KKW Enter. Inc. v. Gloria Jean's Gourment Coffees

Decision Date07 June 1999
Docket NumberNo. 98-2337,98-2337
Parties(1st Cir. 1999) KKW ENTERPRISES, INC., Plaintiff, Appellee, v. GLORIA JEAN'S GOURMET COFFEES FRANCHISING CORP., Defendant, Appellant. . Aruged
CourtU.S. Court of Appeals — First Circuit

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND

[Copyrighted Material Omitted] Frederic A. Cohen, with whom Norman M. Leon, Rudnick & Wolfe, William M. Dolan III, Angel Taveras and Brown, Rudnick, Freed & Gesmer were on brief, for appellant.

George E. Lieberman, with whom Tillinghast Licht & Semonoff Ltd was on brief, for appellee.

Before Torruella, Chief Judge, Campbell, Senior Circuit Judge, and Boudin, Circuit Judge.

TORRUELLA, Chief Judge.

Defendant-appellant, Gloria Jean's Gourmet Coffees Franchising Corp. ("Gloria-Jean's"), appeals the district court's order partially granting the motion of plaintiff-appellee, KKW Enterprises, Inc. ("KKW"), to stay arbitration as to claims under the Rhode Island Franchise Investment Act, R.I. Gen. Laws § 19-28.1-14 ("statutory claims"), and its order denying Gloria Jean's motion to stay proceedings pending arbitration as to the statutory claims.

BACKGROUND

Gloria Jean's is an Illinois corporation with its principal place of business in Castroville, California. Gloria Jean's grants franchises to qualified persons to operate Gloria Jean's Gourmet Coffee Stores throughout the United States. KKW is a franchisee of Gloria Jean's.

On November 25, 1992, KKW entered into franchise agreements with Gloria Jean's pursuant to which Gloria Jean's granted KKW limited licenses to operate Gloria Jean's franchises at the Independence Mall in Kingston, Massachusetts and in the Northshore Shopping Center, in Peabody, Massachusetts. KKW subsequently entered into two subsequent franchise agreements with Gloria Jean's to operate Gloria Jean's Gourmet Coffee Stores in Square One Mall, in Saugus, Massachusetts, and at the University Mall in South Burlington, Vermont.

The franchise agreements were heavily negotiated. KKW was represented by counsel in connection with those negotiations, and KKW's counsel proposed various changes to the franchise agreements, all of which were incorporated into those agreements. None of the changes to the franchise agreements which KKW's counsel proposed during these negotiations concerned the arbitration agreements or the selection of Chicago as the forum for arbitration of disputes under the agreements.

In entering into each of the franchise agreements, the parties explicitly agreed that they would submit all disputes arising out of or relating to the franchise agreements, the validity of those agreements, or the parties' relationship to arbitration before the American Arbitration Association ("AAA"). Paragraph 18.B of each franchise agreement, in pertinent part, states:

EXCEPT INSOFAR AS THE FRANCHISOR AS PROVIDED IN PARAGRAPH A OF THIS SECTION ELECTS TO ENFORCE THIS AGREEMENT OR ANY OTHER RELATED AGREEMENT, ALL CONTROVERSIES, DISPUTES OR CLAIMS ARISING BETWEEN THE FRANCHISOR, ITS AFFILIATES, OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND ATTORNEYS (IN THEIR REPRESENTATIVE CAPACITY) AND THE FRANCHISEE (ITS OWNERS AND GUARANTORS, IF APPLICABLE) ARISING OUT OF OR RELATED TO: (1) THIS AGREEMENT OR ANY PROVISION THEREOF OR ANY RELATED AGREEMENT; (2) THE RELATIONSHIP OF THE PARTIES HERETO; (3) THE VALIDITY OF THIS AGREEMENT OR ANY RELATED AGREEMENT, OR ANY PROVISION THEREOF; OR (4) ANY SPECIFICATION, STANDARD OR OPERATING PROCEDURE RELATING TO THE ESTABLISHMENT OR OPERATION OF THE FRANCHISE SHALL BE SUBMITTED FOR ARBITRATION TO BE ADMINISTERED BY THE CHICAGO, ILLINOIS OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ON DEMAND OF EITHER PARTY. SUCH ARBITRATION PROCEEDINGS SHALL BE CONDUCTED IN CHICAGO, ILLINOIS AND, EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, SHALL BE CONDUCTED IN ACCORDANCE WITH THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION.

