Pinkis v. Network Cinema Corp.

• Decision Date: 16 July 1973
• Docket Number: No. 2002--I,2002--I
• Citation: 9 Wn.App. 337,512 P.2d 751
• Parties: Marvin PINKIS et al., Respondents, v. NETWORK CINEMA CORPORATION, a Delaware corporation, Petitioner.
• Court: Washington Court of Appeals

Page 337

9 Wn.App. 337

512 P.2d 751

Marvin PINKIS et al., Respondents, v. NETWORK CINEMA CORPORATION, a Delaware corporation, Petitioner.

No. 2002--I.

Court of Appeals of Washington, Division 1, Panel Two.

July 16, 1973.

Cartano, Botzer & Chapman, William H. Botzer, Thomas C. McKinnon, Seattle, for appellant.

Culp, Dwyer, Guterson & Grader, John S. Ebel, Seattle, for respondent.

CALLOW, Judge.

Marvin Pinkis and S. E. McCoy are residents of the State of Washington; and Mandella Enterprises, Inc., is a Washington corporation. These Washington residents entered into an exhibitor franchise agreement with Network Cinema Corporation, a Delaware corporation, relating to the establishment and operation of a theater to be known as a 'Jerry Lewis Cinema' to be located at Federal Way, King County, Washington. Network Cinema Corporation is engaged in the business of selling and servicing franchises for 'Jerry Lewis Cinemas' throughout the United States. The agreement was negotiated and was to be performed in Washington. It was executed on March 15, 1970.

The plaintiffs commenced litigation with an initial complaint signed and filed on April 7, 1972. Thereafter, the plaintiffs filed an amended complaint composed of four claims. The first claim sets forth 38 separate alleged misrepresentations each of which related to the establishment and operation of a theater under the franchise format. The pleading states that the plaintiffs relied upon these false representations, entered into the agreement, and paid fees thereunder to the defendant. The second claim in the complaint alleges mistake on the part of the plaintiffs which the defendant knew of but failed to correct. The third claim alleges that the defendant was mistaken in the representations made; and if the plaintiffs had known of the defendant's mistake, they would not have entered into the agreement. The fourth claim relates to failures in performance by the defendant. There is no mention whatsoever of the arbitration clause in the agreement in any context in the amended complaint. The plaintiffs pray for rescission of the agreement and return of the parties to their prior status. The plaintiffs further allege that the agreement was in violation of the Washington Franchise Investment Protection Act, RCW 19.100.

The exhibitor franchise agreement contained a sentence which stated that it 'shall be construed in accordance with and governed by the laws of the State of New York.' In addition, it contained an arbitration clause which read 14. ARBITRATION. Any controversy, dispute or question arising out of, in connection with, or in relation to this agreement or its interpretation, performance or nonperformance of any breach thereof shall be determined by arbitration conducted in New York City in accordance with the then existing rules of the American Arbitration Association, and judgment upon any award, which may include an award of damages, may be entered in the highest State or Federal court having jurisdiction. Nothing contained herein shall in any way deprive the COMPANY of its right to obtain injunctive or other equitable relief as previously set forth herein.

The defendant moved for an order dismissing the action or, in the alternative, staying the action pending arbitration. In resistance to this motion, the plaintiffs filed an affidavit of S. E. McCoy which said in part:

When we were given the Exhibitor Franchise Agreement for signature, Mr. Chuck Beaumont, West Coast salesman for Network, told us that we should not take the Agreement to a lawyer, because the company would not agree to change one word. Because we had been induced into believing we were being treated fairly, and because of this claimed necessity for prompt signing, we did not review the contract in detail and did not take it to an attorney for review; we signed the agreement without making any changes. None of the Network representatives called to our attention Paragraph 14 of the 'Additional Terms' requiring arbitration of any disputes in New York City, and we were not aware that it was in the Agreement.

The action is before this court pursuant to a writ of certiorari to review the denial of this motion by the trial court.

The defendant claims that the trial court erred in not enforcing the arbitration clause by dismissing the action or staying the action pending arbitration; in failing to apply the Federal Arbitration Act, 9 U.S.C. §§ 1--14; in failing to grant the motion under New York law if that governs; or enforcing the arbitration clause under Washington law and the Washington Arbitration Act, if that governs.

