Renee Everett v. Paul Davis Restoration, Incorp

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 12-3407 & 13-1036
RENEE EVERETT and BUILDING WERKS OF WI, LLC,
Plaintiffs-Appellees,
v.
PAUL DAVIS RESTORATION, INC.,
Defendant-Appellant.
____________________
Appeals from the United States District Court for the
Eastern District of Wisconsin.
No. 1:10–CV–00634–WCG — William C. Griesbach, Chief Judge.
____________________
ARGUED APRIL 10, 2014 — DECIDED NOVEMBER 3, 2014
____________________
Before CUDAHY and EASTERBROOK, Circuit Judges, and
LAWRENCE, District Judge. *
CUDAHY, Circuit Judge. In the case before us we must de-
termine whether an owner-operator of a franchise is obligat-
ed to arbitrate under a franchise agreement because she re-
ceived direct benefits from the agreement despite not having
* Of the Southern District of Indiana, sitting by designation.
2 Nos. 12-3407 & 13-1036
signed the document. Paul Davis Restoration, Inc. (PDRI)
seeks to bind Renee Everett to an arbitration award pursuant
to the franchise agreement PDRI had with her husband and
the Everetts’ corporation. Although Ms. Everett was a non-
signatory to the franchise agreement, PDRI asserted she was
subject to arbitration under the doctrine of direct benefits
estoppel, among other theories. The district court ultimately
determined that the benefits Ms. Everett received were fil-
tered through her ownership interest in their corporation or
through her husband and were therefore indirect. Because
the facts before us indicate that Ms. Everett did receive a di-
rect benefit from the franchise agreement and can therefore
be held to the agreement, we now reverse.
PDRI entered into a franchise agreement with Matthew
Everett and EA Green Bay, LLC (EAGB). Prior to PDRI’s
termination of the franchise agreement, EAGB operated and
conducted franchise business under the d/b/a name “Paul
Davis Restoration of Northeast Wisconsin” (the franchise).
EAGB was owned, controlled, and operated by Mr. Everett,
but the evidence clearly shows it was also owned, con-
trolled, and operated by Ms. Everett.
Effective September 1, 2004, Mr. Everett and EAGB en-
tered into the Franchise agreement with PDRI. PDRI’s fran-
chise agreements require the Principal Owners of the fran-
chise to form a corporate entity to operate the franchise
business. To comply with this requirement Mr. Everett
formed EAGB in 2004. There is no dispute that Mr. Everett
formed EAGB solely to comply with the PDRI franchise re-
quirement. The franchise agreement also required that
EAGB not be used to conduct any business other than oper-
ating the PDRI franchise business. Thus, it is clear that EAGB
Nos. 12-3407 & 13-1036 3
was formed to gain the benefit of the franchise agreement
and was used only to conduct the business of the franchise.
Mr. Everett originally executed the agreement on behalf
of EAGB as the franchisee company and individually in his
own capacity as the 100% principal owner of EAGB. Despite
Mr. Everett signing as the 100% principal owner of EAGB
the record shows that Ms. Everett had a 50% ownership of
EAGB potentially as early as June 11, 2004 and at the latest
by 2008. Regardless of when Ms. Everett became a partial
owner, the franchise agreement very clearly stated that the
Everetts were required to obtain PDRI’s consent before
transferring ownership. The terms of the franchise agree-
ment also clearly required that Ms. Everett sign the franchise
agreement in her personal capacity as an additional princi-
pal owner. The Everetts never requested consent and never
had Ms. Everett sign the contract despite their knowledge of
these requirements in the agreement. Ms. Everett also played
an active role in running EAGB, holding herself out as the
Executive Vice President of the franchise and attending
PDRI franchise meetings as the representative of the fran-
chise.
