Doctor's Associates, Inc. v. Hamilton

• Decision Date: 14 July 1998
• Docket Number: Docket No. 97-9271
• Citation: 150 F.3d 157
• Parties: DOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee, v. Erik J. HAMILTON, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

Page 157

150 F.3d 157

DOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee, v. Erik J. HAMILTON, Defendant-Appellant.

Docket No. 97-9271.

United States Court of Appeals Second Circuit.

Argued May 21, 1998.

Decided July 14, 1998.

David M. Duree, Reinert & Duree, St. Louis, MO (Nicholas Wocl, Tooher, Puzzuoli & Wocl, Stamford, CT, of counsel), for Appellant.

Edward Wood Dunham, Wiggin & Dana, New Haven, CT, for Appellee.

Before: MESKILL and KEARSE, Circuit Judges, and TELESCA, District Judge. ^*

MESKILL, Circuit Judge:

Defendant-appellant Erik J. Hamilton (Hamilton) appeals from an order of the United States District Court for the District of Connecticut, Dorsey, J., compelling arbitration with, and enjoining him from prosecuting a New Jersey lawsuit he filed against, plaintiff-appellee Doctor's Associates, Inc. (DAI), the franchisor of "Subway" sandwich shops. Hamilton challenges the district court's exercise of jurisdiction over this action and the court's failure to apply New Jersey law to resolve Hamilton's challenge to the franchise agreement's arbitral forum selection clause and his unconscionability defense to the arbitration agreement. For the reasons set forth below, we affirm the decision of the district court.

BACKGROUND

DAI is a Florida corporation with its principal place of business in Fort Lauderdale, Florida and an office in Milford, Connecticut. In June 1995 Hamilton entered into a franchise agreement (the "Agreement") with DAI, permitting him to operate a Subway shop in Voorhees, New Jersey. Several provisions of the Agreement are relevant to the issues on appeal. Paragraph 10(c) of the Agreement contains an arbitration clause (and an arbitral forum selection clause), which states:

Any dispute or claim arising out of or relating to this Agreement not settled by the parties ... in accordance with the terms of this Agreement is to be submitted directly to arbitration, shall be settled in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association at a hearing to be held at Bridgeport, Connecticut. Judgment upon an award rendered by the Arbitrator may be entered in any court having jurisdiction. The commencement of ... arbitration proceedings by an aggrieved party to settle any such dispute or claim is a condition precedent to the commencement of legal action by either party, except as specifically provided in this Agreement.

Paragraph 10(b) of the Agreement further provides that the Federal Arbitration Act ("FAA" or "the Act"), 9 U.S.C. §§ 1-16, applies to all claims arising out of, among other things, "applicable state franchise disclosure or franchise relationship statutes." The Agreement, under Paragraph 10(d), also provides, in pertinent part, that "the total of all permissible claims arising under or relating to this Agreement, including the breach thereof, for damages made by either party against the other shall not exceed $50,000" ("$50,000 limit" or "liability cap"). Finally, Paragraph 13 contains a choice-of-law provision, which provides that the "Agreement shall be governed by and construed in accordance with the laws of the State of Florida without reference to the body of laws governing conflicts of law."

On December 26, 1996 DAI filed a demand for arbitration with the American Arbitration Association (AAA) to resolve a dispute with Hamilton who claimed he had been fraudulently induced to enter into the Agreement. DAI requested a declaratory judgment that it had not committed fraud and that "any failure of [Hamilton's] business and loss of money was entirely [Hamilton's] responsibility."

On January 22, 1997 Hamilton filed a lawsuit against DAI in the Superior Court of New Jersey (the "New Jersey suit"), alleging that DAI fraudulently induced him to enter into the Agreement and violated the New Jersey Franchise Practices Act. See N.J. Stat. Ann. §§ 56:10-1 to 56:10-15 (West 1989). In addition to DAI, Hamilton named as defendants Michael Stocklin and William McClain, both of whom were development agents for DAI. At the time Hamilton filed his complaint, Stocklin was a New Jersey resident. Hamilton alleged that Stocklin and McClain, in conjunction with DAI, made various fraudulent misrepresentations to him concerning the past sales and other aspects of the store he eventually operated. Hamilton sought over $1 million in actual and punitive damages in addition to attorney's fees.

