Doctor's Associates, Inc. v. Jabush
| Decision Date | 16 July 1996 |
| Docket Number | D,1696,Nos. 1344,s. 1344 |
| Citation | 89 F.3d 109 |
| Parties | DOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee, v. Sharlene JABUSH, The Estate of Charles Nadel, Saviour Mercieca, Maryann Mercieca, Raymond Montclar, Than Myers, William J. O'Brien, Constance M. O'Brien, William T. Holland, Martin Pena, Brian Spears, and Lisa Spears, Defendants-Appellants. ockets 95-7694(L), 95-7764(CON). |
| Court | U.S. Court of Appeals — Second 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 is the franchisor of "Subway" sandwich shops. Defendants, Subway franchisees, appeal from a judgment 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 barring them from prosecuting any pending or proposed lawsuits against Plaintiff.
Doctor's Associates, Inc. ("DAI") is a Florida corporation with its principal place of business in Florida. Defendants are present or former Subway franchisees who own or did own franchises in various states. Subway sandwich shop franchisees must purchase their franchise from DAI and must lease their store premises from a DAI-affiliated leasing company.
DAI provides all prospective franchisees with a Uniform Franchise Offering Circular, which contains copies of both a standard Subway franchise agreement and a Subway sublease agreement. See 16 C.F.R. § 436.1 et seq.. Franchisees have time to review those documents before deciding whether to purchase a Subway franchise.
After a Subway franchise is purchased, DAI helps the franchisee find a site for the Subway shop. If DAI approves the site, one of DAI's affiliated real-estate leasing companies takes a lease on the site and then requires the franchisee to sublease the premises.
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, and judgement upon an award rendered by As noted, the sublease agreements do not contain an arbitration clause; they do, however, have a "cross-default" provision, which provides, in relevant part:
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. Each party will be responsible for their [sic] own costs in conjunction with the arbitration proceeding. If Franchisee commences action in any court prior to an arbitrator's final decision on the controversy or claim, then the Franchisee will be responsible for all expenses incurred by the Company and Franchisee in the arbitration and the court proceedings
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, a 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 1993, DAI and certain of its leasing companies sued Defendants Brian and Lisa Spears in Maryland state court for alleged breaches of the Spearses' sublease agreements. The Spearses, in turn, sued DAI, its owners, and its agents in Maryland state court, alleging breach of the franchise agreements, fraud, statutory violations concerning their franchises, and tortious interference with a purchase and sale agreement. DAI responded by filing a demand for arbitration with the American Arbitration Association ("AAA"). The Spearses refused to comply with the arbitration demand.
As to the other Defendants in this action, DAI filed separate demands for arbitration with the AAA, alleging breaches of their franchise agreements. DAI asserted a myriad of reasons for the alleged breaches, including the franchisees' failure to maintain compliance standards as outlined in the Subway Operations Manual. These Defendants also refused to comply with the demands for arbitration. Instead, contending that the arbitration clause was unenforceable, they threatened to file--but did not actually file--state and/or federal lawsuits against DAI, its owners, and development agents. Neither DAI nor its affiliated leasing companies filed any eviction actions against these Defendants for alleged breaches of the subleases.
Between February and April 1995, DAI brought six separate actions to compel arbitration against Defendants in the United States District Court for the District of Connecticut. DAI also sought a preliminary injunction, enjoining Defendants from prosecuting their existing or potential lawsuits against DAI. The district court consolidated these six actions.
The court granted DAI's petitions to compel arbitration, and entered a preliminary injunction barring Defendants from prosecuting any pending or proposed actions against DAI. Doctor's Assocs. v. Jabush, 3:95CV00695 (PCD), slip op. at 4 (D. Conn. June 21, 1995).
Defendants now appeal, arguing that: (1) the district court did not have subject matter jurisdiction over the petitions to compel arbitration; (2) the defense of fraud is not an arbitrable issue; (3) the arbitration clause is unconscionable; (4) DAI waived its right to arbitrate; (5) Defendants are entitled to a jury trial; (6) the preliminary injunctions imposed by the district court should be vacated; and (7) the district court abused its discretion in failing to require DAI to post an injunction bond.