In 2010 the franchise agreement was terminated by PDRI
for cause. After termination a clause in the franchise agree-
ment prohibited EAGB and the Everetts (as principal own-
ers) from competing with PDRI for two years. Mr. Everett
then transferred his 50% ownership of EAGB to Ms. Everett,
to whom he gave 45%, and the remaining 5% to an EAGB
employee. Rather than abiding by the non-compete clause,
Ms. Everett, who now owned 95% of EAGB, continued to
operate EAGB under the new d/b/a name Building Werks.
Building Werks served the same customers from the same
4 Nos. 12-3407 & 13-1036
business location, employed the same people, and traded
upon the goodwill and reputation built under the PDRI ban-
ner. Ms. Everett even emailed customers from a PDRI mar-
keting list with the subject line: “Same Great Service Under a
New Name!” The Everetts seemingly colluded to avoid the
post-termination restrictive covenant by simply taking down
the PDRI sign and removing Mr. Everett as a principal own-
er.
PDRI responded by initiating arbitration. Ms. Everett
then filed suit seeking a declaratory judgment that she was
not bound to arbitrate because she did not sign the franchise
agreement. The district court initially denied the preliminary
injunction finding “abundant evidence” that she was bound
by the franchise agreement under the direct benefits doctrine
and that there was a scheme between the Everetts to try to
avoid the non-compete provisions. Thus, the arbitration con-
tinued and the panel entered a unanimous award against
Ms. Everett.
PDRI returned to the district court and requested confir-
mation of the arbitration award and Ms. Everett simultane-
ously moved to vacate the award. Despite there being no
change in the undisputed facts and evidence before the court
and no intervening change in the law, the district court re-
versed itself, holding that Ms. Everett did not directly benefit
from the franchise and was thus not bound by the arbitra-
tion clause. The district court vacated the arbitration award,
finding the benefit to Ms. Everett to be indirect because it
flowed through her ownership interest in EAGB and her re-
lationship to Mr. Everett, but not to her directly. PDRI ap-
peals. We review the district court’s decision to vacate the
arbitration award de novo. Webster v. A.T. Kearney, Inc., 507
Nos. 12-3407 & 13-1036 5
F.3d 568, 571 (7th Cir. 2007); Zurich Am. Ins. Co. v. Watts In-
dus., 417 F.3d 682, 687 (7th Cir. 2005).
I.
The primary question before us is whether Ms. Everett is
bound to the arbitration award, pursuant to the franchise
agreement. Typically, the fact that Ms. Everett never signed
the franchise agreement would be the end of our discussion.
However, the obligation to arbitrate a dispute is not always
limited to those who have personally signed an agreement
containing such a provision. See e.g., Thomson-CSF v. Ameri-
can Arbitration Association, 64 F.3d 773, 776 (2d Cir. 1995)
(“This Court has made clear that a nonsignatory party may
be bound to an arbitration agreement if so dictated by the
‘ordinary principles of contract and agency.’” (citing McAl-
lister Bros., Inc. v. A & S Transp. Co., 621 F.2d 519, 524 (2d Cir.
1980))). We have previously recognized a number of theories
binding non-signatories to arbitrate, including the doctrine
of direct benefits estoppel. Zurich Am. Ins. Co., 417 F.3d at
687.
Our initial task is to determine whether Renee Everett re-
ceived a direct benefit from the franchise agreement or
whether, as the district court found, some aspect of Ms. Ev-
erett’s relationship to the franchise or her husband made any
benefit she received indirect. Under the doctrine of direct
benefits estoppel, a non-signatory party is estopped from
avoiding arbitration if she “knowingly seeks the benefits of
the contract containing the arbitration clause.” Id. at 688. As
the name suggests, in order to trigger the doctrine the bene-
fit received by the non-signatory must flow directly from the
agreement. Id.; MAG Portfolio Consult., GmbH v. Merlin Bio-
med Group, LLC, 268 F.3d 58, 61 (2d Cir. 2001). Thus, a benefit
6 Nos. 12-3407 & 13-1036
derived from the agreement itself is direct. However, a bene-
fit derived from the exploitation of the contractual relation-
ship of parties to an agreement, but not the agreement itself
is indirect. MAG Portfolio, 268 F.3d at 61.
