Doctor's Associates, Inc. v. Hollingsworth

• Decision Date: 25 November 1996
• Docket Number: Civil No. 3:96cv1887.
• Citation: 949 F.Supp. 77
• Parties: DOCTOR'S ASSOCIATES, INC., Plaintiff, v. David HOLLINGSWORTH, et al., Defendants.
• Court: U.S. District Court — District of Connecticut

949 F.Supp. 77

DOCTOR'S ASSOCIATES, INC., Plaintiff, v. David HOLLINGSWORTH, et al., Defendants.

Civil No. 3:96cv1887.

United States District Court, D. Connecticut.

November 25, 1996.

COPYRIGHT MATERIAL OMITTED

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

David M. Duree, Reinert, Duree & Crane, St. Louis, MO, for Defendants.

RULING ON PENDING MATTERS

DORSEY, Chief Judge.

Plaintiff Doctor's Associates, Inc. ("DAI") filed 15 separate Petitions to Compel Arbitration pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, with accompanying motions for injunctive relief. Defendants David Hollingsworth, et al. filed motions to dismiss each of the Petitions to Compel Arbitration. For the following reasons, DAI's petitions and motions are granted, and Defendants' motions are denied.

I. BACKGROUND

DAI is the national franchisor of Subway sandwich shops and is a Florida corporation. Defendants are Subway franchisees. DAI entered into standard written franchise agreements with Defendants, permitting them to operate Subway shops. The agreements contain an arbitration clause (¶ 10c), which provides that "[a]ny controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by Arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association at a hearing to be held in Bridgeport, Connecticut...."

Disputes arose and the franchisees brought suit in state court in Madison County, Illinois against Frederick DeLuca and Peter Buck, the co-owners of DAI, DAI's administrative affiliate, Franchise World Headquarters, Inc. ("FWHI"), the trustees of The Subway Franchisee Advertising Fund Trust ("SFAFT"), the executive director of the SFAFT, and eight vendors to Subway franchisees. The Madison County complaint is a class action comprised of former and current Subway franchisees.¹ The complaint alleges various breaches of fiduciary duty and conspiracy claims relating to the alleged mismanagement and misappropriation of contributions to the SFAFT.

DAI demanded arbitration with each of the 31 named Madison County plaintiffs in 18 separate arbitrations.² DAI subsequently filed 15 separate petitions to compel arbitration and motions for injunctive relief, seeking to have the state court matters enjoined and resolved by arbitration. These cases were consolidated under the lead case, 3:96cv1887 Doctor's Associates v. Hollingsworth.³ DAI did not petition here to compel arbitration with the 3 groups of Madison County plaintiffs from Florida, with whom DAI has demanded arbitration as there is no diversity jurisdiction between them and DAI since DAI is a Florida corporation.

This is another in a long series of disputes between DAI and various Subway franchisees regarding their obligation to arbitrate under the franchise agreement. This time the franchisees' counsel has introduced a new wrinkle, having styled their state cause of action as a class action without naming DAI as a party.

The franchisees moved to dismiss DAI's petitions alleging that: (1) there is no subject matter jurisdiction; (2) the arbitration clause does not embrace class action lawsuits; and (3) DAI's attempt to use the arbitration clause would eliminate a cause of action under the Illinois Class Action Statute and is thus void as against public policy, unconscionable and is overreaching by DAI. The franchisees further contend that since DAI is not a defendant in the state court action there is nothing to arbitrate and DAI is not an aggrieved party entitled to compel arbitration pursuant to 9 U.S.C. § 4. The parties were heard on October 11, 1996.

II. DISCUSSION

A. Petition to Compel Arbitration

1. Arbitration of Class Actions

The franchisees contend that arbitration is improper because the scope of the arbitration clause in the most recent franchise agreements exclude arbitration of class actions. Brief in Support of Motion to Dismiss, p. 3. The Franchise Agreements now provide that "[e]ach claim or controversy will be arbitrated by the Franchisee on an individual basis and shall not be consolidated in any arbitration action with the claim of any other franchisee." 1993 Franchise Agreement ¶ 10c, p. 9. DAI has demanded 18 separate arbitrations and has not sought to consolidate them. DAI's arbitration demands are not precluded by the arbitration clause.

2. Unconscionability

The franchisees conclusorily argue that "[t]he use of the arbitration clause to attempt to eliminate a cause of action under the Illinois Class Action Statute is void as against public policy, is unconscionable and the result of overreaching by DAI ..." and cite Graham Oil Co. v. Arco Products Co., 43 F.3d 1244 (9th Cir.1995), cert. denied, ___ U.S. ___, 116 S.Ct. 275, 133 L.Ed.2d 195 (1995); Postal Instant Press, Inc. v. Sealy, 43 Cal.App.4th 1704, 51 Cal.Rptr.2d 365 (1996); and Kubis & Perszyk Associates, Inc. v. Sun Microsystems, Inc. et al, 146 N.J. 176, 680 A.2d 618 (1996). Brief in Support of Motion to Dismiss, p. 3. The franchisees do not identify the Illinois statute to which they refer. The authority they cite provides no support for their position.⁴ The Illinois class action statute does not preclude enforcement of an otherwise valid arbitration clause.

