Khoja et al v. DPD SUB, Inc. et al

Filing 21

ORDER that Defendants Motion to Dismiss or, in the Alternative, to Stay the Proceeding and Compel Arbitration ECF No. 6 , is DENIED IN PART AND GRANTED IN PART. It is FURTHER ORDERED that pursuant to 9 U.S.C. §§ 3-4, the parties s hall proceed with arbitration in accordance with the Franchise Agreement. This Court shall retain jurisdiction until arbitration has been completed. It is FURTHER ORDERED that since the length of the arbitration process is uncertain, I find that t his case should be administratively closed pursuant to D.C.COLO.LCivR 41.2 with leave to be reopened for good cause shown. If no action is taken to reopen this case before September 18, 2016, the case will be dismissed without prejudice without any further notice to either party. by Judge Wiley Y. Daniel on 9/29/2015.(evana, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Senior Judge Wiley Y. Daniel
Civil Action No. 15-cv-00258-WYD-KMT
MEHB KHOJA, and
RODOLFO GUIZAR REYES as the assignee of TEXAS SNACKS, LLC, on behalf of
themselves and all other similarly situated persons,
Plaintiffs,
v.
DPD SUB, INC., a Colorado corporation, and
DPI SUB, INC. a Colorado corporation,
Defendants.

ORDER

THIS MATTER comes before the Court on Defendants Doc Popcorn Franchising,
LLC’s and Doc Popcorn, LLC’s (hereinafter referred to as “Defendants” or “Doc
Popcorn”) Motion to Dismiss or, in the Alternative, to Stay the Proceeding and Compel
Arbitration (ECF No. 6), filed March 9, 2015. Plaintiffs filed a response and Defendants
filed a reply in support of its motion. After carefully considering the pleadings submitted
by both parties, I find that the arbitration agreement is valid and enforceable and thus,
this matter should be stayed pending arbitration pursuant to
9 U.S.C. § 3.
I.

INTRODUCTION
On February 6, 2015, Plaintiffs filed the instant action on behalf of themselves

and “the class ... of past and current franchisees of Doc Popcorn, which is more than

fifty (50) individuals or entities.” (Compl. ¶ 6). Plaintiffs seek a declaratory judgment
“regarding the validity of the dispute resolution provision in the franchise agreement and
for money damages resulting from Doc Popcorn’s intentional and/or negligent
misrepresentations and omissions ....” (Compl ¶ 8). Plaintiffs assert claims for: (1)
declaratory judgment; (2) fraud or fraud in the inducement; and (3) negligent
misrepresentation. Defendants have moved to dismiss the Complaint for lack of subject
matter jurisdiction under Fed. R. Civ. P. 12(b)(1) or, in the alternative, stay these
proceedings pending the outcome of arbitration.
II.

BACKGROUND
Plaintiffs are individuals who signed Franchise Agreements with Defendants.

Doc Popcorn is a Colorado corporation that offered and sold Doc Popcorn franchises to
franchisees. In its Complaint, Plaintiffs allege that Doc Popcorn uses a website to
market its franchises. (Compl. ¶¶ 1-11). “To be a franchisee of Doc Popcorn costs a
substantial amount of money. Plaintiffs and the other class members paid an initial
franchise fee of between $27,500.00 and $59,500.00, a ‘store creation fee’ of between
$3,500.00 and $15,000.00, and construction/equipment fees of up to $130,000.00.”
(Compl. ¶ 16). Plaintiffs allege that “[d]espite the representations made by Doc Popcorn
on its website and in its Franchise Disclosure Document and Agreement and the
substantial investment required and paid by franchisees, Doc Popcorn franchises are,
for the most part, unprofitable and struggle to stay in business.” (Compl. ¶ 17). “In Doc
Popcorn’s franchise model, Doc Popcorn is the only participant making money.”
(Compl. ¶ 17). Plaintiffs further allege that “Doc Popcorn’s financial model is
-2-