Initially, the district court reached the conclusion that
there was “abundant evidence” that Ms. Everett directly
benefited from the franchise agreement signed by her hus-
band. The court took particular note of the collusion be-
tween the Everetts to avoid the restrictive covenant in the
Franchise Agreement and the fact that EAGB was a family
owned business, which Ms. Everett both ran and profited
from. However, when considering whether to approve the
arbitration award in PDRI’s favor, the district court was “no
longer convinced” it had used a “correct application of direct
benefits estoppel.” PDRI asserted that Ms. Everett received
direct economic benefits that would not have existed but for
the franchise agreement and that her new business, Building
Werks, would not exist if not for her secret ownership and
operation of the PDRI franchise. While conceding this was
all true, the district court concluded that PDRI did not show
that “she benefitted directly from the contract” but instead
from “the business that the contract made profitable.” The
district court thus determined that all benefits Ms. Everett
received were filtered through the business and her hus-
band, making them indirect benefits.
There is a relative dearth of precedent regarding direct
benefits estoppel, and consequently the district court primar-
ily relied on a handful of Second Circuit cases to flesh out
the distinction between direct and indirect benefits. To illus-
trate indirect benefits, the district court relied upon Thomp-
son-CSF v. American Arbitration Association, 64 F.3d 773 (2d
Nos. 12-3407 & 13-1036 7
Cir. 1995). In Thompson two companies agreed to trade ex-
clusively with each other. Id. at 775. A third party competitor
obtained one of the companies with the intent of squeezing
the other company out of business. Id. at 776. The un-
acquired signatory was now contractually bound to trade
only with the subsidiary of its competitor, and the third par-
ty competitor then exploited the trade contract and refused
to trade with the other company. Id. While the trade agree-
ment was crucial to the benefit the third party obtained by
shutting down its competition, the agreement was not the
direct source of the benefit; rather the source of the benefit
was the third party’s ability to exploit the contractual rela-
tionship. Id. at 779.
Analogizing Thompson to the facts of this case, the district
court found that the Ms. Everett only “exploited, or benefit-
ted from, the contractual relationship her husband and
EAGB had with PDRI. EAGB presumably was profitable be-
cause of the PDRI franchise.” In other words the court de-
termined that as Mr. Everett’s spouse and co-owner she had
a right to share the profits of the franchise, but that the bene-
fits were indirect since they derived through her husband
and the corporation. We find this to be too narrow an inter-
pretation of direct benefits estoppel. Instead we find that Ms.
Everett was not merely exploiting the contractual relation-
ship among EAGB, Mr. Everett and PDRI, but rather the
benefit of the contract itself—namely owning and operating
a PDRI franchise. Ms. Everett received the same benefits as
her husband, which included benefitting from trading upon
the name, goodwill, reputation and other direct contractual
benefits of the franchise agreement.
8 Nos. 12-3407 & 13-1036
There is also something to be said for the fact that Mr.
and Ms. Everett colluded to avoid the franchise agreement in
order to leave Ms. Everett free from the contractual obliga-
tions contained in it. Yet, Ms. Everett received precisely the
same key benefits that Mr. Everett did. In that regard, this
case is not analogous to Thompson, where a third party took
advantage of an existing contractual relationship, 64 F.3d at
779, because here the Everetts sought to obtain the benefits
of the franchise agreement for both Mr. and Ms. Everett,
while still being able to avoid some of the obligations by
misrepresenting Ms. Everett’s ownership and operating in-
terest in EAGB.
