Subway Equipment Leasing Corp. v. Forte

• Decision Date: 24 March 1999
• Docket Number: No. 97-31236,97-31236
• Parties: SUBWAY EQUIPMENT LEASING CORPORATION; Subway Restaurants, Inc., Plaintiffs-Appellants, v. Bonnie FORTE, wife of/and; Charles N. Forte; Selena Rankins, wife of/and; Frank R. Rankins; Dorothy Sims, wife of/and; Earl Sims, Jr., Defendants-Counter Claimants-Appellees, v. Doctor's Associates, Inc., doing business as Subway; Frederick A. DeLuca, Counter Defendants-Appellants. Earl Sims; Subway Development of Louisiana, Inc.; Subway Management Group of Louisiana, Plaintiffs-Appellees, v. Doctor's Associates, Inc.; Frederick DeLuca; Subway Restaurants, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 324

169 F.3d 324

SUBWAY EQUIPMENT LEASING CORPORATION; Subway Restaurants, Inc., Plaintiffs-Appellants, v. Bonnie FORTE, wife of/and; Charles N. Forte; Selena

Rankins, wife of/and; Frank R. Rankins; Dorothy

Sims, wife of/and; Earl Sims, Jr., Defendants-Counter Claimants-Appellees, v. Doctor's Associates, Inc., doing business as Subway;

Frederick A. DeLuca, Counter Defendants-Appellants.

Earl Sims; Subway Development of Louisiana, Inc.; Subway

Management Group of Louisiana, Plaintiffs-Appellees, v. Doctor's Associates, Inc.; Frederick DeLuca; Subway

Restaurants, Inc., Defendants-Appellants.

No. 97-31236.

United States Court of Appeals, Fifth Circuit.

March 24, 1999.

Edward Wood Dunham, Wiggins & Dana, New Haven, CT, for Plaintiffs-Appellants and Counter Defendants-Appellants.

James C. Ferguson, Ferguson & Associates, Baton Rouge, LA, David Maxwell Duree, Reinert & Duree, St. Louis, MO, for Plaintiffs-Appellees and Defendants-Counter Claimants-Appellees.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before JOLLY, DUHE and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Doctor's Associates, Inc. ("DAI") and companies associated with DAI appeal a district court ruling denying their motion for a stay pending arbitration. The district court held that DAI and its associates had invoked the judicial process thereby creating a significant delay that prejudiced the opposing parties and that DAI had therefore waived its right to arbitration. Because DAI has not invoked the judicial process with respect to the claim it wishes to arbitrate and because there is no evidence that the opposing parties have been prejudiced by any delay, we reverse.

I

This case involves a franchisor-franchisee relationship gone sour. Subway, the chain sandwich shop, sells franchises through DAI. Earl and Dorothy Sims and various other partners ("the franchisees"), ran four Subway franchises in the 1980's. Earl Sims was also a Subway Development Agent ("D.A.") for the Baton Rouge area and, on a temporary basis, for the New Orleans area. The franchisees' agreements with DAI, contained broad arbitration clauses. Earl Sims's D.A. contract with DAI contained a similar arbitration clause.

The franchisees subletted real estate and leased equipment from DAI's affiliated companies, Subway Restaurants, Inc. ("SRI") and Subway Sandwich Shops ("SSS"), both of which leased real estate, and Subway Equipment Leasing ("SEL"), which leased store equipment. The franchisees' real estate subleases and the equipment leases did not contain arbitration clauses.

In March 1988, Earl Sims, much to his displeasure, was replaced by another D.A. in the New Orleans area. In May of 1988, he filed an arbitration demand with the American Arbitration Association ("AAA"), claiming that DAI had breached the D.A. agreement. Subsequently, the franchisees defaulted on their real estate and equipment leases. Shortly thereafter, the litigation began in earnest.

In November 1988, SEL and SRI sued the franchisees in United States District Court for the Eastern District of Louisiana to recover amounts due under the equipment and real estate contracts for one of the franchises ("the 1988 federal case"). The claims made by SEL and SRI were under their respective contracts with the franchisees, for which there were no arbitration clauses. The franchisees responded by filing what they styled as a counterclaim against DAI and Frederick DeLuca, one of DAI's principals. Although neither DAI nor DeLuca were parties to the lawsuit, the franchisees claimed that they should be joined as SEL and SRI were merely extensions of DAI. The district court apparently permitted this joinder. ¹ The counterclaim alleged similar claims to those made by Sims in his arbitration demand.

