Mulcahy LLP Secures Significant Arbitration Award In Favor Of Safeguard Distributor
By Mulcahy LLP on November 02, 2016
BOISE, IDAHO – Following a hard fought, twenty-one month arbitration proceeding, Mulcahy LLP obtained an overwhelming victory on behalf of distributor T3 Enterprises, Inc. against Safeguard Business System, Inc.
Dawn Teply, the owner of T3 Enterprises, spent years building a reputation as a Safeguard distributor in Boise, Idaho. She did this knowing that her Distributor Agreement with Safeguard granted her the exclusive right, for a 36-month period, to all commissions generated from sales to customers that first purchased Safeguard products (referred to as “Safeguard Systems”) from T3 Enterprises. This 36-month account protection for a particular customer would restart each time T3 Enterprises made a new sale to that customer.
Safeguard initially granted its distributors these account protection rights to shield the distributors from intra-brand competition as an incentive for the distributors to invest the time and money necessary to build out their territories. However, in recent years, Safeguard’s appreciation for and adherence to the distributors’ account protection rights had dramatically shifted.
In 2013, Safeguard and and its parent company Deluxe Corporation, through a shell company, Safeguard Acquisitions, Inc., acquired two distributorships, Idaho Business Forms, Inc. (“IBF”) and DocuSource – longtime competitors of Mrs. Teply and Safeguard in the Boise region. Instead of focusing the sales efforts of these newly acquired distributorships to customers other than those belonging to existing Safeguard distributors, Safeguard and Deluxe used IBF and DocuSource to sell Safeguard Systems directly to Mrs. Teply’s protected customers.
Not only did these large, company-owned distributorships directly compete with Mrs. Teply, but they were also given more favorable pricing on the Safeguard Systems than those prices made available by Safeguard to Mrs. Teply. T3 Enterprises did not stand a chance.
After discovering that some of her customers had been solicited by IBF and DocuSource, Mrs. Teply approached executives of Safeguard about adhering to her account protection rights.
Instead of rotating the commissions from the sales of IBF and DocuSource to Mrs. Teply and discontinuing the competing activity, Safeguard made significant efforts to conceal its involvement and misrepresented to Mrs. Teply the actual sales made to her customers.
After discussions with Safeguard went nowhere, Mrs. Teply retained Mulcahy LLP to pursue appropriate legal action.
After successfully petitioning an Idaho court to invalidate the Texas venue provision in the Distributor Agreement, on February 19, 2015, Mulcahy LLP filed a Demand for Arbitration on behalf of T3 Enterprises against Safeguard for breach of contract, tortious interference, and violation of the Texas Deceptive Trade Practices Act (“TDTPA”).
Following extensive discovery, motion practice, and a two-week arbitration hearing, on October 5, 2016, a panel of three arbitrators found in favor of T3 Enterprises in an amount in excess of $1.4 million on its contract, tortious interference, and TDTPA claims.
Highlights from the Panel’s 35-page Interim Award include the following findings of fact and conclusions of law:
- The language of the Distributor Agreement is unambiguous – Safeguard agreed that, if T3 Enterprises solicited an order with a customer for any Safeguard Systems, then T3 Enterprises was entitled to commissions generated from any and all sales of Safeguard Systems to that customer for the next 36 months;
- T3 Enterprises has no obligation to share its’ protected customers with Safeguard or any other Safeguard distributor;
- Safeguard knew that the acquisition of IBF and DocuSource would interfere with and violate T3 Enterprises’ customer protection rights and pursued those transactions regardless;
- While operating IBF and DocuSource as company-owned distributorships, Safeguard encouraged, facilitated and allowed IBF’s and DocuSource’s sales agents to solicit and obtain orders from T3 Enterprises’ protected customers;
- Safeguard failed to rotate commissions to T3 Enterprises on sales of Safeguard Systems that were made to T3 Enterprises’ customers by IBF and DocuSource;
- Safeguard breached the Distributor Agreement by failing to pay T3 Enterprises commissions on sales made by Safeguard, IBF and DocuSource to T3 Enterprises’ customers;
- Safeguard breached the Distributor Agreement by providing IBF lower price schedules on Safeguard products than those prices offered by Safeguard to T3 Enterprises;
- Safeguard intentionally interfered with T3 Enterprises’ business relations with its protected customers when Safeguard used IBF and DocuSource to directly sell Safeguard Systems to T3 Enterprises’ protected customers;
- Safeguard had a duty to (1) disclose the sales made to T3 Enterprises’ protected customers by Safeguard or other Safeguard distributors, and (2) rotate the commissions on those sales to T3 Enterprises; and
- Safeguard not only breached the Distributor Agreement, but it fraudulently concealed known communications from protected customers (such as orders) and commissions paid to IBF and DocuSource on those sales.
Ultimately, the panel found that Safeguard had taken advantage of T3 Enterprises to a “grossly unfair degree” by refusing to enforce T3 Enterprises account protection rights and actively participating in the violation of those rights. Those violations by Safeguard were found to have constructively terminated Mrs. Teply’s distributorship and damaged T3 Enterprises in the amount of $1,475,707.53.
The panel also identified T3 Enterprises as the “prevailing party” for purposes of awarding reasonable attorneys’ fees and costs. The fees and costs motion is currently pending.
On October 17, 2016, the panel issued a Supplement to Interim Award. In the supplement, they made clear that T3 Enterprises – and its principals or agents – were excused by virtue of Safeguard’s material breach of the Distributor Agreement from having to comply with any of the post-termination provision in the Distributor Agreement, in particular, the post-term covenant against competition.
This is a significant supplement to the original award as the panel has made clear that Mrs. Teply is free to continue to work in the only industry she has known for more than a decade without fear of subsequent litigation from Safeguard for breaching the noncompete provision of the Distributor Agreement.
Copies of the arbitration panel’s Interim Award and Supplement to Interim Award, in their entirety, can be viewed by clicking the links on the right.
Mulcahy LLP attorneys are certified experts in California franchise law. We can be reached at (949) 252-9377. Our boutique litigation firm provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Supplement to Interim Award
On October 5, 2016, the Panel issued an Interim Award in this matter in favor of Claimant T3 Enterprises, Inc. (“T3”) and against Respondent Safeguard Business Systems, Inc.
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Following a hard fought, twenty-one month arbitration proceeding, Mulcahy LLP obtained an overwhelming victory on behalf of distributor T3 Enterprises, Inc. against Safeguard Business System, Inc.
Download PDF >>>