fundamentally flawed because it knowingly makes unwarranted and unrealistic
assumptions to calculate customer capture rates and, based on such calculations,
advises franchisees that outlets in malls and other locations with slow traffic are viable
locations.” (Compl. ¶ 17).
The Franchise Agreement, entered into by Doc Popcorn and each Plaintiff
individually, contained a section entitled “DISPUTE RESOLUTION,” which reads, in
relevant part:
… all controversies, disputes, or claims…arising out of or related to:
(i) this Agreement or any other agreement between the parties or
any provision of the agreements; (ii) the relationship of the parties
to this Agreement; (iii) the validity of this Agreement or any other
agreement between the parties or any provision of the agreements;
or (iv) any part of the System, shall first be submitted by the parties
to non-binding mediation before the Judicial Arbiter Group (“JAG”)
located in Denver, Colorado to be conducted at the offices of Doc
Popcorn or JAG in Denver, Colorado.
(ECF No. 6, Ex. A, ¶ 15.2). This “DISPUTE RESOLUTION” (hereinafter referred to as
“DR”) section of the Franchise Agreement also states that if mediation is ultimately
unsuccessful, the parties are required to pursue their claims pursuant to the following
arbitration clause:
…if any claim is not resolved by mediation, it shall be submitted for
final and binding arbitration to the Denver, Colorado office of JAG
on demand of either party. Such arbitration proceedings shall be
conducted in Denver, Colorado, and shall be heard by one
arbitrator in accordance with the then current Commercial
Arbitration Rules of JAG.
(ECF No. 6, Ex. A, ¶15.2). The DR section further provides that “[a]ll Claims between
Doc Popcorn and Franchisee shall be governed by the Federal Arbitration Act (“FAA”)
and no procedural arbitration issues are to be resolved pursuant to any state statutes,
-3-

regulations or common law.” (ECF No. 6, Ex. A, ¶15.5). “Except to the extent governed
by the FAA, ... this Agreement shall be interpreted under the laws of the state of
Colorado and any dispute between the parties shall be governed by ... the substantive
laws of the state of Colorado, which laws shall prevail if there is any conflict of law.”
(ECF No. 6, Ex. A, ¶15.5). Each Plaintiff agreed to engage in arbitration “on an
individual basis only.” (ECF No. 6, Ex. A, ¶15.4).
III.

ANALYSIS
Turning to the case at hand, in its motion, Doc Popcorn argues that this case

should be dismissed for lack of subject matter jurisdiction, or in the alternative, stayed
pending arbitration. Doc Popcorn claims the since both Plaintiffs individually entered
into a valid arbitration agreement that applies to the claims asserted in this case, the
matter should be dismissed or stayed pending arbitration. Plaintiffs disagree and
contend that the DR section in the Franchise Agreement is illusory, thus unenforceable.
As courts of limited jurisdiction, federal courts may only adjudicate cases that the
Constitution and Congress have granted them authority to hear. Todd Holding Co., Inc.
v. Super Value Stores, Inc., 744 F. Supp. 1025, 1026 (D. Colo. 1990). Thus, the court
must satisfy itself of subject matter jurisdiction before proceeding to the merits of a
claim. Gold v. Local 7 United Food and Commercial Workers Union, 159 F.3d 1307,
1309-10 (10th Cir. 1998). “[T]he burden is on the party claiming jurisdiction to show it
by a preponderance of the evidence.” Celli v. Shoell, 40 F.3d 324, 327 (10th Cir. 1994).
“Mere conclusory allegations of jurisdiction are not enough.” United States, ex rel.
Hafter v. Spectrum Emergency Care, Inc., 190 F.3d 1196, 1160 (10th Cir. 1999).
-4-

When a party moves to dismiss for lack of subject matter jurisdiction pursuant to
Fed. R. Civ. P. 12(b)(1), the attack can be either a facial attack to the allegations of the
complaint or a factual attack. Osborn v. United States, 918 F.2d 724, 729 n. 6 (8th Cir.
1990). Where there is a facial attack, the Court must look to the factual allegations of
the Complaint. Groundhog v. Keller, 442 F.2d 674, 677 (10th Cir. 1971). In a factual
attack, the court may consider matters outside the pleadings, and the motion is not
converted to a motion for summary judgment. Id.; Cizek v. United States, 953 F.2d
1232, 1233 (10th Cir. 1992). “The trial court may proceed as it never could under
12(b)(6) or Fed. R. Civ. P. 56.” Osborn v. United States, 918 F.2d 724, 730 (quoting
Mortenson v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891 (3rd Cir. 1977)).
“Because at issue in a factual 12(b)(1) motion is the trial court’s jurisdiction – its
very power to hear the case – there is substantial authority that the trial court is free to
weigh the evidence and satisfy itself as to the existence of its power to hear the case.”
Id. “Once the evidence is submitted, the district court must decide the jurisdictional
issue, not simply rule that there is or is not enough evidence to have a trial on the
issue.” Osborn, 918 F.2d at 730.
The FAA provides that “[a] written provision in any ... contract evidencing a
transaction involving commerce to settle by arbitration a controversy thereafter arising
out of such contract of transaction ... shall be valid, irrevocable, and enforceable ...”
9 U.S.C. § 2. Section 3 of the FAA “also provides for stays of proceedings in federal
district courts when an issue in the proceeding is referable to arbitration, § 3; and for
orders compelling arbitration when one party has failed, neglected, or refused to comply
-5-

