Tikcnor v. Choice Hotels Internat'l

• Decision Date: 12 September 2001
• Docket Number: No. 00-35048,DEFENDANT-APPELLANT,PLAINTIFFS-APPELLEES,00-35048
• Parties: (9th Cir. 2001) JAMES L. TICKNOR; JANET TICKNOR; LARRY TICKNOR; TICKCO HOLDING, L.L.C.; TICKNOR LODGING CORPORATION,, v. CHOICE HOTELS INTERNATIONAL, INC.,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 931

265 F.3d 931 (9th Cir. 2001)

JAMES L. TICKNOR; JANET TICKNOR; LARRY TICKNOR; TICKCO HOLDING, L.L.C.; TICKNOR LODGING CORPORATION, PLAINTIFFS-APPELLEES, v. CHOICE HOTELS INTERNATIONAL, INC., DEFENDANT-APPELLANT.

No. 00-35048

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted July 19, 2001

Filed September 12, 2001

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Patrick M. Sullivan; Butte, Montana; Attorney for the appellant.

Robert K. Baldwin; Bozeman, Montana; Attorney for the appellee

Appeal from the United States District Court for the District of Montana Donald W. Molloy, District Judge, Presiding. D.C. No. CV-99-00047-DWM

Before: Harry Pregerson, A. Wallace Tashima and Sidney R. Thomas, Circuit Judges.

Thomas, Circuit Judge

Opinion by Judge Thomas; Dissent by Judge Tashima

In this appeal, we consider whether the Federal Arbitration Act preempts state law governing the unconscionability of adhesion contracts. Under the circumstances presented by this case, we conclude that it does not, and we affirm the order of the district court denying the motion to compel arbitration.

I.

In 1998, James Ticknor and the Ticknor Lodging Corporation (collectively, "Ticknor") executed an Econo Lodge Franchise Agreement ("Franchise Agreement") with Choice Hotels, International, Inc. ("Choice") for the operation of a hotel located in Bozeman, Montana. In return for the payment of franchise fees, Ticknor was granted a non-exclusive license to use the Econo-Lodge mark in connection with the motel. In addition, Choice was to integrate the motel into its national advertising and reservations system and provide other assistance. James Ticknor's parents, Janet and Larry Ticknor and Tickco Holding LLC (their company) guaranteed the performance of the Agreement. Ticknor and Ticknor Lodging also executed the separate guaranty agreement ("Guaranty Agreement").

The Franchise Agreement, which was a pre-printed standard form instrument drafted by Choice, contained an arbitration clause providing:

Except for our claims against you for indemnification, actions for collection of moneys owed us under this Agreement, or actions seeking to enjoin you from using the Marks in violation of this Agreement, any controversy or claim relating to this Agreement, or the breach of this Agreement, including any claim that this Agreement or any part of this Agreement is invalid, illegal, or otherwise voidable or void, will be sent to final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator will apply the substantive laws of Maryland, without reference to its conflict of laws provision. Judgment on the arbitration award may be entered in any court having jurisdiction. If any party fails to appear at any properly noticed arbitration proceeding, an award may be entered against the party, notwithstanding its failure to appear. Any arbitration will be conducted at our headquarters office in Maryland.

The Franchise Agreement also contained a choice of law provision that stated: "This Agreement becomes valid only when we have signed it, and it will be interpreted under the substantive laws of Maryland, not including its conflict of laws provision."

The Guaranty Agreement did not contain either an arbitration clause or a choice of law provision. However, it did provide in relevant part that:

the undersigned do jointly and severally, unconditionally and irrevocably, guaranty to Choice that Ticknor Lodging Corporation . . . and James L. Ticknor, Individually, Jointly and Severally, . . . will perform throughout the term of the Agreement each and every covenant, payment or obligation on the part of the Franchisee contained and set forth in said Agreement.

