Torres v. Simpatico, Inc.

• Decision Date: 03 February 2014
• Docket Number: Case No. 4:12CV2373 CDP.
• Citation: 995 F.Supp.2d 1057
• Parties: Jose TORRES, et al., Plaintiffs, v. SIMPATICO, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Missouri

995 F.Supp.2d 1057

Jose TORRES, et al., Plaintiffs,

v.SIMPATICO, INC., et al., Defendants.

Case No. 4:12CV2373 CDP.

United States District Court,

E.D. Missouri,

Eastern Division.

Feb. 3, 2014.

Jonathan E. Fortman, Law Office of Jonathan E. Fortman, LLC, Florissant, MO, for Plaintiffs.

Glenn E. Davis, Lindsay T. Leible, Hepler Broom, St. Louis, MO, for Defendants.

MEMORANDUM AND ORDER

CATHERINE D. PERRY, District Judge.

This Federal Racketeer Influenced and Corrupt Organizations Act (RICO) class action suit is before me on defendants' motion to compel arbitration and to dismiss without prejudice, or alternatively to stay the action pending arbitration. Plaintiffs are five individual unit franchisees of the Stratus Building Solution franchise system. Defendants include the system franchisor, some master (regional) franchisors, and various individuals associated with the Franchise System. Plaintiffs allege that defendants fraudulently induced plaintiffs to purchase unit franchises and exploited the system to extract exorbitant fees from plaintiffs without fulfilling defendants' own contractual obligations.

The franchise agreement between plaintiffs and the master franchisors included a broad arbitration agreement, which plaintiffs allege is substantively unconscionable. I find that the challenged clauses are not unenforceable for unconscionability and that plaintiffs do not carry their burden of showing that the agreement forecloses pursuit of their statutory rights. Because the arbitration agreement sanctioned enforcement by third parties and the unit franchise agreement required plaintiffs to indemnify Stratus Franchising and its franchisees, I find that that Stratus Franchising and the non-signatory master franchisees are third-party beneficiaries and can enforce the arbitration agreement. As all of plaintiffs' claims are subject to arbitration, I will grant the motion to compel arbitration and will dismiss this action without prejudice.

Background

Stratus Franchising LLC ¹ is a commercial cleaning business, involving both master and unit franchises. Stratus Franchising sells master franchises, which then serve as the exclusive franchisor of Stratus in their regional market and sell unit franchises within that geographic area. Collectively, this system of franchises is referred to as the “Stratus System.”

Plaintiffs are owners of unit franchises ² that bring this RICO class action against over seventy individuals and entities associated with the Stratus System. The defendants include Stratus Franchising, its officers Peter Frese, Jr. and Dennis Jarrett, and the three individual master franchisers with which plaintiffs contracted to purchase unit franchises: ³ Simpatico, PHSCCH SBS, and Stratus Building Solutions of Houston (the signatory master franchisors). Also listed as defendants are a number of master franchisees that did not contract with the named plaintiffs (the non-signatory master franchisees) ⁴ as well as individual defendants who plaintiffs categorize as “Masters” ⁵ or “Representatives.” ⁶

Plaintiffs allege that the Stratus System is an illegal scheme that defrauds unit franchisees by misrepresenting the organization and nature of the Stratus System. Plaintiffs also allege that unit franchisees' financial prospects are misrepresented and that they were defrauded by Stratus Franchising's practice of oversaturating geographical markets, grossly underpricing the franchisees' work to customers, deceptively churning franchisee service accounts, and charging undisclosed and inflated fees to the franchisees. Plaintiffs further allege that each master franchisor perpetuated the fraudulent system by using the same practices with the express knowledge of Stratus Franchising and its officers.

Discussion

Motion to Compel Arbitration

The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq., “establishes a liberal federal policy favoring arbitration agreements.” M.A. Mortenson Co. v. Saunders Concrete Co., Inc., 676 F.3d 1153, 1156 (8th Cir.2012). “[T]he FAA limits a district court's initial role in any challenge to an arbitration agreement to deciding whether ‘the making of the agreement for arbitration or the failure to comply therewith’ is at issue.” MedCam, Inc. v. MCNC, 414 F.3d 972, 974 (8th Cir.2005) (quoting 9 U.S.C. § 4). “[The Eighth Circuit] has refined this inquiry to asking 1) whether the agreement for arbitration was validly made and 2) whether the arbitration agreement applies to the dispute at hand, i.e., whether the dispute falls within the scope of the arbitration agreement.” Id. (emphasis in original).