On May 7, 1998, KKW filed a ten count complaint against Gloria Jean's in the Superior Court of the State of Rhode Island for Providence County. That action was removed by Gloria Jean's to the United States District Court for the District of Rhode Island on June 4, 1998. KKW's complaint alleges that Gloria Jean's fraudulently induced it to enter into certain franchise agreements by misrepresenting: (1) its ability to obtain favorable leases; (2) its ability to obtain certain types of store locations; and (3) the success of another franchise. Claiming that it relied upon these alleged misrepresentations in entering into its franchise agreements with Gloria Jean's, KKW's complaint seeks damages for the losses it purportedly incurred in obtaining and operating its Gloria Jean's Stores, and rescission of its two remaining franchise agreements.

KKW's complaint asserts four claims for damages: (1) intentional misrepresentation (Count I); (2) breach of fiduciary duty (Count V); (3) violation of the Rhode Island Franchise Investment Act (Count VII) and violation of the Rhode Island Franchise and Distributorship Investment Regulations Act (Count IX); and (4) six claims which it contends entitles it to rescission of its remaining franchise agreements -- intentional misrepresentation (Count II), negligent misrepresentation (Count III), innocent misrepresentation (Count IV), breach of fiduciary duty (Count VI), violation of the Rhode Island Franchise Investment Act (Count VIII) and violation of the Rhode Island Franchise and Distributorship Investment Regulations Act (Count X).

On June 11, 1998, Gloria Jean's moved, pursuant to Section 3 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 3, to stay the district court action pending arbitration. At the August 7, 1998 hearing on that motion, the district court concluded that all of the claims set forth in KKW's Complaint were referable to arbitration under the parties' written arbitration agreements. The district court nonetheless denied Gloria Jean's Motion to Stay as premature, concluding that the arbitration agreements required, as a condition precedent to arbitration, that Gloria Jean's not only move to stay the litigation, but actually "demand" arbitration.

Immediately after the August 7, 1998 hearing, on August 11, 1998, Gloria Jean's filed a Demand for Arbitration with the Chicago, Illinois office of the American Arbitration Association seeking a declaration that it has no liability for the claims asserted in KKW's Complaint. Gloria Jean's also demanded, by letter of the same date, that KKW submit the claims pending in the district court, as well as any other claims encompassed by the parties' arbitration agreements, to arbitration in accordance with the terms of those agreements. On August 12, 1998, Gloria Jean's filed a Renewed Motion to Stay Proceedings Pending Arbitration.

On September 1, 1998, KKW moved to stay the arbitration proceeding Gloria Jean's had commenced. On October 23, 1998, oral argument was held before the district court on both Gloria Jean's Renewed Motion to Stay Proceedings Pending Arbitration and KKW's Motion to Stay Arbitration. By Order dated November 4, 1998, the district court, inter alia, (1) granted Gloria Jean's Motion to Stay Proceedings Pending Arbitration as to KKW's non-statutory claims; (2) denied the Motion as to KKW's statutory claims; (3) granted KKW's Motion to Stay the arbitration in Chicago, Illinois as to KKW's statutory claims; and (4) denied that Motion as to the non-statutory claims.

Addressing KKW's common-law claims, the Court stated that "[t]here's no question in the Court's mind that the dispute here, or the core of the dispute, at least, [sic] the non-statutory claims that are asserted by the Plaintiff are arbitrable." The district court further stated, however, that its conclusion that KKW's non-statutory claims were arbitrable did not "answer the question as to where the arbitration should take place as to those claims, nor does it answer the question regarding [the arbitrability of] the statutory claims."

In discussing this question, the district court first stated that "[t]he Federal Arbitration Act does not preempt provisions in an agreement to arbitrate that deal with the mechanics of the arbitration, where are they to take place, where the arbitration is to take place and the like." For this reason, the district court concluded, it was required to determine the validity of the arbitration agreements' choice-of-forum clause in light of the standards set forth by the United States Supreme Court in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Noting the strong presumption in favor of forum selection clauses established by that decision and the similarly strong relationship between Illinois and the underlying dispute, the district court concluded, at least with respect to KKW's non-statutory claims, that there was no basis for disregarding the parties' agreement to arbitrate their disputes before the Chicago office of the AAA. Accordingly, the district court granted Gloria Jean's Motion to Stay Proceedings Pending Arbitration as to KKW's non-statutory claims, and denied KKW's motion to stay the arbitration of those claims.

KKW's statutory claims, the district court stated, presented a "different situation." Relying on § 19-28.1-14 of the Rhode Island Franchise Investment Act, the district court stated that because "[t]he Rhode Island General Assembly has, specifically, stated a strong policy against provisions that restrict jurisdiction or venue to a forum outside of this State," the choice-of-forum provision in the parties' arbitration agreements was "invalid and unenforceable" with respect to KKW's statutory claims. Gloria Jean's Motion to Stay was therefore denied as to those claims.

On November 20, 1998, the district court issued an Amended Order Granting in Part and Denying in Part Motions for Stays and Enlargements of Time. In that November 20 Amended Order, the...

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