Lawrence v. Comprehensive Business Services Co., 87-2229

• Decision Date: 15 December 1987
• Docket Number: No. 87-2229,87-2229
• Citation: 833 F.2d 1159
• Parties: Robert W. LAWRENCE and Rita J. Lawrence, Plaintiffs-Appellants, v. COMPREHENSIVE BUSINESS SERVICES COMPANY and Comprehensive Accounting Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1159

833 F.2d 1159

Robert W. LAWRENCE and Rita J. Lawrence, Plaintiffs-Appellants, v. COMPREHENSIVE BUSINESS SERVICES COMPANY and Comprehensive Accounting Corporation, Defendants-Appellees.

No. 87-2229.

United States Court of Appeals Fifth Circuit.

Dec. 15, 1987.

Patrick J. Dyer, Wilshire & Scott, Houston, Tex., for plaintiffs-appellants.

Lester L. Hewitt, Steve Rosenblatt, Albert B. Kimball, Jr., Pravel, Gambrell, Hewitt & Kimball, Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before CLARK, Chief Judge, GEE and RUBIN, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

Robert and Rita Lawrence appeal an order staying litigation and compelling arbitration pursuant to an arbitration provision in a franchise agreement between the Lawrences and Comprehensive Business Services Co. The Lawrences contend that the agreement violates Texas law. They argue that the legality of the agreement is not a proper subject of arbitration and that an arbitration provision cannot be used to circumvent state law. In addition, the Lawrences argue that the arbitration provision is unenforceable because Comprehensive's obligation to arbitrate was illusory; that even if the arbitration provision has some effect, it does not govern the issue of illegality; and that Comprehensive waived arbitration by filing a separate suit against Lawrence and by indicating that it did not consider itself bound by the arbitration clause. Because these considerations cannot overcome the strong federal interest in encouraging arbitration, we affirm the district court's order compelling arbitration.

I.

Comprehensive franchises accounting and bookkeeping practices nationally. In February 1981, Comprehensive entered into a franchise agreement with Robert Lawrence, a Texas certified public accountant, licensing Lawrence to use the trade name Comprehensive Business Services. The agreement required Lawrence to purchase Comprehensive forms, stationery, and computer hardware and software, and to use his best efforts to promote its business. The agreement also required Lawrence to make periodic royalty payments and to pay periodic fees to Comprehensive's national advertising fund.

After the agreement had been executed, Lawrence learned that the Texas State Board of Public Accountancy had taken disciplinary action against other Comprehensive franchisees for operating an accounting practice under a trade name. After Comprehensive attempted unsuccessfully to receive a favorable ruling from the Texas State Board, Lawrence stopped using the trade name. He advised Comprehensive that he could not continue under the agreement because if he did, he might lose his license.

In December 1984, when the parties were unable to resolve their differences, Comprehensive sued Lawrence in Illinois small claims court for approximately $5,000 it claimed Lawrence owed it for services it provided. Comprehensive eventually obtained a judgment, which Lawrence paid. The Lawrences in turn sued Comprehensive in Texas state court, seeking a judgment declaring the agreement illegal and unenforceable and freeing them from any further liability under it. Comprehensive removed the suit to the United States District Court for the Southern District of Texas and moved to stay the litigation and compel arbitration pursuant to the arbitration clause in the agreement. The arbitration clause provided in relevant part:

Mandatory and Binding Arbitration. In the event a dispute cannot be resolved amicably, the parties mutually recognize and agree that it will be to their best interests that their differences be resolved with a minimum of time and money being expended commensurate with a due process hearing. To this end the parties agree that they will not file any lawsuits or claims against each other (except an action by [Comprehensive] for possession of the accounts) without first submitting their grievances to mandatory and binding arbitration. Any controversy arising out of, or relating to, this agreement or any modification or extension thereof, including any claim for damages or rescission, or both, shall be settled by arbitration ... in accordance with the rules, regulations and precepts then obtaining of the American Arbitration Association (AAA) in connection with commercial arbitration.

