Saleemi v. Doctor's Assocs., Inc.

• Citation: 176 Wash.2d 368,292 P.3d 108
• Decision Date: 17 January 2013
• Docket Number: No. 87062–4.,87062–4.
• Parties: Waqas SALEEMI, a single man, and Farooq Sharyar, a single man, Respondents, v. DOCTOR'S ASSOCIATES, INC., a Florida corporation, Petitioner.
• Court: Washington Supreme Court

176 Wash.2d 368

292 P.3d 108

Waqas SALEEMI, a single man, and Farooq Sharyar, a single man, Respondents,

v.DOCTOR'S ASSOCIATES, INC., a Florida corporation, Petitioner.

No. 87062–4.

Supreme Court of Washington, En Banc.

Argued Sept. 20, 2012.

Decided Jan. 17, 2013.

Gary Howard Branfeld, Smith Alling PS, Tacoma, WA, for Petitioner.

Douglas Duane Sulkosky, Attorney at Law, Tacoma, WA, Todd Scott Baran, Todd S. Baran, PC, Portland, OR, for Respondents.

CHAMBERS, J.^*

[176 Wash.2d 371]¶ 1 Doctor' Associates Inc. (DAI), a Florida corporation, franchises Subway sandwich shops across the country. Waqas Saleemi and Farooq Sharyar operated three Subway franchises in Washington State. Their franchise agreements provided that any disputes would be arbitrated in Bridgeport, Connecticut, under Connecticut law, except for Connecticut franchise law. After a dispute arose, a Washington State superior court judge found the choice of law and forum selection clause unenforceable and entered an order compelling Washington arbitration. DAI did not seek discretionary review at the time. Saleemi and Sharyar prevailed at arbitration. DAI now asks us to vacate the trial court's order compelling arbitration that would require this dispute to be arbitrated, again, in Connecticut. But DAI fails to show that it has been prejudiced by the trial court's order compelling arbitration. We affirm.

FACTS

¶ 2 Between 2004 and 2006, Saleemi and Sharyar entered into three franchise agreements with DAI to operate three Subway sandwich shops in Pierce County. In 2008, a manager at one of the restaurants told DAI inspectors that “he rarely saw respondents' brother Faraz Saleemi, the former manager of the store, because ‘they’ had opened a new restaurant in Bonney Lake named Puccini's.” Clerk's Papers (CP) at 288 (Interim Award of Arbitrator). Under the franchise agreement, Saleemi and Sharyar had agreed that they would “ ‘not own or operate, or assist another person to own or operate, any other business ... which is identical with or similar to the business reasonably contemplated by this Agreement.’ ” CP at 289 (quoting Franchise Agreement). Ethan Golf, who was at the time a DAI contractor, researched the manager's tip on the Internet, saw what he believed to be pictures of Waqas Saleemi behind the counter at Puccini's, and sent an “employee to purchase sandwiches at the restaurant. The employee returned with the sandwiches and reported that she had observed respondents working there.” CP at 288. Golf informed Len Axelrod, the head of DAI's legal department.

¶ 3 Axelrod did not refer the matter to the usual internal legal team. Under DAI's normal practices, as found by the arbitrator,

termination letters for non-compete violations would generally describe the nature of the violation and provide for a cure by having the franchisee discontinue its ownership or operation of the competing business, pay a penalty and pay a percentage of the gross sales of the competing business as set forth in the franchise agreement.

CP at 289. Instead of these normal practices, the termination letter sent to Saleemi and Sharyar did not describe the violation or offer them any opportunity to cure. Id. When pressed by Saleemi and Sharyar's attorney, DAI attorney Kerry Patton sent a follow up letter that described the alleged violation, asserted that the damages were in excess of $45,000, and offered to allow Saleemi and Sharyar to cure by selling the Subway restaurants within 60 days. The head of DAI's legal practice group “acknowledged that the penalties ... exceeded and were inconsistent with those authorized by section 5.4 of the [franchise] Agreements.” Id. It appears that at least Golf and Axelrod believed, incorrectly, that Saleemi and Sharyar had an ownership interest in Puccini's.

¶ 4 After receiving the second termination letter, Saleemi and Sharyar attempted to sell their Subway franchises. They had initial cause for optimism: well within the 60 day window.

Salim Malik signed an agreement to purchase the three stores ... subject to a 20 day contingency period. At the insistence of Mr. Axelrod, DAI filed its Demand for Arbitration on August 20, 2008, less than 60 days after Mr. Patton's letter. Mr. Malik was told of the pending arbitration by respondents during the contingency period and elected to withdraw the offer. By declaration he states he withdrew his offer solely because of the pending lawsuit.