with an arbitration agreement, § 4.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.
20, 25 (1991) (citing 9 U.S.C. §§ 3, 4).
Agreements to arbitrate are “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. § 4. A
motion to compel arbitration based on an arbitration agreement is governed by 9 U.S.C.
§ 4 which reads as follows:
The court shall hear the parties, and upon being satisfied
that the making of the agreement for arbitration or the failure
to comply therewith is not in issue, the court shall make an
order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. ... If the
making of the arbitration agreement or the failure, neglect, or
refusal to perform the same be in issue, the court shall
proceed summarily to the trial thereof.
9 U.S.C. § 4. Accordingly, the Supreme Court has held that when the parties to an
agreement dispute whether arbitration is required by that agreement, a federal court
may only resolve the issue when the parties dispute the making of the arbitration
agreement itself. Id.; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404
(1967). “[A] federal court may consider only issues relating to the making and
performance of the agreement to arbitrate.” Prima Paint Corp., 388 U.S. at 404.
This Court has previously held that when the dispute involves the formation of
the arbitration agreement itself, courts apply “a standard similar to that governing
motions for summary judgment.” Stein v. Burt-Kuni One, LLC, 396 F. Supp. 2d 1211,
1213 (D. Colo. 2005) (citing SmartText Corp. v. Interland, Inc., 296 F. Supp. 2d 1257,
1262 (D. Kan. 2003)). The defendant bears the initial burden of setting forth sufficient
evidence to demonstrate that an enforceable arbitration agreement exists. Id. Then,
-6-

the burden shifts to the plaintiff to show that there is a “genuine issue of material fact as
to the making of the agreement, using evidence comparable to that identified in Fed. R.
Civ. P. 56.” Id. If the plaintiff fails to meet his or her burden, then arbitration is
appropriate for all disputes covered by the arbitration agreement. However, if the
plaintiff establishes a genuine issue of material fact, a jury trial “on the existence of the
arbitration agreement is required.” Id.
An arbitration agreement is a contract, the interpretation of which is a matter of
law. Allen v. Pacheco, 71 P.3d 375, 378 (Colo. 2003). Here, pursuant to the Doc
Popcorn Franchise Agreement, I apply the laws of the state of Colorado. Turning to my
analysis, I must first review whether Doc Popcorn satisfied its initial burden by
submitting sufficient evidence to demonstrate that an enforceable arbitration agreement
exists. Doc Popcorn has submitted evidence in the form of the Franchise Agreements
executed by both Plaintiffs and the Franchise Disclosure Documents, which were
provided to both Plaintiffs. Given the legal standard set forth in both Stein and
SmartText Corp., I find that after reviewing the afore-mentioned evidence, Doc Popcorn
has met its initial burden of demonstrating an enforceable arbitration agreement. The
burden now shifts to the Plaintiffs to show that there is a genuine issue of material fact
as to the making of the agreement. Stein, 396 F. Supp. 2d at 1213.
Plaintiffs argue that the DR section of the Franchise Agreement is illusory, thus,
unenforceable because Doc Popcorn is not bound by its terms. The Tenth Circuit has
held that “an arbitration agreement allowing one party the unfettered right to alter the
arbitration agreement’s existence or its scope is illusory.” Dumais v. Am. Golf Corp.,
-7-

299 F.3d 1216, 1219 (10th Cir. 2002). Here, the applicable DR section includes a
provision entitled “Alternative Dispute Resolution,” which provides:
Without limiting any of the foregoing, Doc Popcorn reserves the right, at
any time, to create a dispute resolution program and related
specifications, standards, procedures and rules for the implementation
thereof to be administered by Doc Popcorn or its designees for the benefit
of all franchisees conducting business under the System. The standards,
specifications, procedures and rules for the dispute resolution program
shall be made part of the Library of Operating Manuals, and Franchisee
shall comply with all the standards, specifications, procedures and rules in
seeking resolution of any claims, controversies or disputes with or
involving Doc Popcorn or other franchisees, if applicable under the
program. If Doc Popcorn, in its sole discretion, makes the dispute
resolution program mandatory, Franchisee, Franchisee’s owners, and Doc
Popcorn agree to submit any claims, controversies or disputes arising out
of or regarding this Agreement (and Attachments, Exhibits and Riders) or
the relationship created by this Agreement for resolution in accordance
with the dispute resolution program prior to, or in lieu of, seeking
resolution of such claims, controversies or disputes in the manner
described in this Article 15 (but the provisions of Section 15.6 concerning
Doc Popcorn’s and Franchisee’s right to seek relief in a court for certain
actions including for injunctive or other extraordinary relief shall not be
superseded or affected by this Section) or if such claim, controversy or
dispute relates to another franchisee, Franchisee and Franchisee’s
owners agree to participate in the program and submit any such claims,
controversies or disputes in accordance with the program’s standards,
specifications, procedures and rules, prior to seeking resolution of such
claims by any other judicial or legally available means.
(ECF No. 6, Ex. A, ¶15.8). Plaintiffs construe the foregoing provision as giving Doc
Popcorn the right to create a dispute resolution program to replace the entire DR
section, in its sole discretion. (Resp. at 9). On the other hand, Doc Popcorn claims that
its discretion is limited in that “[u]nder section 3.12 of the Franchise Agreement, Doc
Popcorn can only modify the arbitration clause by changing its ‘Library of Operating
Manuals,’ accomplished by the requirement that it ‘notify [Plaintiffs] about changes in
writing by fax, mail, electronic mail or posting on Doc Popcorn’s website on the
-8-