Thus, the district court’s finding that “whatever benefit
Ms. Everett derived from the franchise agreement was fil-
tered through her ownership interest in EAGB and would
therefore be considered indirect” is inappropriate. It is clear
from the record that EAGB existed solely because of the
franchise agreement. PDRI required that Mr. Everett create
EAGB to qualify for the franchise agreement and further
stipulated that EAGB could only be used to run the fran-
chise. To say the benefits of the franchise were indirect by
flowing first to EAGB and then to Ms. Everett is a flawed in-
terpretation of the doctrine of direct benefits estoppel. Ms.
Everett’s ownership interest in EAGB was itself a direct ben-
efit of the agreement, and not a separate relationship that the
benefits of the agreement flowed through. Without the fran-
chise agreement EAGB and the business it operated would
not have existed, and thus Ms. Everett’s ownership interest
would not have existed.
In fact, if we extended the district court’s interpretation
to its logical end direct benefits estoppel would never be
Nos. 12-3407 & 13-1036 9
available against a non-signatory if at least one signatory ex-
isted with an ownership interest, because the benefits of the
agreement can always be said to flow through that signato-
ry. We do not think this interpretation is in accord with the
Second Circuit cases.
The only way the benefits flowing to Ms. Everett could
have been more direct would be if she had signed the
agreement as a principal owner, as she was in fact obligated
to do under the agreement. She was a majority owner active-
ly involved in operating the franchise and has continued to
benefit from the goodwill towards the PDRI franchise while
running her new company. We are not persuaded that Ms.
Everett’s ability to own and operate a successful franchise
was somehow an indirect benefit of the franchise agreement
merely because it was done through an LLC. Relying on
corporate formalities to argue that an ownership interest
somehow dilutes the benefits of a franchise agreement is not
persuasive in this case. Rather, as PDRI asserts, ownership of
EAGB was itself a direct benefit of the contract. See Blaustein
v. Huete, 449 Fed. Appx. 347, 350 (5th Cir. 2011) (holding that
a member of an LLC was obligated to arbitrate because he
had formed the LLC for the purpose of the contractual rela-
tionships and received the same benefits under the contract).
II.
PDRI also asserted the doctrine of assumption; however,
the application of the direct benefits estoppel doctrine dis-
poses of the issue, making it unnecessary for us to pass on
the less well-developed assumption arguments.
10 Nos. 12-3407 & 13-1036
III.
Finally, Ms. Everett asserts a number of other reasons
why the arbitration award should not be enforced. The dis-
trict court did not address any of these issues, but because
they are legal issues that can be easily disposed of, we will
address them now.
First, Ms. Everett asserts that the Wisconsin Fair Dealer-
ship Law (WDFL) invalidates the arbitration clause in its en-
tirety, leaving the franchise agreement without any arbitra-
tion clause. The franchise agreement did incorporate Wis-
consin law by amendment to the agreement, and specifically
adopted the protections of the WDFL. As a result, there is no
doubt that the WDFL governs any arbitration arising from
the agreement. However, this does not mean, as Ms. Everett
argues, that the arbitration clause is automatically invalidat-
ed by the incorporation of the WDFL. Instead, the arbitration
process, as PDRI concedes, is governed by the protections of
the WDFL. Ms. Everett ultimately provides no support for
her contention that the WDFL invalidates arbitration agree-
ments that explicitly adopt the protections of the WDFL. In
fact, the one case that Ms. Everett does cite in support of her
argument has nothing to do with the WDFL’s impact on an
arbitration clause. See White Hen Pantry v. Buttke, 301 N.W.2d
316 (Wis. 1981). As a result, we reject Ms. Everett’s argument
that the WDFL wholly invalidates the arbitration clause.
Ms. Everett further argues that the arbitration clause was
unconscionable. This argument is frivolous. This agreement
is not the typical consumer contract involving a highly so-
phisticated party and one without sophistication. Instead,
the terms of the agreement here were negotiated by two so-
phisticated parties. To suggest, as Ms. Everett does, that the
Nos. 12-3407 & 13-1036 11
power balance between PDRI and Mr. Everett, an experi-
enced businessman, were so one-sided so as to deprive Mr.
