WW, LLC v. The Coffee Beanery LTD

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1774
WW, LLC, A Maryland Limited Liability Corporation trading
as The Coffee Beanery Cafe; DEBORAH WILLIAMS; RICHARD
WELSHANS,
Plaintiffs - Appellants,
v.
THE COFFEE BEANERY LTD; JOANNE SHAW; JULIUS L. SHAW; KEVIN
SHAW; KURT SHAW; KEN COXEN; WALTER PILON; OWEN STERN,
Defendants - Appellees.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Andre M. Davis, District Judge. (1:05-
cv-03360-AMD)
Argued: December 9, 2010 Decided: March 23, 2011
Before NIEMEYER, DUNCAN, and KEENAN, Circuit Judges.
Reversed and remanded by unpublished opinion. Judge Niemeyer
wrote the opinion, in which Judge Duncan and Judge Keenan
joined.
ARGUED: Harry Martin Rifkin, Lutherville, Maryland, for
Appellants. Karl V. Fink, PEAR SPERLING EGGAN & DANIELS, PC,
Ann Arbor, Michigan, for Appellees. ON BRIEF: Joshua R. Fink,
PEAR SPERLING EGGAN & DANIELS, PC, Ann Arbor, Michigan, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.
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NIEMEYER, Circuit Judge:
WW, LLC, a Maryland limited liability company, Richard
Welshans, and Deborah Williams commenced this action against The
Coffee Beanery, Ltd., a Michigan corporation, and individual
officers of The Coffee Beanery, alleging that the defendants
made material misrepresentations that induced the plaintiffs to
enter into a franchise agreement with The Coffee Beanery. The
district court stayed this action to allow the parties to
proceed to arbitration in the Eastern District of Michigan, as
required by the franchise agreement. After arbitration, the
district court in the Eastern District of Michigan entered
judgment on the arbitration award in favor of The Coffee Beanery
and its officers. The district court in this case then
dismissed this action “in accordance with the [Eastern District
of Michigan] judgment.”
Subsequently, the Sixth Circuit reversed the judgment of
the Eastern District of Michigan and vacated the franchise
agreement, including its arbitration clause, prompting the
plaintiffs here to file a motion to reopen this action under
Federal Rule of Civil Procedure 60(b)(5) (authorizing a court to
reopen a judgment that is based on an earlier judgment that has
been reversed or vacated). The district court declined to
reopen this action, and the plaintiffs filed this appeal.
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For the reasons that follow, we reverse and remand for
further proceedings in the district court.
I
The Coffee Beanery franchises specialty retail coffee
stores, cafes, kiosks, coffee carts, and coffee bars, and it is
registered in Maryland, allowing it to offer and sell franchises
in Maryland. In May 2003, Richard Welshans and Deborah
Williams, a married couple, investigated the possibility of
purchasing a franchise to operate a Coffee Beanery store in
Annapolis, Maryland, and, pursuant to their inquiry, The Coffee
Beanery mailed them a copy of the Uniform Franchise Offering
Circular for the State of Maryland, together with a form
franchise agreement, which Welshans and Williams received in
early June 2003. About a week later, Kevin Shaw, the vice-
president of The Coffee Beanery, visited Welshans and Williams
in Annapolis to discuss more particularly the possibility of
entering into a franchise agreement. Several days later,
Welshans and Williams attended a Coffee Beanery “discovery day”
in Flushing, Michigan, during which they were given a tour of a
Coffee Beanery Cafe store and engaged in further discussions
about entering into a franchise. At the conclusion of
“discovery day,” Welshans signed a franchise agreement with The
Coffee Beanery for the operation of a franchised Coffee Beanery
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Cafe store in Annapolis. Subsequently, with The Coffee
Beanery’s consent, Welshans assigned the franchise agreement to
WW, LLC, a Maryland limited liability company owned by Welshans
and Williams. WW, LLC, opened its Coffee Beanery Cafe store in
2004.
The store was unsuccessful and generated a cash loss each
year of its operation. WW, LLC, attributed the losses to store
layout, the cash register system, the advertising program, and
the nature of required equipment. More importantly, they claim
that material facts about Coffee Beanery Cafe store franchises
were misrepresented or omitted during the negotiation process.
WW, LLC, Welshans, and Williams commenced this action in
December 2005, alleging violations of the Maryland Franchise
Law, detrimental reliance, intentional misrepresentation, and
negligent misrepresentation. They complained, among other
things, that the Uniform Franchise Offering Circular provided by
The Coffee Beanery was incomplete and inaccurate, in violation
of Maryland law. They alleged that the franchise agreement
contained untrue statements of fact, and that Kevin Shaw (a
Coffee Beanery officer) and The Coffee Beanery made false
statements regarding the operation and earnings of franchised
stores and other matters. WW, LLC, also filed a complaint with
the Maryland Securities Commissioner.