3. Subject Matter Jurisdiction

Pursuant to § 4 of the FAA, district courts only have jurisdiction to hear petitions to compel arbitration if the court "would have jurisdiction under Title 28, in a civil action ... of the subject matter of a suit arising out of the controversy between the parties...." 9 U.S.C. § 4. Accordingly, "there must be diversity of citizenship or some other independent basis for federal jurisdiction before the [arbitration] order can issue." Doctor's Associates, Inc. v. Distajo, 66 F.3d 438, 444 (2d Cir.1995), cert. denied, ___ U.S. ___, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996) (citation omitted). DAI alleges diversity as the basis for federal subject matter jurisdiction. 28 U.S.C. § 1332. The franchisees contest diversity jurisdiction because the amount in controversy does not exceed $50,000. DAI, having invoked federal jurisdiction, has the burden of proving the requisite amount in controversy. United Food Local 919 v. Centermark Properties, 30 F.3d 298, 301 (2d Cir.1994); R.G. Barry Corp. v. Mushroom Makers, Inc., 612 F.2d 651, 655 (2d Cir.1979).

a. Amount in Controversy

The franchisees contend that the requisite amount in controversy does not exist between DAI and each member, named and unnamed, of the state class action, citing Zahn v. International Paper Co., 414 U.S. 291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973).⁵ In Zahn, the Supreme Court held:

When two or more plaintiffs, having separate and distinct demands, unite for convenience and economy in a single suit, it is essential that the demand of each be of the requisite jurisdictional amount; but when several plaintiffs unite to enforce a single title or right, in which they have a common and undivided interest, it is enough if their interests collectively equal the jurisdictional amount.

414 U.S. at 294, 94 S.Ct. at 508 (quoting Troy Bank v. G.A. Whitehead & Co., 222 U.S. 39, 40-41, 32 S.Ct. 9, 9-10, 56 L.Ed. 81 (1911)). The franchisees' reliance on Zahn is misplaced. Since "diversity jurisdiction is determined by reference to the parties named in the proceeding before the district court," Distajo, 66 F.3d at 445, the parties who must have an amount in controversy with DAI that exceeds $50,000 are those named in the petitions to compel arbitration, not each and every member of the class. Nevertheless, the question is what is the amount in controversy with the individuals named in the petitions to compel arbitration.

DAI's petitions to compel arbitration state that the amount in controversy exceeds $50,000, and "`the 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 less than the jurisdictional amount to justify a dismissal.'" A.F.A. Tours, Inc. v. Whitchurch, 937 F.2d 82, 87 (2d Cir.1991) (quotation omitted) (emphasis in original). See also Jumara v. State Farm Ins. Co., 55 F.3d 873, 877 (3rd Cir.1995); Sharp Electronics Corp. v. Copy Plus, Inc., 939 F.2d 513, 515 (7th Cir.1991); Matter of Milliken & Co. (Wilson Bus. Prod. Sys. & Serv., Inc.), 1992 WL 188387 at *5-*6 (July 30, 1992 S.D.N.Y.). "[T]he amount in controversy in a petition to compel arbitration ... is determined by the underlying cause of action that would be arbitrated." Jumara, 55 F.3d at 877. The court should look at the "possible award resulting from the desired arbitration, since the petition to compel is only the first step in litigation which seeks as its goal a judgment affirming award." Davenport v. Procter & Gamble Mfg. Co., 241 F.2d 511, 514 (2d Cir. 1957). The amount in controversy is the difference "between winning and losing the underlying arbitration...." Webb v. Investacorp, Inc., 89 F.3d 252, 257, n. 1 (5th Cir.1996).

The underlying dispute to be arbitrated, as set forth in DAI's Demands for Arbitration, is whether DAI or any individual or entity acting on its behalf and its owners, Deluca and Buck, engaged in the misconduct alleged in the state court complaint, which was attached to the Demand for Arbitration. "[T]he amount in controversy, in an action for declaratory ... relief, is the value of the right to be protected or the extent of the injury to be prevented." Webb, 89 F.3d at 256 (quotation omitted). Accord: Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 347, 97 S.Ct. 2434, 2443-44, 53 L.Ed.2d 383 (1977) ("[i]n actions seeking declaratory or injunctive relief it is well established that the amount in controversy is measured by the value of the object of the litigation ..."). Franchisees seek monetary damages in the state court and that amount is the "injury to be prevented" in the arbitration. As such, the franchisees' state court...