Doctor's Associates, Inc. v. Stuart
| Citation | 85 F.3d 975 |
| Decision Date | 04 June 1996 |
| Docket Number | D,No. 1340,1340 |
| Parties | DOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee, v. Donald A. STUART and Martin Schwarze, Defendants-Appellants. ocket 95-7760. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Edward W. Dunham, Wiggin & Dana, New Haven, CT, for Plaintiff-Appellee.
David Duree, Reinert & Duree, P.C., St. Louis, MO (Nicholas Wocl, Tooher, Puzzuoli & Wocl, Stamford, CT, of counsel), for Defendants-Appellants.
Before: MINER, McLAUGHLIN, and LEVAL, Circuit Judges.
Plaintiff, Doctor's Associates, Inc., is the franchisor for the popular "Subway" sandwich shops. Defendants, Donald Stuart and Martin Schwarze, two Subway franchisees, appeal from a decision and order of the United States District Court for the District of Connecticut (Peter C. Dorsey, Chief Judge ), ordering them to arbitrate with Plaintiff, and issuing a preliminary injunction that barred them from prosecuting a lawsuit against Doctor's Associates, Inc. in Illinois state court.
Doctor's Associates, Inc. ("DAI") is a Florida corporation with its principal place of business in Florida. Defendants own and operate two Subway sandwich shops in Illinois.
Pursuant to Federal Trade Commission disclosure regulations, see 16 C.F.R. § 436.1 et seq., promulgated under the Federal Trade Commission Act, 15 U.S.C. § 45, DAI provides all prospective franchisees with a Uniform Franchise Offering Circular ("UFOC"). The UFOC contains copies of both a standard Subway franchise agreement and a Subway sublease agreement. Franchisees then have some time to review those documents before deciding whether to purchase a Subway franchise.
After a Subway franchise is purchased, DAI helps the franchisee to find a site for the Subway shop. If DAI approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with DAI.
All franchise agreements (though not the subleases) contain an arbitration clause, substantially identical to the following:
Any 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, or whichever city in which the Company is then headquartered, 1 The franchise agreements also contain a Connecticut choice of law clause.
] and judgment upon an award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The commencement of arbitration proceedings by an aggrieved party to settle disputes arising out of or relating to this contract is a condition precedent to the commencement of legal action by either party
As noted, the sublease agreements contain no arbitration clause; they do, however, have a "cross-default" provision, which provides, in relevant part:
If at any time during the term of this Sublease, Sublessee shall default in the performance of any of the terms, covenants or conditions of the aforesaid Franchise Agreement ... Sublessor, at its option, may terminate this lease ... and upon such termination, Sublessee shall quit and surrender the leased premises to Sublessor....
Under this provision, therefore, the franchisee's breach of the franchise agreement is also a breach of the sublease; and the sublessor may bring an action to evict the franchisee/sublessee.
In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. DAI allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked DAI for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois.
DAI then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants' objections, DAI made Defendants locate their second Subway store in Granite City, less than two miles from Defendants' first store. The opening of this second shop cut into the sales of Defendants' first Granite City shop.
Defendants sued DAI, its owners, and development agents in Illinois state court (the "Illinois action"), seeking a declaratory judgment that the arbitration clause in the franchise agreement is unenforceable. They also sought damages for violation of the Illinois Franchise Disclosure Act, breach of the covenant of good faith and fair dealing, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and common law fraud.
Within two weeks, DAI filed a petition, in the United States District Court for the District of Connecticut, to compel arbitration against Defendants, pursuant to 9 U.S.C. § 4. DAI also asked for a preliminary injunction, barring Defendants from prosecuting their Illinois action. The district court held a hearing on the petition to compel arbitration and the motion for a preliminary injunction.
Meanwhile, back in Illinois, the state court entered summary judgment, declaring the arbitration clause void and unenforceable.
Ignoring the state judgment, the district court in Connecticut entered an order, compelling Defendants to arbitrate with DAI. It also issued a preliminary injunction, enjoining Defendants from further prosecuting their Illinois action. The district court did not require DAI to post an injunction bond.
After the district court issued that order, this Court issued its opinion in Doctor's Associates v. Distajo, 66 F.3d 438 (2d Cir.1995), cert. denied, --- U.S. ----, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996), a consolidation of seventeen cases involving disputes between DAI and various franchisees. In Distajo, we reversed orders entered in the United States District Court for the District of Connecticut compelling arbitration and issuing preliminary injunctions, and we remanded for further hearings solely to evaluate the franchisees' defenses to arbitration of fraud, alter ego, and waiver. See id.
Defendants went back to Illinois where they filed with the Illinois Supreme Court a "Motion for Supervisory Order," collaterally attacking both the district court's decision in this case and our decision in Distajo. The Illinois Supreme Court summarily denied the motion.
Defendants now return to us, appealing the order that compelled arbitration and that enjoined them from prosecuting their Illinois action. They contend that: (1) the district court does not have personal jurisdiction over them, because the arbitration clause is unenforceable and service was improper; (2) venue is improper in Connecticut; (3) they are entitled to a jury trial; (4) the district court does not have the authority to enjoin the Illinois action; and (5) the district court abused its discretion in not requiring DAI to post an injunction bond. 2 We reject all the claims raised in this scattershot appeal.
Defendants argue that the district court lacked personal jurisdiction over them for two reasons: (A) they cannot be found to have consented to contractual personal jurisdiction if the arbitration agreement is unenforceable; and (B) DAI served its Petition to Compel Arbitration and Summons on Defendants' attorney, rather than on Defendants personally. We reject both contentions.
A. Contractual Personal Jurisdiction
When a party agrees Victory Transp. Inc. v. Comisaria General de Abastecimientos y Transportes, 336 F.2d 354, 363 (2d Cir.1964), cert. denied, 381 U.S. 934, 85 S.Ct. 1763, 14 L.Ed.2d 698 (1965); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Lecopulos, 553 F.2d 842, 844 (2d Cir.1977); Island Territory of Curacao v. Solitron Devices, Inc., 489 F.2d 1313, 1317 (2d Cir.1973), cert. denied, 416 U.S. 986, 94 S.Ct. 2389, 40 L.Ed.2d 763 (1974).
Defendants argue, however, that they cannot be deemed to have consented to personal jurisdiction if the arbitration clause is unenforceable. And, they assert the arbitration clause is unenforceable because: (1) DAI fraudulently induced them into the arbitration agreement; (2) the arbitration agreement is unconscionable; and (3) DAI waived its right to arbitrate.
Defendants contend that DAI fraudulently induced them into executing the franchise agreements by falsely representing that arbitration was a condition precedent to the institution of legal action by either party to the franchise agreement. DAI, however, had reserved to itself the right to bring summary eviction proceedings against its franchisees through DAI's affiliated leasing companies. Defendants also claim that DAI failed to mention that its standard operating procedure was to bring summary eviction actions against franchisees for alleged breaches of the franchise agreement. The district court found this defense insufficient as a matter of law, and we agree.
In Distajo, we held that it is the district court's responsibility--not the arbitrators'--to decide whether an arbitration clause was fraudulently induced. See Distajo, 66 F.3d at 457.
"The essential elements of an action in fraud ... are: (1) that a false representation was made as a statement of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other party to act on it; and (4) that the latter did so act on it to his injury." Miller v. Appleby, 183 Conn. 51, 54-55, 438 A.2d 811 (1981) (citation omitted); see also Clark v. Haggard, 141...
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