Everett of any meaningful choice, or that the terms were so
unreasonable as to be outside any notion of normal commer-
cial relations is to misunderstand the doctrine of uncon-
scionability. See e.g., Wis. Auto Title Loans, Inc. v. Jones, 714
N.W.2d 155, 164 (Wis. 2006); Coady v. Cross Country Bank, 729
N.W.2d 732, 742 (Wis. App. Ct. 2007). We thus reject Ms. Ev-
erett’s unconscionability argument.
Ms. Everett also alleges that the arbitration agreement vi-
olated Ms. Everett’s due process rights. We find this argu-
ment wholly unavailing, as this argument fails at the most
basic level—none of the parties involved are state actors. 1 See
e.g., Davis v. Prudential Securities, Inc., 59 F.3d 1186, 1191
(11th Cir. 1995) (“We agree with numerous courts that have
held that the state action element of a due process claim is
absent in private arbitration cases.”).
Finally, Ms. Everett argues that the district court should
have vacated the arbitration award on the basis that the arbi-
tration panel both exceeded its powers and exhibited bias
favoring PDRI. Addressing the scope of the panel’s power
first, Ms. Everett’s argument fails due to the limited nature
of our review of arbitration awards. Under Wisconsin law,
Ms. Everett begins, “courts will vacate an award when arbi-
trators exceeded their power though ‘perverse misconstruc-
tion,’ positive misconduct, a manifest disregard of the law,
or when the award is illegal or in violation of a strong public
1We note that in support of this argument, Ms. Everett cites Shelley v.
Kraemer, 334 U.S. 1 (1948), which on its face provides a very close analo-
gy for this situation. However, Shelley’s holding has never been applied
outside the context of race discrimination. See Davis, 59 F.3d at 1191.
12 Nos. 12-3407 & 13-1036
policy.” Appellees’ Br. at 35–36 (citing Baldwin-Woodville Ar-
ea School Dist. v. West Cent. Educ. Association-Baldwin Wood-
ville Unit, 317 Wis. 2d 691, 701 (Wis. 2009)). While Ms. Everett
correctly states the law regarding vacatur of arbitration
awards, she incorrectly applies it to the conduct she com-
plains of—none of which rises to the level of egregious mis-
conduct that justifies vacatur. Instead, Ms. Everett’s allega-
tions speak of certain errors made by the arbitration panel,
which are unreviewable. Halim v. Great Gatsby’s Auction Gal-
lery, Inc., 516 F.3d 557, 563 (7th Cir. 2008) (“Factual or legal
error, no matter how gross, is insufficient to support over-
turning an arbitration award.”).
We also find that Ms. Everett’s claim of bias fails. She
seems to base this claim on two factors: first that the struc-
ture of the panel exhibited bias because it was made up of
PDRI franchise owners, and second that ex parte communi-
cations between the parties and members of the arbitration
panel prejudiced the proceedings. Regarding the unfairness
of the peer-franchisee arbitration system, the arrangement
was fully disclosed to Mr. Everett and these types of arbitra-
tion panels have repeatedly been upheld. See e.g., Woods v.
Saturn Distribution Corp., 78 F.3d 424, 428–29 (7th Cir. 1996)
(holding that evidence of bias must show that the “arbitra-
tors had a personal stake in the outcome of the arbitration,”
simply showing a financial relationship between arbitrators
and a party is not sufficient). Similarly, Ms. Everett has
failed to show that the ex parte communications between the
arbitrators and the parties prejudiced the proceedings in any
way. Non-prejudicial ex parte communications are not a ba-
sis for vacatur. Drobny v. C.I.R., 113 F.3d 670, 680–81 (finding
that “innocuous communication” was not prejudicial and
therefore not an impermissible ex parte communication).
Nos. 12-3407 & 13-1036 13
For the foregoing reasons the judgment is REVERSED
and REMANDED.