under this doctrine, a non-signatory is estopped from ‎avoiding arbitration if she “knowingly seeks the benefits of the contract containing an arbitration ‎clause.” Here, Renee Everett obtained the benefits of the franchise agreement, namely owning ‎and operating the franchise and trading upon the name, goodwill, and reputation of the ‎franchisor.‎

While the holding in Everett supports franchisor controls of brand reputation by supporting the ‎enforcement of post-termination contractual provisions, franchisors are advised to take steps to ‎ensure the proper persons are bound to covenants not to compete and other contractual provisions ‎from the onset of the relationship.  Requiring individual shareholders or members of a franchisee ‎entity to execute personal guaranties, and including provisions that prohibit the unauthorized ‎transfer of the franchise agreement, may be effective tools to ensure contractual terms can be ‎enforced against the proper offenders.  It is always easier to have all proper persons sign the ‎franchise agreement and any ancillary documents at the onset of the franchise relationship than ‎relying on the doctrine of equitable estoppel afterwards in the event of a dispute.‎