Doctor's Associates, Inc. v. Distajo

Decision Date24 February 1997
Docket NumberD,No. 302,302
PartiesDOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee, v. Emily DISTAJO, et al., Defendants-Appellants. ocket 96-7321.
CourtU.S. Court of Appeals — Second Circuit

David M. Duree, St. Louis, MO (Reinert & Duree, P.C.; Nicholas Wocl, Stamford, CT, Tooher, Puzzuoli & Wocl, Co-Counsel), for Defendants-Appellants.

Edward Wood Dunham, New Haven, CT (Wiggin & Dana, Mark R. Kravitz, of Counsel), for Plaintiff-Appellee.

Before: FEINBERG, LEVAL and PARKER, Circuit Judges.

FEINBERG, Circuit Judge:

Plaintiff-appellee Doctor's Associates, Inc. (DAI), a Florida corporation, is the national franchisor of "Subway" sandwich shops. Defendants-appellants, present and former Subway franchisees, appeal from orders of the United States District Court for the District of Connecticut, Peter C. Dorsey, Chief Judge, dated February 14, 1996, and March 14, 1996, both published at 944 F.Supp. 1010 (D.Conn.1996), granting petitions by DAI to compel arbitration of claims the franchisees filed against DAI in various state courts. (The term "the franchisees" is used in this opinion to designate those Subway franchisees who brought state court actions against DAI and were named below as respondents in DAI's petitions to compel arbitration.) For reasons set forth below, we affirm. In a related appeal, No. 96-7011, the franchisees also challenge the district court's preliminary injunction dated January 3, 1996, enjoining them from prosecuting their state suits against DAI. By separate order filed today, we dismiss that appeal as moot.

We are not the first panel of this court to encounter an appeal by groups of Subway franchisees, represented by attorney David M. Duree, involving similar--if not identical--facts and legal issues regarding arbitration of disputes with DAI. We have already remanded once in this case, Doctor's Associates, Inc. v. Distajo, 66 F.3d 438 (2d Cir.1995), cert. denied, --- U.S. ----, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996) (Distajo I ), and two other panels have since affirmed orders granting DAI's petitions to compel arbitration of claims by other Subway franchisees. Doctor's Associates, Inc. v. Stuart, 85 F.3d 975 (2d Cir.1996); Doctor's Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir.1996). At least one other appeal is pending in this court from a decision compelling franchisees to arbitrate disputes with DAI. Doctor's Associates, Inc. v. Riggs, No. 96-9141 (argument not yet scheduled). The parties have also waged battles in various other courts across the country. See Distajo I, 66 F.3d at 441 n. 1 (listing other DAI/franchisee litigation). After the franchisees submitted their initial brief in this appeal, we issued our opinion in Stuart, which, as discussed below, controls some of the legal issues raised in this appeal. Our decision today resolves several other legal issues in this bitter litigation.

I. Facts and Prior Proceedings

When purchasing franchises from DAI each franchisee-defendant 1 executed a standard franchise agreement which requires the parties to arbitrate claims arising under the agreement. 2 Most of the franchise agreements state that they are governed by Connecticut law. Each franchisee-defendant also entered into a standard sublease with a leasing company affiliated with DAI. The sublease, which does not contain an arbitration clause, includes a "cross-default" provision, which allows the leasing company to evict a franchisee for violations of either the sublease or the franchise agreement. 3

Between 1991 and 1993, many disputes arose between DAI and the franchisees regarding rents, royalties and advertising fees due under the franchise agreements and subleases. To recover these monies, DAI instructed its leasing companies to file eviction actions, primarily in Illinois state court, against certain franchisees. In addition, all franchisees except the Kanes and Bickels claim that DAI routinely threatened to bring such eviction proceedings to recover alleged unpaid fees and rents.

Several months to one year after the close of these eviction proceedings, each franchisee filed a nearly identical action against DAI in state court in either Illinois, Pennsylvania, Massachusetts or North Carolina. Each suit alleged, among other things, (1) fraud with respect to DAI's policies of operating through assetless leasing companies, avoiding arbitration through use of eviction proceedings, and withholding business information from franchisees, (2) breach of contract for DAI's failure to arbitrate the disputes underlying the eviction actions, and for various unrelated violations of the franchise agreements, and (3) violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, the Illinois Franchise Disclosure Act and the Lanham Act. Each franchisee requested compensation and substantial punitive damages.