Internet.” (Reply at 4).
While this is a close call, I am guided by the detailed analysis set forth in Vernon
v. Qwest Communications Intern., Inc., 925 F. Supp. 2d 1185 (2013), where this court
found that Qwest’s Subscriber Agreement, which provided, “Qwest is not obligated to
give you notice of changes to this Agreement before it becomes effective,” to be
enforceable and not illusory. Id. at 1193. After discussing the pertinent case law, the
district judge in Qwest reasoned that because the Subscriber Agreement clarified that
Qwest may “at any time, effective upon posting to www.qwest.com/legal or any written
notice to you, including email ... modify the Service and/or any of the terms and
conditions of this Agreement....,” this language required enough notice to render the
agreement “not fatally illusory.” Id. at 1193-94. Similarly, here, I find that the phrase set
forth in Paragraph 15.8 of the DR provision, “[t]he standards, specifications, procedures
and rules for the dispute resolution program shall be made part of the Library of
Operating Manuals, and Franchisee shall comply with all the standards, specifications,
procedures and rules in seeking resolution of any claims, controversies or disputes with
or involving Doc Popcorn or other franchisees” limits Doc Popcorn’s ability to modify the
DR section without notice. (ECF No. 6, Ex. A, ¶15.8). Thus, I reject Plaintiffs’ argument
that the DR section is illusory. See Iberia Credit Bureau, Inc. v. Cingular Wireless LLC,
379 F.3d 159, 173–74 (5th Cir. 2004) (declining to follow Dumais where the contracts in
question gave the defendant companies the right to change the terms upon notice to the
customer of the proposed changes); Hancock v. American Telephone and Telegraph
Company, Inc., 2011 WL 3626785, at *6–7 (W.D. Okla. 2011) (rejecting a challenge to
-9-

an arbitration provision as illusory after noting that the service provider was required to
give customers advance notice of any material changes and that customers could reject
any proposed change by terminating their service); Lumuenemo v. Citigroup, Inc., 2009
WL 371901, at *5 (D.Colo. 2009) (holding that an arbitration agreement was not illusory
where it gave the drafting party the right to modify the agreement under certain
restrictions).
Accordingly, I find that Plaintiffs have failed to demonstrate a triable issue of fact
as to the validity of the DR provision. Thus, I find that an enforceable arbitration
agreement exists between Plaintiffs and Doc Popcorn. This matter is stayed pending
arbitration.
IV.

CONCLUSION
Based on the foregoing, it is
ORDERED that Defendants’ Motion to Dismiss or, in the Alternative, to Stay the

Proceeding and Compel Arbitration (ECF No. 6), is DENIED IN PART AND GRANTED
IN PART. The motion is denied to the extent it requests dismissal of this action. The
motion is granted to the extent it requests that this matter be stayed pending arbitration.
It is
FURTHER ORDERED that pursuant to 9 U.S.C. §§ 3-4, the parties shall proceed
with arbitration in accordance with the Franchise Agreement. This Court shall retain
jurisdiction until arbitration has been completed. It is
FURTHER ORDERED that since the length of the arbitration process is
uncertain, I find that this case should be administratively closed pursuant to
-10-

D.C.COLO.LCivR 41.2 with leave to be reopened for good cause shown. If no action is
taken to reopen this case before September 18, 2016, the case will be dismissed
without prejudice without any further notice to either party.
Dated: September 29, 2015
BY THE COURT:

s/ Wiley Y. Daniel
Wiley Y. Daniel
Senior United States District Judge

-11-