Great Earth Companies, Inc. v. Simons

Decision Date01 May 2002
Docket NumberNo. 00-2033.,00-2033.
Citation288 F.3d 878
PartiesGREAT EARTH COMPANIES, INC., and Great Earth International Franchising Corp., Plaintiffs-Appellees, v. Richard SIMONS and Kimberly Simons, Defendants-Appellants.
CourtU.S. Court of Appeals — Sixth Circuit

Robert G. Kamenec (argued and briefed), Plunkett & Cooney, Bloomfield Hills, MI, for Plaintiffs-Appellees.

Bradley L. Smith (argued and briefed), Dykema Gossett, Ann Arbor, MI, for Defendants-Appellants.

Before BOGGS and MOORE, Circuit Judges; RUSSELL, District Judge.*

OPINION

MOORE, Circuit Judge.

Appellants Richard and Kimberly Simons (the "Simonses") appeal the district court's decision compelling arbitration and enjoining prosecution of their state-court action against Great Earth Companies, Inc. and Great Earth International Franchising Corporation (collectively "Great Earth"), which alleged various claims arising from a franchise agreement between the Simonses and Great Earth. On appeal, the Simonses contend that (1) the district court should have abstained from exercising jurisdiction in deference to their pending state-court suit; (2) Great Earth was precluded from litigating arbitrability in Michigan by the franchise agreement's forum selection clause; (3) the arbitration clause was void because it was fraudulently induced; (4) the injunction of the state-court suit violated the Federal Anti Injunction Act; and (5) Great Earth was judicially and equitably estopped from asserting that arbitration could be conducted in Michigan. For the reasons stated below, we AFFIRM the decision of the district court.

I. BACKGROUND

On June 20, 1998, Appellants Richard and Kimberly Simons entered into a Franchise Agreement (the "Agreement") with Great Earth. Pursuant to the Agreement, Great Earth licensed the Simonses to operate a Great Earth vitamin retail outlet within the state of Michigan. Article 15.1 of the Agreement provides that "any dispute between Franchisor ... and Franchisee... arising out of, relating to, or referencing this Franchise Agreement or its breach in any way ... shall be resolved by submission to binding arbitration by the American Arbitration Association ("AAA")." Joint Appendix ("J.A.") at 23 (Agreement at 31). Article 15.3, entitled "Law: Venue," provides in relevant part that "[a]ll arbitration hearings and other arbitration proceedings shall take place in Nassau County, New York, or if Franchisor so elects, in the county where the principal place of business of Franchisee is then located." J.A. at 24.

On November 3, 1999, the Simonses filed suit against Great Earth in Michigan state court, alleging violations of the Michigan Franchise Investment Law ("MFIL"), common law fraud, breach of fiduciary duties, breach of duties of good faith and fair dealing, and fraudulent inducement of the Agreement's arbitration clause. Although Great Earth filed a motion in the state-court action to dismiss or stay the proceedings and to compel arbitration in New York pursuant to the Agreement, Great Earth abandoned this motion before the scheduled hearing. Great Earth then filed an independent petition to compel arbitration in the U.S. District Court for the Southern District of New York ("Southern District of New York"). On February 10, 2000, the Southern District of New York entered a temporary restraining order prohibiting the Simonses from proceeding in the Michigan state suit and ordering them to show cause why an order compelling arbitration under § 4 of the Federal Arbitration Act ("FAA") should not be issued.

A hearing was held on March 16, 2000, to receive testimony on the issue of whether the Simonses were fraudulently induced to sign the arbitration agreement. The Simonses argued that the Offering Circular provided to them by Great Earth in early June 1998 fraudulently represented that any provision in the Franchise Agreement requiring arbitration or litigation outside of Michigan was void and unenforceable by Great Earth, because such provision was in conflict with rights conferred to franchisees by the MFIL. The Offering Circular contained disclosures required by the Federal Trade Commission and the State of Michigan, and was accompanied by a sample franchise agreement. One of the disclosures contained in the Offering Circular, entitled an "Addendum for Michigan Franchisees," states:

THE STATE OF MICHIGAN PROHIBITS CERTAIN UNFAIR PROVISIONS THAT ARE SOMETIMES IN [F]RANCHISE DOCUMENTS. IF ANY OF THE FOLLOWING PROVISIONS ARE IN THESE FRANCHISE DOCUMENTS, THE PROVISIONS ARE VOID AND CANNOT BE ENFORCED AGAINST YOU.

....