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The Coffee Beanery and the other individual defendants
filed a motion to dismiss this action or to stay it pending
arbitration. Around the same time, they filed a petition to
compel arbitration in the Eastern District of Michigan, relying
on the franchise agreement’s arbitration clause and its forum
selection clause, which provided that any legal action be
brought in the Eastern District of Michigan.
In response to The Coffee Beanery’s motion to stay pending
arbitration and WW, LLC’s motion to stay pending investigation
by the Maryland Securities Commissioner, the district court
entered an order, dated March 23, 2006, staying this action
“pending further order of this court.”
In the agency action, the Maryland Securities Commissioner
entered an order directing The Coffee Beanery and its officers
to show cause “why a final order should not be entered ordering
that Respondents cease and desist from violating the disclosure
and antifraud provisions of the Maryland Franchise Law.”
Following an agency investigation, the Commissioner and The
Coffee Beanery entered into a consent order, in which The Coffee
Beanery neither admitted nor denied the Commissioner’s statement
of facts and conclusions of law but agreed to the agency’s
jurisdiction and its order. The Commissioner found that The
Coffee Beanery violated the Maryland Franchise Law by making
material misrepresentations of fact or omissions of material
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fact about The Coffee Beanery franchise and by offering and
selling franchises in Maryland without giving prospective
franchisees a copy of the required offering prospectus, in
accordance with Maryland law. The consent order directed that
The Coffee Beanery and its officers “permanently cease and
desist from offering and selling franchises in Maryland or to
any prospective Maryland franchisees in violation of the
Maryland Franchise Law.” The consent order also required The
Coffee Beanery “to make a rescission offer to the Welshans, by
and through WW, LLC” allowing them to rescind the franchise
agreement on the condition that they release all claims against
The Coffee Beanery and its agents. Finally, the consent order
provided that it was “a disclosable order as described
under . . . the Maryland Franchise Law.” WW, LLC, Welshans, and
Williams did not accept the rescission offer provided for in the
consent order, electing to pursue their claims against The
Coffee Beanery, as asserted in this action.
After the Coffee Beanery filed the petition to compel
arbitration in the Eastern District of Michigan, that court
granted the petition, and the arbitrator subsequently found in
favor of The Coffee Beanery. The arbitrator found “no intent on
the part of Respondents to mislead Claimants or misrepresent the
franchise system.” She determined that The Coffee Beanery had
provided WW, LLC, with “adequate, proper and timely disclosure
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. . . under Michigan and Maryland franchise laws, excellent
training, competent assistance with store location, competent
lay-out of the store and business start-up resources,
comprehensive operations, training and equipment manuals,
excellent coffee and related products, available trouble-
shooting resources, and available financial assistance.” The
arbitrator determined that WW, LLC’s lack of success was not
caused by The Coffee Beanery. She determined that The Coffee
Beanery properly provided Welshans with a copy of the Uniform
Franchise Offering Circular, and that WW, LLC, had not proved
the elements necessary to recover for claims based on
nondisclosure of gift cards, the DMX music system, and Pepsi
contract requirements. She found that Welshans did not “rely on
any sales or expense information provided by Respondents.” And
with respect to WW, LLC’s claim that Kevin Shaw failed to
disclose a felony grand larceny conviction, the arbitrator
concluded that it was not the kind of conviction subject to
disclosure because Michigan and Maryland disclosure laws are
limited to “felonies that involve fraud, embezzlement,
fraudulent conversion, or misappropriation of property.” In
addition, the arbitrator found “the testimony of witnesses
Welshans, Williams, and their expert witness Lombardo with
regard to the claim for damages, not credible.” Ultimately, the
arbitrator concluded that The Coffee Beanery was not liable on
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any claim and that WW, LLC, Welshans, and Williams should pay
costs and back royalties to The Coffee Beanery.
The district court for the Eastern District of Michigan
confirmed the arbitration award and entered a judgment ordering
WW, LLC, Welshans, and Williams to pay The Coffee Beanery
$152,766.73.
Based on the judgment entered in the Eastern District of
Michigan, the district court in this case entered an order on
March 3, 2008, dismissing this action “[i]n accordance with the
judgment . . . of the United States District Court for the
Eastern District of Michigan.”