Defendants' attorney, as representative for numerous Subway franchisees, and DAI are by no means strangers to this Court. Both participated in Doctor's Assocs. v. Distajo, 66 F.3d 438 (2d Cir.1995), cert. denied, --- U.S. ----, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996), and Doctor's Assocs. v. Stuart, 85 F.3d 975 (2d Cir.1996), decisions which were handed In Distajo, a consolidation of seventeen cases involving disputes between DAI and various franchisees, we reversed district court orders compelling arbitration and issuing preliminary injunctions, and remanded for further hearings on the franchisees' defenses of fraud, alter ego, and waiver. See Distajo, 66 F.3d at 458.
down subsequent to the district court's orders in this case.
Stuart was yet another case involving conflicts between DAI and other franchisees. There, we affirmed district court orders compelling arbitration and issuing preliminary injunctions barring parallel state litigation in Illinois. See Stuart, 85 F.3d at 978-79.
Many of the issues raised and addressed in Distajo and Stuart overlap the issues advanced here. Familiarity with those two decisions is therefore assumed.
Defendants argue that the district court lacks subject matter jurisdiction over DAI's petitions to compel arbitration. That issue was fully addressed and rejected in Distajo. See Distajo, 66 F.3d at 444-46. There is no need to revisit that claim here.
Defendants contend that DAI fraudulently induced the franchise agreements, in general, and the arbitration clause, in particular. Specifically, they claim that DAI falsely represented that arbitration was a condition precedent to the institution of legal action by either party to the franchise agreement; and yet DAI, through its affiliated leasing companies, reserved the right to bring summary eviction proceedings against its franchisees for breaches of the franchise agreement.
The district court declined to reach this issue, finding that "[t]he claim that the franchise agreement, and the arbitration clause, are void as procured by fraud can be arbitrated." Jabush, No. 3:95CV00695 (PCD), slip op. at 4.
As the parties concede, however, we subsequently decided in Distajo that it is the district court's responsibility--not the arbitrators'--to determine the issue of fraud in the inducement of the arbitration clause. See Distajo, 66 F.3d at 457. Thus, the issue of fraudulent inducement, as it relates to all Defendants in this action, is remanded to the district court for further consideration in light of Distajo. See id.
Defendants claim that the arbitration clause is unconscionable because the franchise agreement does not disclose that: (1) the AAA charges as much as $5,000 for filing and administration fees; (2) the high cost of arbitrating in Connecticut--including travel and lodging expenses for the franchisee and his or her attorney--requires the franchisee to win the arbitration to break even financially; (3) the franchisee must pay half of the hourly charges of the arbitrators, who are often attorneys with high-priced rates; (4) the AAA relies on DAI to provide it with repeat business and thus has a bias in favor of DAI; and (5) DAI primarily resolves its disputes with the franchisees by having its affiliated leasing companies file, or threaten to file, eviction lawsuits instead of arbitrating as represented by the franchise agreements.
Defendants' counsel raised these precise arguments in Stuart, 85 F.3d 975, which was argued in tandem with the instant appeal. As to arguments (1)-(4) above, we reject...
To continue reading
Request your trial
-
Bair v. Purcell
...accept on the other[.]" Hume v. United States, 132 U.S. 406, 411, 10 S.Ct. 134, 33 L.Ed. 393 (1889); see also Doctor's Assoc., Inc. v. Jabush, 89 F.3d 109, 113 (2d Cir. 1996) (quoting Hume); Williston on Contracts § 65:6 (2007) (citing Hume for its "oft-quoted expression of the test [for un......
-
Bishop v. We Care Hair Development Corp.
...or oppressed by We Care Hair's eviction proceeding, as the sublease clearly provided for such action. See Doctor's Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir.1996) (applying Illinois We also reject plaintiffs' argument that We Care Hair fraudulently induced them to accept the arbitrati......
-
Stamm v. Barclays Bank of New York
...to the other party". Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C.Cir.1965). See also Doctor's Associates, Inc. v. Jabush, 89 F.3d 109, 113 (2d Cir.1996) ("An unconscionable bargain is one which no man in his senses and not under delusion would make on the one hand, and .......
-
Doctor's Associates, Inc. v. Distajo
...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. Do......
-
Recent Developments in the Case Law of Arbitration
...1920 (1995). 9. 925 F.Supp. 1053 (S.D.N.Y. 1996). 10. No. 95-2203(EGS)(D.D.C. June 21, 1996). 11. Doctors Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir. 1996); Doctors Associates, Inc. v. Distajo, 66 F.3d 438, 457 (2d Cir. 1995). 12. 885 F.Supp. 69 (S.D.N.Y. 1995). 13. 13 U.S.C. § 67. 14.......