(f) A provision requiring that arbitration or litigation be conducted outside this state.

J.A. at 182 (S.D.N.Y. Amended Op. at 9 (quoting Offering Circular at 34)). As noted above, the Franchise Agreement did contain a provision requiring disputes to be arbitrated in New York. The Simonses argued that this statement was a knowing misrepresentation, because Great Earth knew at the time that it would attempt to enforce the Agreement's forum selection clause in the event of a dispute, notwithstanding its statement in the Offering Circular. Richard Simons testified at the hearing and stated that it was his understanding at the time he signed the Agreement that disputes would be arbitrated in Michigan.

The Southern District of New York concluded that the Simonses had shown that the agreement to arbitrate outside of Michigan was induced by fraud. The court initially noted that the FAA preempted the MFIL's prohibition on agreements to arbitrate outside of Michigan, and that the Agreement's venue clause therefore was not voided by Michigan law. Nevertheless, the court concluded that Great Earth had fraudulently induced the Simonses to agree to the forum selection clause by knowingly misrepresenting in the Offering Circular that it would not seek arbitration outside of Michigan. The court therefore refused to order arbitration in New York. The court went on to note that "[w]ere we writing on a blank slate, we would find that there was no meeting of the minds not only with respect to the arbitration clause's forum selection provision, but also with respect to the arbitration clause as a whole." J.A. at 111 (S.D.N.Y.Op.3/24/00). The court explained, however, that

in light of Mr. Simons' testimony at the March 16 hearing, that it was his understanding when signing the Agreement that he had agreed that disputes would be arbitrated in Michigan, in light of Great Earth's alternative position that if it does not prevail here and successfully compel arbitration in New York, arbitration ought to take place in Michigan, and in light of Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095 (9th [C]ir.1999) (directing arbitration in California where parties were in dispute over forum and had not clearly agreed to arbitrate in Oklahoma), and Alphagraphics Franchising, Inc., 840 F.Supp. at 708 (compelling arbitration in Michigan even though arbitration forum selection clause was unenforceable against franchisees due to fraud in inducement), Great Earth and the Simons are directed to arbitrate their dispute in Michigan.

J.A. at 111.

The Simonses moved for reconsideration, requesting that the district court rescind its order compelling the parties to arbitrate in Michigan. The court wrote that it was "somewhat surprised by [the motion's] filing in light of the testimony of Mr. Richard Simon[s]." J.A. at 116 (S.D.N.Y. 5/17/00 Order). Nevertheless, the court withdrew the portion of its earlier opinion ordering arbitration in Michigan, "as it was unnecessary for the resolution of the precise question presented." J.A. at 116. The court noted, however, that "the sworn testimony of Mr. Simons remains for further use in further forums." J.A. at 117. On May 17, 2000, the court issued an amended opinion, which denied Great Earth's petition to compel arbitration in New York but ordered no other action.

The Simonses proceeded with their Michigan state-court action. On May 25, 2000, the Simonses filed a motion for partial summary judgment in the state-court suit. Hearing on the motion was scheduled for June 21, 2000. On June 16, 2000, Great Earth filed a petition in the U.S. District Court for the Eastern District of Michigan ("Eastern District of Michigan") to compel arbitration in Washtenaw County, Michigan, and to enjoin the state-court proceedings. Oral argument was held on the motion on July 20, 2000. In an Opinion and Order dated July 31, 2000, the Eastern District of Michigan granted the petition to compel arbitration and enjoined the Simonses from prosecuting the pending state-court action. The Simonses filed a timely notice of appeal.

II. ANALYSIS
A. Jurisdiction

Appellate jurisdiction over district court orders concerning arbitration is governed by section 16 of the FAA. 9 U.S.C. § 16. Section 16 provides in relevant part:

(a) An appeal may be taken from —

....

(3) a final decision with respect to an arbitration that is subject to this title.

(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order —

(1) granting a stay of any action under section 3 of this title;

(2) directing arbitration to proceed under section 4 of this title;

(3) compelling arbitration under section 206 of this title....

9 U.S.C. § 16. "Section 16(a)(3) ... preserves immediate appeal of any `final decision with respect to an arbitration,' regardless of whether the decision is favorable or hostile to arbitration." Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 86, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000); Arnold v. Arnold Corp.-Printed Communications for Bus., 920 F.2d 1269, 1275 (6th Cir.1990). Thus, we have appellate jurisdiction over a decision with respect to arbitration if it "ends the litigation on the merits and leaves nothing more for the court to do but execute the judgment."...

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