An arbitration agreement's scope is interpreted literally, with any doubts resolved in favor of arbitration. MedCam, 414 F.3d at 975. The district court should compel arbitration “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.' ” Id. (quotation omitted).

Plaintiffs acknowledge that the unit franchise agreement included a standard form arbitration clause. However, plaintiffs argue that the arbitration clause is invalid for unconscionability and that non-signatory defendants cannot enforce the arbitration clause.

The unit franchise agreement was entered between each plaintiff and his or her respective master franchisor and states, in relevant part,

i. The parties hereto agree that, except [as otherwise provided] ... all controversies, disputes, or claims between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you ... arising out of or related to

1. this Agreement or any other agreement between you and us;

2. our relationship with you; [or]

3. the validity of this Agreement or any other agreement between you and us; ...

Must be submitted for binding arbitration, on demand of either party, to the American Arbitration Association. The arbitration proceedings will be conducted by one arbitrator and, except as this Subsection otherwise provides, according to the ... rules of the American Arbitration Association....

ii. The arbitrator has the right to award or include in his or her award any relief which he or she deems proper, including, without limitation, money damages ..., specific performance, injunctive relief, and attorneys' fees and costs ... provided that the arbitrator may not ... except as expressly provided in Subsection XVII G below, award any punitive or exemplary damages against any party (we and you hereby waiving to the fullest extent permitted by law any right to or claim for any punitive or exemplary damages against the other).

...

iv. We and you agree that arbitration will be conducted on an individual, not a class-wide, basis and that an arbitration proceeding between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you (and/or your owners, managers, guarantors, affiliates, and/or employees) may not be consolidated with any other arbitration proceedings between us and any other person.

v. The provisions of this Section XXVI [encompassing the methods for dispute resolution] are intended to benefit and bind certain third party non-signatories....

The Arbitration Clause is Valid

Section 2 of the FAA permits arbitration agreements to be invalidated by generally applicable contract defenses, including unconscionability. AT & T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 1746, 179 L.Ed.2d 742 (2011) (quotation omitted) (citing 9 U.S.C. § 2). In order for a contract to be deemed unenforceable on grounds of unconscionability, a court applying Missouri law must find it both procedurally and substantively unconscionable.⁷ Procedural unconscionability is determined by examining the circumstances of the contract formation, and substantive unconscionability depends upon the contract's actual terms. Whitney v. Alltel Comm's, Inc., 173 S.W.3d 300, 308 (Mo.Ct.App.2005).

Plaintiffs allege that the terms of the arbitration agreement are unconscionable for four reasons: first, the costs to arbitrate will exceed the average claimant's loss; second, the arbitration claimant must pre-pay the filing fee and other pre-hearing fees; third, the prevailing party is entitled to reimbursement of costs and expenses; and fourth, the agreement limits the franchisee's available remedies.

The Federal Arbitration Act prohibits a judge from weighing the cost of arbitration against a claimant's potential recovery. Am. Express Co. v. It. Colors Rest., ––– U.S. ––––, 133 S.Ct. 2304, 2312, 186 L.Ed.2d 417 (2013). Thus, plaintiffs' first reason for unconscionability fails at the start. However, American Express recognized that “perhaps” a plaintiff could show that arbitration filing fees and administrative costs are so high that they bar access to the arbitral forum and thereby “constitute the elimination of the right to pursue [any] remedy.” See id. at 2310–2311 (contrasting actual access to arbitration with profitable access).

A claimant seeking to establish that an arbitration agreement unconscionably precludes the vindication of statutory rights in the arbitral forum because it would be prohibitively expensive “bears the burden of showing the likelihood of such costs.” Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). The Eighth Circuit requires “more than just a hypothetical inability to pay.” Faber v. Menard, Inc., 367 F.3d 1048, 1053 (8th Cir.2004). Rather, the contesting party must present “specific evidence of likely arbitrators' fees” and their own inability to pay those fees, including, for example, the sophistication of the issues, average arbitrator costs in the region, and evidence of the party's own financial condition. Id. at 1054.

Plaintiffs provide only limited evidence to show that the cost of entrance precludes arbitration. The American Arbitration Association (AAA), whose rules and procedures the parties...