In Industrial Electronics Corp. v. iPower Distribution Group, (7th Cir. May 31, 2000), the U.S. Court of Appeals for the Seventh Circuit recently ruled that an arbitration clause in a franchise agreement did not cover a dispute between the franchisor and a member of the limited liability company which was the franchisee. The franchisor, iPower, was in the business of organizing dealers of industrial supplies into selling groups that would use iPower's software to sell their supplies. iPower proposed its program to a group of suppliers who liked the idea, and they formed a limited liability company to become a franchisee of iPower.
The franchise agreement between iPower and the limited liability company included an arbitration clause that generally covered disputes arising out of or relating to the franchise agreement.
Later a dispute arose when one of the dealers, Industrial Electronics, alleged that iPower had made material misrepresentations in order to induce Industrial Electronics to join the group.
Industrial Electronics started a court action against iPower, and iPower moved to stay the case pending arbitration under the franchise agreement.
The district court denied the stay, and iPower appealed. The Seventh Circuit ruled that the district court was correct in declining to enforce the arbitration agreement as to this dispute. The court ruled that Industrial Electronics' part ownership of the limited liability company did not make it liable for the obligations of the limited liability company, and that the claims made by Industrial Electronics did not require any interpretation of the franchise agreement. Therefore the arbitration clause in the franchise agreement did not cover the dispute, and Industrial Electronics was free to pursue its action against iPower in court.
The Industrial Electronics decision demonstrates that a business engaged in a transaction involving multiple agreements must take care to ensure that all parties with which it wishes to arbitrate are made parties to the arbitration clause.
COURT FINDS THAT ARBITRATORS EXCEEDED THEIR AUTHORITY
In Agco Corporation v. Anglin, (7th Cir. June 9, 2000), which was another case involving multiple agreements, the U.S. Court of Appeals for the Seventh Circuit ruled that arbitrators had exceeded their authority by deciding issues that were outside the scope of the arbitration clause.
Although the plaintiff and defendants had agreed to arbitrate disputes arising out of certain agreements between themselves, the arbitrators decided a claim arising out of other agreements, entered into between defendants and a company that was later acquired by plaintiff, which did not have arbitration clauses.
The court ruled that when the arbitrators decided claims arising out of the agreements without arbitration clauses, they exceeded their authority and the award could therefore not be confirmed as a judgment.