The first issue raised is whether the agreement is subject to the United States Arbitration Act of 1925, 9 U.S.C. §§ 1--14. Section 1 of that act defines 'commerce' as meaning commerce among the several states. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), involved, in part, a consulting agreement entered into between a Maryland corporation and New Jersey corporation, the consulting services to be performed by an officer of the New Jersey corporation for the Maryland corporation. In discussing whether 'commerce' was involved under the definition that would bring the federal arbitration act into play, the opinion noted that the agreement was inextricably tied to the continuing operations of an interstate business. In a footnote, it was observed that the act reached 'contracts relating to interstate commerce', and the court was concerned with an agreement relating to the operation of a business in another state.

In the case before us, we find that 'commerce' is involved and that the federal act is applicable. The terms of the agreement called for the Delaware corporate defendant to provide the Washington exhibitor with, Inter alia, advice, training, educational materials, promotional assistance, advertising, and, to book for exhibit by the exhibitor, all films to be shown by the exhibitor. The exhibitor was not to exhibit any film except those booked by the defendant unless written consent to do so was given. The agreement contemplated, on its face, commerce between the states and, therefore, was subject to the federal arbitration act. Dickstein v. duPont, 443 F.2d 783 (1st Cir. 1971); Bartell Media Corp. v. Fawcett Printing Corp., 342 F.Supp. 196 (S.D.N.Y.1972); Joseph Muller Corp. Zurich v. Commonwealth Petrochemicals, Inc., 334 F.Supp. 1013 (S.D.N.Y.1971).

We turn to a consideration of the decisions where a claimant has alleged he was fraudulently induced to enter into a contract, and the opponent has demanded arbitration of the dispute pursuant to the contract itself. It is to be remembered that a claim that entry into a contract was induced by fraud makes the contract voidable, not void. Jack Mann Chevrolet Co. v. Associates Inv. Co., 125 F.2d 778 (6th Cir. 1942). The decision as to whether its execution was, in fact, induced by fraud is a decision that the parties separately may agree to arbitrate if they so desire.

Prima Paint Corp. inquired whether the federal court or arbitration should resolve a claim of fraud in the inducement of a contract governed by the federal arbitration act. The agreement in issue included an arbitration clause which read in part

'Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York, in accordance with the rules then obtaining of the American Arbitration Association . . ..'

Prima Paint Corp. v. Flood & Conklin Mfg. Co., supra, 388 U.S. at 398, 87 S.Ct. at 1803.

The plaintiff, Prima Paint Corp., commenced an action to rescind an agreement on the basis that it has been fraudulently induced. The trial court granted the defendant's motion to stay the action pending arbitration holding that a charge of fraud in the inducement of a contract containing an arbitration clause in these terms was a question for the arbitrators and not the court. The trial court was upheld by the Court of Appeals for the Second Circuit, and the United States Supreme Court affirmed. The Court of Appeals decision in Prima Paint Corp. based upon Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir. 1959), was interpreted as holding that a claim of fraud in the inducement of the contract generally--as opposed to the arbitration clause itself--was for the arbitrators and not for the courts; and this was a rule of 'national substantive law' governing even in the face of a contrary state rule. The Court of Appeals opinion is interpreted as adopting as a matter of federal law, having supremacy over state law, the rule that unless the parties intend otherwise an arbitration clause is 'separable' from the contract in which it is embedded. Where no claim is made that entry into the arbitration clause itself was fraudulently induced, a broad arbitration clause will encompass arbitration of the claim that the entire contract was induced by fraud. The view that the issue of 'separability' of the arbitration clause from the remainder of the contract is one of state law was rejected as was the view that a claim of fraud in the inducement is an issue to be decided by a court. Continuing, the Prima Paint Corp. decision observes at page 403, of 388 U.S., at page 1806 of 87 S.Ct. that section 4 of the federal arbitration act instructs a federal court to order arbitration to proceed when it is satisfied that "the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue." (Footnote omitted.) 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 court to consider claims of fraud in the inducement of the contract generally.

This decision is necessary if the...