Upon notice of each case filed by a franchisee, DAI immediately filed a written demand for arbitration with the American Arbitration Association in accordance with that body's Commercial Arbitration Rules (AAA Rules). When the franchisees refused to arbitrate their disputes, DAI filed the present petitions to compel arbitration pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. § 4. The franchisees conceded that their claims in state court raise arbitrable issues under the arbitration clause in the franchise agreements. However, they argued, among other things, that DAI fraudulently induced the arbitration clause and that DAI waived its right to arbitrate by filing or threatening to file the prior eviction actions.

In November 1994, the district court granted most of DAI's petitions to compel arbitration. 4 It rejected the franchisees' arguments that the arbitration agreement was void for lack of mutuality or as a contract of adhesion, that the agreement was unconscionable, and that DAI had waived its right to arbitrate. The court also held that the franchisees' defense of fraudulent inducement should be decided by the arbitrator. By order dated December 9, 1994, the court enjoined the franchisees from prosecuting their state court actions, in order to effectuate the judgment compelling arbitration, see 28 U.S.C. § 2283.

The franchisees appealed both orders to this court. In September 1995, we issued an opinion (Distajo I) affirming and reversing in part. We upheld the district court's rulings (1) that it had subject matter (diversity) jurisdiction, (2) that judgments the franchisees had obtained against DAI in their Illinois and North Carolina state suits were not entitled to preclusive effect, and (3) that the arbitration clause was not void for lack of mutuality. On the other hand, we vacated the district court's ruling rejecting the franchisees' waiver defense to arbitration and instructed that on remand the district court should determine whether (1) "the leasing companies were mere alter egos of DAI," (2) "prosecution of those eviction actions constituted litigation of 'substantial issues going to the merits,' " and (3) "the franchisees suffered prejudice from the eviction proceedings." We also held that on remand, the district court--rather than the arbitrator--should determine whether DAI fraudulently induced the arbitration clause. Finally, we vacated the preliminary injunctions.

After the district court conducted further proceedings on remand, it filed opinions on February 14 and March 14, 1996, again granting DAI's petitions to compel arbitration. The court held that (1) the franchisees had not submitted sufficient evidentiary facts to entitle them to a jury trial on their defenses to arbitration, 944 F.Supp. at 1013-14, 1015-16, (2) DAI had not waived its right to arbitrate by bringing or threatening to bring eviction proceedings, id. at 1018-22, (3) DAI had not fraudulently induced the arbitration clause, id. at 1017-18, and (4) there was no reason for the district court to abstain based on the franchisees' state court litigation, id. at 1022-23. The franchisees challenge all of these rulings, and raise the additional arguments that (1) issues of fact remain with respect to their defenses that the arbitration clause is unconscionable and fails to meet their reasonable expectations, (2) the district court erred by entering preliminary injunctions on January 3 and March 14, 1996, without requiring DAI to post bonds, (3) the district court lacked subject matter jurisdiction to compel arbitration, and (4) the district court lacked personal jurisdiction over the Kanchwalas.

II. Demand for a Jury Trial

The franchisees argue that the district court erred in denying them a jury trial under 9 U.S.C. § 4 on their defenses of fraud, waiver, unconscionability and failure of the contract to meet their reasonable expectations. In February 1996, the district court granted DAI's motion to forgo trial and decide these issues as a matter of law, finding that the franchisees had not shown that material facts were in dispute with respect to their defenses of fraud and waiver. 5 944 F.Supp. at 1013-15. The franchisees then filed additional affidavits purportedly substantiating these defenses, and moved for reconsideration. In March, the district court denied that motion, observing that the franchisees had waited five to 23 months from the time DAI filed its petitions to submit such affidavits. Id. at 1016. Nevertheless, the court agreed to consider the facts alleged in their "belated" affidavits in ruling on their defenses as a matter of law. Id.

Although a party may demand a jury trial when issues respecting arbitrability are "in issue," 9 U.S.C. § 4, we have cautioned that "[a] party resisting arbitration ... 'bears the burden of showing that he is entitled to a jury trial.' " Stuart, 85 F.3d at 983 (citing Dillard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148, 1154 (5th Cir.1992)). As when opposing a motion for summary judgment under Fed.R.Civ.P. 56, the party requesting a jury trial...

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