In most cases in which a court discusses whether a particular relationship is a "franchise," the purpose is to determine whether the contractual arrangement falls within the scope of a state disclosure or relationship law and the consequences that flow from such determination. In the recent case of Birmingham News Co. v. Horn et al, 2004 Ala. Lexis 152 (Ala. June 11, 2004), the Supreme Court of Alabama upheld an arbitration panel’s holding that certain terminated newspaper dealerships were "franchises" and that the terminated dealers were entitled to, among other things, damages based on the loss of the "merchantable property interest" they had in the franchise. This finding was made in the absence of any statute that might have created a particular remedy for the termination of an arrangement determined under the statute to be a "franchise."
The Ruling Regarding Termination of Dealership Agreements
Birmingham News Co. v. Horn involves six former dealers of The Birmingham News newspaper. After the dealers refused to sign new dealership agreements that were less favorable to them in several respects, The Birmingham News Company (The News) terminated their dealership agreements. The dealers then sued The News in the Alabama Circuit Court After the dealers filed suit in the trial court, The News compelled arbitration pursuant to the terms of the dealer agreements.
The arbitration panel held that the requirement by new management of The News that the dealers sign the new form of dealership agreement and the resulting termination based on their failure to sign the new dealership agreement after representing that the current dealership agreements would be renewed "so long as [the dealers] continued performing their work satisfactorily" constituted breach of contract, fraud, and breach of the covenant of good faith and fair dealing. Contrary to a provision in the dealership agreements, the arbitration panel awarded total compensatory and punitive damages to the dealers, including damages for loss of the value of the "franchise" of approximately $20 million.
The News appealed to the Alabama Supreme Court, arguing that the arbitration award should be vacated due to the fact that the "arbitrators exceeded their powers." After a lengthy discussion, the court stated that the only basis on which it would vacate an arbitration award was if the arbitrators "manifestly disregarded the law" (that is, the applicable law is well defined, explicit, and clearly applicable to the case, and the arbitrators knew the law but ignored it or refused to apply it). The court held that the arbitration panel had not "manifestly disregarded the law" except with respect to the panel’s award of compensation for both "loss of franchise value" and "loss of future profits." The court noted that this aspect of the damages award constituted duplicative damages and reformed the award accordingly.
The Potential Down Side of Arbitration
It is unclear whether the damages awarded to the dealers based on the fact that the relationship constituted a "franchise," even in the absence of an applicable franchise statute, would have been vacated by the court had the issue been raised on appeal by The News, which it was not. However, given the high standard for vacating an arbitration award that the court enunciated, it seems unlikely that this part of the award would have been altered.
Although there are benefits to choosing arbitration as the method for dispute resolution, this case illustrates an important point: Limited judicial review on appeal of an arbitration ruling is a potential downside to choosing arbitration.
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