CP at 290. Malik had offered to purchase the three stores for $1,180,000. Id. The arbitrator later found that “[t]he difference between the Malik purchase price and the present value of the three stores exceeds $100,000.” Id.

¶ 5 After Malik withdrew his purchase offer and with DAI's demand for arbitration pending, Saleemi and Sharyar filed suit in Pierce County Superior Court, arguing that DAI's conduct violated the franchise agreements, Washington's Franchise Investment Protection Act (FIPA), ch. 19.100 RCW, and Washington's Consumer Protection Act (CPA), ch. 19.86 RCW. CP at 2–3. They asked the judge to enjoin the Connecticut arbitration.

¶ 6 The 2006 franchise agreement also had an unusual choice of laws provision:

This Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without reference to its conflicts of law, except as may otherwise be provided in this Agreement. The parties agree any franchise law or business opportunity law of the State of Connecticut, now in effect, or adopted or amended after the date of this Agreement, will not apply to franchises located outside of Connecticut.

CP at 37. The 2006 franchise agreement did not identify what franchise or business opportunity law would apply. Damages were limited to either compensatory damages not to exceed $100,000 or, in the alternative, all franchise fees and royalties paid to DAI by the franchisee during the preceding three years.

¶ 7 On September 19, 2008, Judge Kitty–Ann Van Doorninck found the forum selection clause “unconscionable and unenforceable” and ordered “that the disputes between the parties shall be arbitrated in Washington under Washington law, with no limitations on remedies.” CP at 217–18. DAI did not seek discretionary review of Judge Van Doorninck's order, and arbitration was conducted, as required by the franchise agreement, under American Arbitration Association rules. CP at 35, 222.

¶ 8 More than a year later, the arbitrator denied all of DAI's claims and ruled for Saleemi and Sharyar. The arbitrator found that DAI's belated offer to cure contained penalties that “exceeded and were inconsistent with those authorized by section 5.d of the Agreements.” CP at 289.¹ He found that “DAI discriminated between respondents and other franchisees similarly situated. DAI did not prove that this discrimination was reasonably necessary. Thus, this conduct violated RCW 19.100.180(c).” CP at 289–90. He also found that “[a]lthough there is some evidence to the contrary, this discrimination was not motivated by respondents' religion, race or ancestry.” CP at 290. The arbitrator awarded Saleemi and Sharyar compensatory damages “as that term is defined in section 17” of the franchise agreement in the sum of $230,000—$161,536 for attorney fees and $32,837.96 in costs. CP at 222, 290.

¶ 9 DAI moved to vacate the arbitration award, largely based on the trial court's original order directing Washington arbitration.² Perhaps struck by the time and expense that would have been wasted if her order compelling arbitration was vacated after the lengthy arbitration had finished, Judge Van Doorninck directly asked DAI's lawyer why he had not sought discretionary review. Counsel responded that DAI had determined the “cost and expenses of taking the appeal would not be a wise allocation” and suggested that since Judge Van Doorninck had originally ruled, subsequent case law had provided additional support for upholding the forum selection clause. Verbatim Report of Proceedings (Jan. 22, 2010) at 7–8. Judge Van Doorninck noted that under Washington law, “there needs to be clear error on the face of the arbitrator's award,” found none, and concluded that “[i]t is clear that the defense is unhappy with the result, so you're trying to get a second bite at the apple and it's not going to happen on my watch.” Id. at 8–9.

¶ 10 DAI appealed, arguing that the trial court's initial order compelling Washington arbitration was in error and the error was structural. The Court of Appeals concluded that even if the trial judge's order was incorrect, DAI had not shown prejudice and was not entitled to relief. Saleemi v. Doctor's Assocs., Inc., 166 Wash.App. 81, 98, 269 P.3d 350 (2012). We accepted review. Saleemi v. Doctor's Assocs., Inc., 174 Wash.2d 1001, 278 P.3d 1111 (2012).

ANALYSIS

¶ 11 We typically review trial court decisions to compel or deny arbitration de novo. Zuver v. Airtouch Commc'ns, Inc., 153 Wash.2d 293, 302, 103 P.3d 753 (2004) (citing Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 936 (9th Cir.2001)). Under Washington law, an arbitration agreement “is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of contract.” RCW 7.04A.060(1). This is substantially similar to the Federal Arbitration Act's (FAA) command that an agreement to arbitrate is “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

[176 Wash.2d 376]¶ 12 While not before us, we note with approval the Court of Appeals' rejection of the proposition that the failure to seek discretionary review of an order compelling arbitration waives a later challenge. Saleemi, 166 Wash.App. at 91, 269 P.3d 350. At the time of the order compelling arbitration, DAI had only a right to move for discretionary review under RAP 2.3, not for review as of right under RAP 2.2. It did not lose its right to review as a right by not seeking discretionary...