* * *

The parties recognize that certain disputes (for example those involving public interest, public policy or other similar laws) may not be arbitrable without the subsequent express consent of the parties. As to these disputes the parties agree to either consent to submit them to arbitration by the same terms and conditions that are arbitrable by prior agreement, or if they refuse to so consent, to immediately submit them to court for an early disposition so as not to delay arbitration proceedings on other matters in controversy and as an aid to a fair, final, economic, and expeditious arbitration hearing.

After a hearing, the district court granted Comprehensive's motion to compel arbitration, and the Lawrences appeal.

II.

The Lawrences contend that the agreement violates the Texas Public Accountancy Act of 1979 ¹ and that ordering arbitration pursuant to an arbitration clause in an illegal contract is improper. The Supreme Court rejected a similar argument in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., ² holding that a claim of fraud in the inducement of the entire contract was itself subject to arbitration pursuant to the arbitration provision in the contract. The Court explained:

Under Sec. 4 [of the Federal Arbitration Act], with respect to a matter within the jurisdiction of the federal courts save for the existence of an arbitration clause, the federal court is instructed to order arbitration to proceed once it is satisfied that "the making of the agreement for arbitration or the failure to comply [with the arbitration agreement] is not in issue." Accordingly, if the claim is fraud in the inducement of the arbitration clause itself--an issue which goes to the "making" of the agreement to arbitrate--the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. ³

The Lawrences seek to distinguish Prima Paint, arguing that because the alleged illegality "pervades the entire contract" and because the illegal provision "is so basic and so interwoven with the other contract terms, the agreement must stand or fall as an entirety." But the fraud in the inducement alleged in Prima Paint was just as pervasive as the illegality asserted in this case. Just as in Prima Paint, the Lawrences do not challenge the legality of the arbitration provision itself, but the legality of the entire contract. This court has applied Prima Paint to hold an arbitration clause enforceable in spite of a claim that the gas sales contract containing it was void from its inception because of the parties' failure to comply with a state statute regulating the sale of the state's gas. ⁴ We regard this case as indistinguishable.

The Lawrences argue that to permit arbitration of this suit "is in essence for the court to effectuate an illegal agreement." But their argument presumes that the contract is illegal and that presenting the dispute to the arbitrator somehow effectuates an illegal contract. The flaw in the argument is that the legality of the contract has not yet been decided.

The Lawrences also argue that unlike a claim of fraud in the inducement, which is predicated on the existence of alleged facts that induced the agreement, the illegality argument before us involves "the purely legal application of a statutory proscription to the contract." But the Lawrences do not contend that the agreement did not allow the arbitrator to decide purely legal questions. Because the Lawrences do not attack the arbitration agreement itself, Prima Paint requires that their claim of illegality be arbitrated pursuant to the contract.

Finally, the Lawrences suggest that enforcing the arbitration provision of an illegal contract would contravene Texas law and is therefore improper. This argument forgets that the arbitrability of an issue under the Federal Arbitration Act is a matter of federal law. ⁵ To the extent the Lawrences argue under Sec. 2 of the Federal Arbitration Act that arbitration is prohibited because illegality is a ground which exists "at law or in equity for the revocation of any contract," the Supreme Court rejected the same argument in Southland Corp. v. Keating. ⁶ In that case, the Court held that the California Franchise Investment Law, which required judicial adjudication of disputes, was not a ground that "exist[ed] at law or equity for the revocation of any contract." Rather, the law was a ground for revocation only of arbitration provisions in contracts subject to that law. ⁷ Similarly, the Texas Public Accountancy Act of 1979 is not a ground that exists at law or in equity for the revocation of any contract, and it cannot overcome the strong federal interest in arbitration.

III.

The Lawrences next attack the arbitration clause directly. Citing the Eleventh Circuit's decision in Hull v. Norcom, Inc., ⁸ they argue that the arbitration provision is unenforceable because it is not mutually binding--that Comprehensive's obligation to arbitrate is illusory. They note that the franchise agreement provides Comprehensive a right to seek injunctions in courts and contains a liquidated damages clause, a non-competition clause, and a cumulative remedies clause. The Lawrences contend that the presence of these provisions shows that the arbitration provision was not mutually binding.

In Hull, a former employee sued Norcom, Inc., seeking damages and a declaration that the contract was invalid because Norcom fraudulently induced him to enter into the contract. Norcom moved to compel arbitration pursuant to the...