The judgment entered in the Eastern District of Michigan
was appealed to the Sixth Circuit, and on November 14, 2008, the
Sixth Circuit reversed the judgment, vacated the arbitration
award, and held that the arbitration agreement was unenforceable
because of fraud in the inducement. Without reaching WW, LLC’s
other arguments, the Sixth Circuit held that the arbitrator’s
decision that Kevin Shaw’s grand larceny conviction need not
have been disclosed showed a “manifest disregard for the law”
because a grand larceny conviction involves misappropriation of
property. The Sixth Circuit held that WW, LLC, was not bound by
the arbitration clause because The Coffee Beanery’s failure to
disclose Kevin Shaw’s conviction deprived WW, LLC, “of a
mandatory, statutorily required notice” prior to signing the
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agreement and therefore, WW, LLC, was “fraudulently induced into
signing” the franchise agreement. Finally, the court stated
that WW, LLC, “need not resort to arbitration to vindicate its
statutory rights but may instead seek appropriate relief in a
court of law.”
In light of the Sixth Circuit’s decision reversing the
Eastern District of Michigan judgment, on which the district
court in this case relied to close this case, WW, LLC, requested
that the district court reopen the judgment based on Federal
Rule of Civil Procedure 60(b)(5). By order dated June 1, 2009,
the district court denied the motion, stating:
[T]he mere fact that the Sixth Circuit vacated the
district court judgment enforcing the arbitration
award resulting from the arbitral proceedings over
which that court had jurisdiction is no reason for
this court to vacate its judgment here. In dismissing
the case, this court presumed that plaintiffs would
pursue whatever alternative remedies they wished to
pursue in the court having jurisdiction over the
parties and their dispute, namely, the Eastern
District of Michigan.
While the district court relied on the general language of Rule
60(b), which provides that a court may set aside a judgment on
the basis of “mistake, inadvertence, surprise, or excusable
neglect . . . or . . . any other reason justifying relief from
the operation of the judgment,” it did not address Rule
60(b)(5), which allows relief from a final judgment if “it is
based on an earlier judgment that has been reversed or vacated.”
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From the district court’s order denying their motion to
reopen, WW, LLC, Welshans, and Williams filed this appeal.
II
We review the district court’s denial of a Rule 60(b)
motion for abuse of discretion. See MLC Automotive, LLC v. Town
of Southern Pines, 532 F.3d 269, 277 (4th Cir. 2008). “A
district court abuses its discretion when it . . . fails to
consider judicially recognized factors constraining its exercise
of discretion . . . or commits an error of law.” Bay Country
Consumer Finance, Inc. v. Fidelity Sec. Life Ins. Co., 311 Fed.
App’x 580, 581 (4th Cir. 2008) (per curiam).
In this case, the district court dismissed the plaintiffs’
action, based on the Eastern District of Michigan judgment,
which upheld and enforced the arbitration award in favor of The
Coffee Beanery. When, however, the Sixth Circuit reversed the
judgment of the Eastern District of Michigan, the conditions for
application of Rule 60(b)(5) were met. That Rule provides, “On
motion and just terms, the court may relieve a party or its
legal representative from a final judgment . . . [if] the
judgment . . . is based on an earlier judgment that has been
reversed or vacated.” Because the district court failed to
apply Rule 60(b)(5), we conclude that it abused its discretion
in failing to consider judicially recognized factors
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constraining its exercise of discretion and in committing an
error of law.
Moreover, the existence of a forum selection clause as
contained in the franchise agreement -- even if we were to
assume that it survived the vacated franchise agreement -- would
not dictate a different result. That clause would not strip the
district court of jurisdiction, and it would not even mean that
venue was automatically improper. See 28 U.S.C. § 1404(a); P.M.
Enterprises v. Color Works, Inc., 946 F. Supp. 435, 440 (S.D.W.
Va. 1996); see also Stewart Organization, Inc. v. Ricoh Corp.,
487 U.S. 22, 28 (1988).
The Coffee Beanery argues that WW, LLC’s appeal should be
barred because WW, LLC, did not appeal the district court’s
original dismissal order of March 3, 2008, which was based on
the Eastern District of Michigan judgment. At the time of the
original dismissal order, however, the Eastern District of
Michigan judgment enforcing the arbitration award was still
operative, and therefore, there existed no viable basis for
appealing the district court’s dismissal of this case.
The Coffee Beanery also argues that WW, LLC’s motion to set
aside the judgment and reopen this case was untimely. We reject
this argument, too, as WW, LLC, filed its motion soon after the
Sixth Circuit’s mandate became final, which was the basis for
its motion to reopen this case.
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Accordingly, we reverse the district court’s order denying
the plaintiffs’ Rule 60(b)(5) motion and remand for further
proceedings.
REVERSED AND REMANDED
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