On March 14, 1997 DAI filed this petition to compel arbitration of the dispute between it and Hamilton and moved to enjoin Hamilton from prosecuting the New Jersey suit. Initially, on May 21, 1997 the district court rejected all of Hamilton's defenses to DAI's petition to compel arbitration. Nonetheless, the court denied, without prejudice to renewal, DAI's petition and motion because it believed Hamilton had alleged that he was fraudulently induced into agreeing to the arbitration clause of the Agreement. The district court held that this issue had to be resolved by the state court before a stay would issue. On September 18, 1997, however, after receiving supplemental briefing on the issue, the district court determined that Hamilton's "allegations of fraud in the inducement relate[d] to the franchise agreement as a whole, rather than the arbitration clause." The court therefore concluded that Hamilton's fraud in the inducement claim should be resolved by the arbitrator and it granted DAI's petition to compel arbitration and enjoined Hamilton from prosecuting the New Jersey suit.

This appeal followed.

DISCUSSION

On appeal, Hamilton contends that the district court erred in compelling arbitration because it had no subject matter jurisdiction. According to Hamilton, DAI did not satisfy the requirement for diversity jurisdiction because the Agreement limited damages to $50,000, and Section 4 of the Act does not provide a "federal statutory cause of action permitting the federal courts to determine the arbitrability of pending, non-removable, state damage claims." Hamilton also contends that the district court erred by failing to apply New Jersey law to determine the enforceability of the arbitral forum selection clause and to resolve his unconscionability defense to the arbitration agreement. Hamilton argues that the Agreement's choice of law provision that designated Florida law as the law governing the parties' relationship is void because it conflicts with New Jersey law. These arguments lack merit.

When reviewing a district court's decision regarding subject matter jurisdiction, we review factual findings for clear error and legal conclusions de novo. See Conntech Dev. Co. v. University of Connecticut Educ. Properties, 102 F.3d 677, 681 (2d Cir.1996). We review a district court's decision to compel arbitration de novo. See Doctor's Assocs. v. Distajo, 66 F.3d 438, 444 (2d Cir.1995), cert. denied, 517 U.S. 1120, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996) (Distajo I ).

I. Subject Matter Jurisdiction

A. Amount-in-Controversy Requirement

Hamilton argues that the district court erred in deciding that diversity jurisdiction existed. According to Hamilton, Paragraph 10(d) of the Agreement limits damages to $50,000, which is less than the $75,000 amount-in-controversy requirement. See 28 U.S.C. § 1332. The district court rejected this argument, observing that Hamilton, in the New Jersey suit, "seeks over $1,000,000 in damages ... well over the $75,000 [jurisdictional] minimum. [Hamilton] has ignored the cap on damages set forth in the franchise agreement, and as a result, DAI is forced to defend a claim for over $1,000,000." The district court concluded that "[t]he damages sought in the state action ... is the amount in controversy." We agree.

DAI's petition to compel arbitration states that the amount in controversy exceeds $75,000. "[T]he sum claimed by the plaintiff [DAI] controls if the claim is apparently made in good faith. It must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify a dismissal." A.F.A. Tours v. Whitchurch, 937 F.2d 82, 87 (2d Cir.1991) (citation and internal quotation marks omitted). In the context of a petition to compel arbitration, we have advised district courts to "look through to the possible award resulting from the desired arbitration, since the petition to compel arbitration is only the initial step in a litigation which seeks as its goal a judgment affirming the award." Davenport v. Procter & Gamble Mfg. Co., 241 F.2d 511, 514 (2d Cir.1957); see also Jumara v. State Farm Ins. Co., 55 F.3d 873, 877 (3d Cir.1995) ("[T]he amount in controversy in a petition to compel arbitration ... is determined by the underlying cause of action that would be arbitrated."); Webb v. Investacorp, 89 F.3d 252, 257 n. 1 (5th Cir.1996) (per curiam) (noting that the amount in controversy is the difference "between winning and losing the underlying arbitration").

Here, the underlying dispute to be arbitrated is Hamilton's claim that he was fraudulently induced to enter into the Agreement with DAI, that DAI violated the New Jersey Franchise Practices Act, and that DAI bears the financial responsibility for his losses. In the New Jersey suit, Hamilton, apparently contesting the validity of the liability cap, seeks in excess of $1 million in damages, well over the $75,000 jurisdictional minimum. Should the parties proceed to arbitration and DAI prevail, DAI would have defeated a claim in excess of $1 million in damages. Therefore, the district court properly concluded that notwithstanding the liability cap in the contract, the amount-in-controversy requirement had been met as it could not be said to a "legal certainty" that the award resulting from Hamilton's claims would not exceed the $75,000 jurisdictional minimum.

We dispose of Hamilton's remaining argument that the district court improperly declined to determine the validity of the liability cap before holding that the jurisdictional...