Jensen v. QUIK INTERN.

• Decision Date: 18 November 2004
• Docket Number: No. 97704.,97704.
• Citation: Jensen v. QUIK INTERN., 820 N.E.2d 462, 213 Ill.2d 119, 289 Ill.Dec. 686 (Ill. 2004)
• Parties: Eric JENSEN, Appellee, v. QUIK INTERNATIONAL et al., Appellants.
• Court: Illinois Supreme Court

820 N.E.2d 462

213 Ill.2d 119

289 Ill.Dec. 686

Eric JENSEN, Appellee, v.QUIK INTERNATIONAL et al., Appellants.

No. 97704.

Supreme Court of Illinois.

November 18, 2004.

Fredric A. Cohen and John A. Hughes, of Piper Rudnick, L.L.P., Chicago, for appellants.

Marc N. Blumenthal, Chicago, for appellee.

Justice RARICKdelivered the opinion of the court:

Plaintiff, Eric Jensen, sought to rescind a franchise agreement with Quik International (Quik) pursuant to section 26 of the Franchise Disclosure Act of 1987 (Act)(815 ILCS 705/5(West 2002)) on the grounds that Quik was not registered as a franchise with the Illinois Attorney General's office, as required by sections 5and10 of the Act.Quik sought to stay the litigation in the circuit court of Cook County and compel arbitration of Jensen's claim pursuant to an arbitration clause in the franchise agreement.The appellate court held that because compliance with the registration requirement of the Act was a condition precedent to an enforceable contract, the franchise agreement was not binding on Jensen, and he was not required to submit his claim to arbitration.345 Ill.App.3d 713, 280 Ill.Dec. 179, 801 N.E.2d 1124.For the following reasons, we reverse the decisions of the circuit and appellate courts and remand the cause to the circuit court for further proceedings not inconsistent with this opinion.

Jensen entered into a franchise agreement with Quik, a Nevada franchisor, whereby Quik granted Jensen the right to operate a franchise in Illinois.The franchise agreement contained an arbitration clause, which provided that:

"[A]ny controversy or claim arising out of or relating to this Agreement or its breach, including without limitation, any claim that this Agreement or any of its parts are invalid, illegal or otherwise voidable or void, shall be submitted to arbitration * * *."

Quik subsequently notified Jensen that it was in violation of the Act because its registration as a franchise with the Illinois Attorney General's office had expired at the time it entered into the franchise agreement with Jensen.The notice also informed Jensen of his rights under the Act, including the right to sue for damages and/or rescission of the franchise agreement.

Jensen filed a complaint against Quik, its president, and its chief executive officer, seeking damages and rescission of the franchise agreement.Count I alleged that Quik had violated sections 5and10 of the Act by failing to register as a franchise in Illinois.Count II alleged that Quik violated section 6 of the Act by making incomplete and misleading disclosures.Count III alleged a violation of the Consumer Fraud and Deceptive Business Practices Act(815 ILCS 505/1 et seq.(West 2002)).

Quik filed a motion to stay the litigation pending arbitration, then filed an arbitration demand in Nevada pursuant to section 3 of the Federal Arbitration Act (FAA)(9 U.S.C. § 3(2000)).Jensen filed a cross-motion to stay arbitration pending the circuit court's ruling to stay the litigation.The circuit court denied Quik's motion to stay and granted Jensen's motion to stay arbitration.Quik appealed from both orders pursuant to Rule 307(a)(1), arguing that even though Quik was not registered as a franchisor, Jensen's claim had to be submitted to arbitration because the Federal Arbitration Act governed the agreement and required enforcement of the arbitration clause, superceding state law.

The appellate court affirmed, holding that the issue of whether the parties had entered into an enforceable contract is not arbitrable because the question of whether a contract existed is a question of law for the court.345 Ill.App.3d 713, 280 Ill.Dec. 179, 801 N.E.2d 1124.Quik appeals.

Prior to addressing the merits of Quik's arguments, we set forth the relevant provisions of the Act.Section 5 of the Act provides in pertinent part:

"It is unlawful for any person to offer or sell any franchise required to be registered under this Act unless the franchise has been registered under this Act or is exempt under this Act."815 ILCS 705/5(1)(West 2002).

Section 10 of the Act provides:

"No franchisor may sell or offer to sell a franchise in this State if (1) the franchisee is domiciled in this State or (2) the offer of the franchise is made or accepted in this State and the franchise business is or will be located in this State, unless the franchisor has registered the franchise with the Administrator[¹] by filing such form of notification and disclosure statement as required under Section 16."815 ILCS 705/10(West 2002).

