CHICAGO — A Chicago federal appeals panel has ruled hotel chain Hyatt is due $8.3 million in a dispute over a franchise agreement gone bad.
In late November, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit rejected a bid by hotel developer Shen Zhen New World to vacate Hyatt's award, saying an arbitrator's reasoning checked out in ordering Shen Zhen to pay.
The decision is the latest in a five-year-long dispute between Hyatt and Shen Zhen stemming from a 2012 agreement made between the two parties. After Hyatt granted Shen Zhen its business methods and trademarks to convert a Los Angeles hotel into a Hyatt Regency Hotel, the defendant did not pay the plaintiff as promised in the franchise agreement, Hyatt alleged.
A federal district judge then upheld an arbitrator's decision to award Hyatt $7.7 million in damages and $1.3 million in attorney's fees, which Shen Zhen claimed was a violation of the Federal Arbitration Act. The Cook County Record reported in May that a district court judge ruled that Shen Zhen failed to show any violation of the act, specifically noting the arbitrator “manifestly disregarded” the mediator’s obligation to the California Franchise Investment Laws and Federal Trade Commission regulations.
According to the Nov. 28 appellate court decision, Shen Zhen’s fallback argument was that “the arbitrators exceeded their powers,” thus the award should be set aside. Citing George Watts & Son, Inc. v. Tiffany & Co. 2001 and Affymax, Inc. v. Ortho-McNeil-Janssen Pharmaceuticals, Inc. 2011, similar franchise cases in which an arbitrator allegedly misapplied state franchise laws, the panel of Seventh Circuit judges explained their ruling.
“Watts and Affymax hold that an arbitrator acts as the parties’ joint agent and may do anything the parties themselves may do,” said Seventh Circuit Judge Frank Easterbrook, who authored the Nov. 28 decision. “If they may reach a compromise over some legal issue without being accused of ‘violating the law,’ then the arbitrator may do so on their behalf.”
Easterbrook also noted with Watts and Affymax, “that’s exactly what this arbitrator did” when concluding Hyatt had satisfied its argument that Shen Zhen violated the franchise agreement.
Easterbrook also explained that Shen Zhen’s continued fight cost them Hyatt’s attorney fees of $1.3 million.
“The American Rule requires each side to bear its legal fees in an initial round, but an entity that insists on multiplying the litigation must make the other side whole for rounds after the first,” Easterbrook said in the ruling, adding: “If the parties cannot agree on how much Shen Zhen owes for pointlessly extending this dispute through the district court and the court of appeals, Hyatt should apply for an appropriate order.”
Shen Zhen was represented in the action by Cohen & Lord P.C., of Los Angeles, and Kelly, Olson, Michod, DeHaan & Richter LLC, of Chicago.
Hyatt was represented by DLA Piper LLP, of Chicago.