Subsequently, the parties executed two contract addendums drafted by Choice. The first reduced the amount of liquidated damages potentially payable. The second required Ticknor to make certain facility improvements, but allowed him to operate the motel pending implementation of some of those upgrades. According to Ticknor, Choice had promised to provide technical and financial assistance in the renovation of the motel exterior through its "Signature Exterior Renovation Program."

The ink was hardly dry on the Franchise Agreement when disputes arose. Choice canceled the "Signature Exterior Renovation Program," which Ticknor claims was a material inducement to his assent to the Franchise Agreement. In addition, Ticknor alleges that the Choice reservation system was flawed, resulting in overbookings. As a result of these disagreements, Ticknor suspended payment of the franchise fee. Choice thereupon notified Ticknor that it was suspending the Franchise Agreement. Choice also filed a demand for arbitration with the American Arbitration Association ("AAA"), whereupon Ticknor sought and received a state court temporary restraining order prohibiting Choice from proceeding with arbitration. Choice then removed the state court action to federal court and filed a motion to dismiss or, alternatively, to compel arbitration. The district court declined Ticknor's application for a temporary restraining order. Choice withdrew its arbitration request with the AAA. After an evidentiary hearing, the district court denied Choice's motion to dismiss and alternative motion to compel arbitration. This appeal followed.

We review de novo a district court's order denying a petition to compel arbitration, including its interpretation of the validity and scope of the arbitration clause. Chiron Corp. v. Ortho Diagnostic Sys. Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). "[Q]uestions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 24 (1983). We review the factual findings underlying the district court's decision for clear error. Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir. 1996). The interpretation and meaning of contract provisions are questions of law we review de novo. Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir. 1999). We also review de novo the district court's decision concerning the appropriate choice of law. Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1167 (9th Cir. 1995).

II.

The Federal Arbitration Act ("FAA") provides that written agreements to arbitrate disputes arising out of transactions involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. " 9 U.S.C. §§ 2. The FAA " `creates a body of federal substantive law of arbitrability,' enforceable in both state and federal courts and pre-empting any state laws or policies to the contrary." Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 285 (9th Cir. 1988) (quoting Moses H. Cone Mem'l Hosp., 460 U.S. at 24).

Despite the "liberal federal policy favoring arbitration agreements," Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 81 (2000), state law is not entirely displaced from federal arbitration analysis. Under §§ 2,"state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. " Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis in original). "Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening §§ 2." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686 (2000). "Courts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions." Id. Thus, "Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed `upon the same footing as other contracts.' " Id. (quoting Scherk v. Alberto-Culver Co. , 417 U.S. 506, 511 (1974)). In short, as long as state law defenses concerning the validity, revocability, and enforceability of contracts are generally applied to all contracts, and not limited to arbitration clauses, federal courts may enforce them under the FAA.

Of course, the role of the federal courts in these circumstances is limited: the sole question is whether the arbitration clause at issue is valid and enforceable under §§ 2 of the Federal Arbitration Act. Chiron Corp., 207 F.3d at 1130. In making this determination, federal courts may not address the validity or enforceability of the contract as a whole. Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 401 (1967).

III.

Ticknor has raised the state law defense of unconscionability to Choice's motion to compel arbitration. Before assessing whether that defense is viable, we must determine which state's law applies. Federal courts sitting in diversity look to the law of the forum state in making a choice of law determination. Sparling v. Hoffman Constr. Co., Inc. , 864 F.2d 635, 641 (9th Cir. 1988); see also Zinser v. Accufix Research Institute, Inc., 253 F.3d 1180 (9th Cir. June 15, 2001). Thus, because the complaint was filed in Montana, Montana's choice of law rules apply.

Montana applies the Restatement (Second) of Conflict of Laws § 187(2) "when [it is] faced with the question of whether to give effect to a contractual choice of law by the parties." Keystone, Inc. v. Triad Sys. Corp. , 971 P.2d 1240, 1242 (Mont. 1998). That section provides, in relevant part, that:

The law of the state chosen by the parties to govern their contractual rights and duties will be applied . . . unless . . . (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the role of section...