Section 26 provides that:

"Any person who offers, sells, terminates, or fails to renew a franchise in violation of this Act shall be liable to the franchisee who may sue for damages caused thereby.* * * In the case of a violation of section 5, 6 [fraudulent practices], 10, 11 [amendment of disclosure statement], or 15 [escrow of franchise fees and surety bonds] of the Act, the franchisee may also sue for rescission."815 ILCS 705/26(West 2002).

Because Jensen was domiciled in Illinois, the offer was made in Illinois, and Jensen operated the franchise business from his home in Illinois, Quik was required by section 10 of the Act to be registered with the Illinois Attorney General in order to enter into a franchise agreement with Jensen.Because Quik was not registered with the Attorney General's office at the time of the sale, as required by sections 5and10, Jensen is entitled, pursuant to section 26, to sue for damages and seek rescission of the franchise agreement.As noted above, the franchise agreement provides that all claims, including those that the agreement is illegal or otherwise invalid, must be submitted to arbitration.The question becomes, then, whether Jensen was entitled to pursue his statutory remedy of rescission in state court, or whether he is required by the terms of the franchise agreement to pursue it before an arbitrator.Jensen maintains, and the appellate court found, that he can maintain his statutory claim for rescission in state court because no enforceable contract, and therefore no arbitration clause, existed as a result of Quik's failure to fulfill the condition precedent of registration with the Attorney General's office.

Quik argues that the FAA governs its motion to stay the litigation because: (1) the motion was brought pursuant to section 3 of the FAA;(2) the franchise agreement specifically provides that all issues relating to arbitration or enforcement of the arbitration clause will be governed by the FAA; and (3) as a contract "evidencing a transaction involving commerce"(9 U.S.C. § 2(2000)), the FAA applies as a matter of law.Citing Prima Paint Corp. v. Flood & Conklin Mfg. Co.,388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270, 1277(1967), Quik contends that under the FAA a court may consider only issues relating to the making and performance of the agreement to arbitrate, not the enforceability or validity of the contract containing the arbitration clause as a whole, and that questions concerning the validity and enforceability of the contract are for the arbitrator, not the courts, to decide.When presented with a motion to stay litigation pending arbitration under section 3 of the FAA, the court's inquiry is limited to whether an agreement to arbitrate exists and whether it encompasses the issue in dispute.If the court finds that an agreement to arbitrate exists and the issue presented is within the scope of that agreement, a stay under section 3 of the FAA is mandatory.

Quik contends that there is no dispute that the arbitration agreement exists or that it encompasses the claims alleged in Jensen's complaint.Further, Jensen's complaint contains no allegations that the arbitration provision, as opposed to the franchise agreement as a whole, was procured through fraud, violated the Act, or is otherwise invalid, void, or voidable.Thus, Quik maintains, the stay was mandatory under section 3 of the FAA.

Quik misapprehends the holding of the appellate court in this case.The appellate court in the present case relied on its previous decision in Barter Exchange, Inc. of Chicago v. Barter Exchange, Inc.,238 Ill.App.3d 187, 179 Ill.Dec. 354, 606 N.E.2d 186(1992).In Barter Exchange, Illinois and Kentucky franchisees sought to rescind their franchise agreements because the defendant franchisor allowed its registration to expire before the franchise agreements were executed.The court held that Illinois and Kentucky laws requiring a franchisor to obtain a registration to do business within the state must be deemed part of the respective franchise agreements and that, as implied terms of the contract, those laws established conditions precedent to the effectiveness and enforceability of the contracts.Because the franchisor failed to satisfy the condition precedent of registration, the court held, the franchise contracts were not binding on the franchisees and the contracts were subject to rescission.Rescission implicitly invalidated the arbitration agreement and without an arbitration agreement, the franchisees were not required to submit their claims to arbitration.Barter Exchange,238 Ill.App.3d at 192-94, 179 Ill.Dec. 354, 606 N.E.2d 186.

As in Barter Exchange, the gist of the appellate court's holding in the present case is that because Quik failed to satisfy the condition precedent of registration, there was no enforceable franchise agreement and, therefore, no arbitration clause.In the absence of an agreement to arbitrate, the FAA does not apply.

As the appellate court in this case noted, other districts of the appellate court have rejected Barter Exchange's"condition precedent" analysis.In Cusamano v. Norrell Health Care, Inc.,239 Ill.App.3d 648, 180 Ill.Dec. 352,607 N.E.2d 246(1992), the franchisee sued to rescind the franchise agreement on the ground that the franchisor failed to provide her with a disclosure statement, as required...