A day before the franchisees filed their counterclaim in the 1988 federal case, SEL filed an involuntary bankruptcy petition against the franchisees. By 1990, SEL, SRI and SSS had all filed separate, amended involuntary petitions against the franchisees in bankruptcy court. None of the bankruptcy petitions involved arbitrable claims. In December of 1990, the bankruptcy court entered orders for relief, granting the involuntary petition in each proceeding. The district court reversed the bankruptcy court, holding that SEL, SRI, and SSS were not separate entities for purposes of 11 U.S.C. § 303(b)(1). On appeal, we reversed the holding that SEL, SRI, and SSS were separate entities. Matter of Sims, 994 F.2d 210 (5th Cir.1993). The franchisees then appealed to the Supreme Court, which denied certiorari in 1994. Sims v. Subway Equipment Leasing Corporation, 510 U.S. 1049, 114 S.Ct. 702, 126 L.Ed.2d 669 (1994). The bankruptcy proceedings were finally resolved in 1996.

In the interim, the franchisees had filed two lawsuits of their own. In July 1989, they filed a suit in the District Court for East Baton Rouge Parish for damages against DAI, DeLuca, and SSS. That case was stayed while the bankruptcy case was pending and, after discharge, the state granted DAI's motion to stay the matter pending arbitration. In February of 1990, Sims sued DAI and DeLuca in the Orleans Parish District Court. DAI removed the suit to federal court, where it was consolidated with the 1988 federal case.

The consolidated case was stayed pursuant to the bankruptcy proceedings. At approximately the same time, pursuant to a letter sent by counsel for DAI, the AAA decided to hold Earl Sims's arbitration in abeyance until the bankruptcy proceedings were resolved. Sims apparently did not object to the arbitration proceeding being held in abeyance. When the bankruptcy proceedings concluded in 1996, the franchisees moved to restore their actions in the consolidated case to the active docket. After the district court reopened the franchisees' actions, DAI filed a demand for arbitration with the AAA and moved to stay the litigation pending arbitration. The district court denied the motion, reasoning that DAI waived its right to compel arbitration. DAI has filed a timely appeal.

On appeal, DAI makes two arguments. First, DAI contends that the district court erred when it held that DAI had waived its right to arbitrate claims related to the D.A. agreement. Second, DAI argues that, provided it is correct that the district court should stay the franchisees' claims against DAI pending arbitration, then the district court should also stay the claims against SEL, SRI, and SSS as well. We address each argument in turn.

II

We review the issue of whether a party's conduct amounts to a waiver of arbitration de novo. Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir.1991). The factual findings underlying a district court's waiver determination are reviewed for clear error. See id. at 576. "Waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party." Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986).

There is a strong presumption against waiver of arbitration. See, e.g., Lawrence v. Comprehensive Business Services Co., 833 F.2d 1159, 1164 (5th Cir.1987) ("Waiver of arbitration is not a favored finding and there is a presumption against it."); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) ("[A]s a matter of law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."). Accordingly, a party alleging waiver of arbitration must carry a heavy burden. Associated Builders v. Ratcliff Constr. Co., 823 F.2d 904, 905 (5th Cir.1987).

Walker provides an example of this court's "hesitat[ion] to find that a party has waived its contractual right to arbitration." 938 F.2d at 577. In Walker, the plaintiffs sued in state court, alleging state securities law violations. Instead of immediately demanding arbitration, the defendant answered the complaint and participated in discovery. Thirteen months later, after the plaintiffs moved to transfer the case, the defendant sought to enforce its contractual right to arbitration. Despite the defendant's delay and participation in the lawsuit, this court held that the defendant had not waived arbitration because the plaintiffs failed to show that they were "materially prejudiced" by the delay. Id. at 578.

Before proceeding to the arguments in this case, we should note that the Second Circuit has addressed the waiver issue in great detail with respect to litigation involving one of the parties before this court, DAI. In Doctor's Associates, Inc. v. Distajo, the Second Circuit considered and rejected challenges to the arbitration clause in a Subway franchise agreement. 66 F.3d 438 (2d Cir.1995) ("Distajo I "), cert. denied, 517 U.S. 1120, 116 S.Ct. 1352, 134 L.Ed.2d 520 (1996). The court held that "[i]f the alleged violations of the subleases were premised on violations of the franchise agreement (which DAI was contractually bound to resolve through arbitration) then DAI did litigate substantial issues going to the merits, and the only remaining question will be whether the franchisees suffered prejudice from the eviction proceedings." Id. at 457.

In a subsequent appeal of Distajo I, the Second Circuit further delved into the meaning of prejudice for purposes of a waiver of an arbitration agreement: "prejudice ... refers to the inherent unfairness--in terms of delay, expense, or damage to a party's legal position--that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue." Doctor's Associates v. Distajo, 107 F.3d 126, 134 (2d Cir.1997), cert. denied, --- U.S. ----, 118 S.Ct. 365, 139 L.Ed.2d 284 (1997) ("Distajo II "). However, in Distajo II, the court held that, even where DAI directed its affiliates to sue pursuant to cross-default clauses based on franchise agreement breaches, there was no...