Doctor's Associates, Inc. v. Edison Subs, LLC

Filing 20

RULING denying 2 Motion for Permanent Injunction. Signed by Judge Janet C. Hall on 1/3/2014. (Lewis, D)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
DOCTOR‟S ASSOCIATES INC.,
Plaintiff,
v.
EDISON SUBS, LLC,
Defendant.

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CIVIL ACTION NO.
3:13-CV-839 (JCH)

JANUARY 3, 2013

RULING RE: PLAINTIFF’S MOTION FOR INJUNCTION (Doc. No. 2)
Pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 4, plaintiff Doctor‟s
Associates Inc. (hereinafter “DAI” or “Subway”) brings this action against defendant
Edison Subs, LLC (“Edison”) to compel arbitration in connection with a lawsuit brought
in New Jersey state court (the “New Jersey Lawsuit”). DAI moves to enjoin Edison from
prosecuting its claims against DAI, including claims asserted against DAI in the New
Jersey Lawsuit, except through arbitral proceedings in Connecticut.
For the reasons set forth below, DAI‟s Motion (Doc. No. 2) is DENIED.
I.

FACTUAL BACKGROUND1
A.

Franchise Agreement

The written franchise agreement underlying this action (the “Franchise
Agreement”) is for a Subway restaurant located in Edison, New Jersey. See Pl.‟s Pet.
to Compel Arbitration (“Pl.‟s Pet.”) (Doc. No. 1) ¶ 7. The Franchise Agreement requires
any claim arising out of it to be resolved by arbitral proceedings in Connecticut. See
Pl.‟s Ex. B to Pl.‟s Pet. (“Franchise Agreement”) (Doc. No. 1-3) ¶ 10.a & b. A franchisee

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Neither party requested a hearing regarding this Motion, and the court did not hold such a
hearing because there were no factual disputes. See Maryland Cas. Co. v. Realty Advisory Bd. on Labor
Relations, 107 F.3d 979, 984 (2d Cir. 1997); Doctor's Associates, Inc. v. Stuart, 11 F. Supp. 2d 221, 224
n.3 (D. Conn. 1998).

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who brings suit in court in violation of the Franchise Agreement agrees to pay DAI‟s
costs and attorney‟s fees. Id. ¶ 10.h.
In addition, the Franchise Agreement provides that a franchisee “may only seek
damages or any remedy under law or equity for any arbitrable claim against [DAI] or [its]
successors or assigns,” and that DAI‟s “Affiliates, shareholders, directors, employees,
agents and representatives, and their affiliates, shall not be liable nor named as a party
in any arbitration or litigated proceeding” brought by the franchisee for claims arising out
of or relating to the Franchise Agreement. Id. ¶ 10.d. A franchisee who violates this
clause of the Franchise Agreement agrees to reimburse the reasonable costs of
litigation and/or arbitration incurred by DAI as a result. Id.
The Franchise Agreement was signed by Aliya Patel. Id. at 15. Edison did not
sign—and, indeed, denies having ever received a copy of—the Franchise Agreement.
See Def.‟s Opp‟n (Doc. No. 16) at 3.
B.

New Jersey Lawsuit

In March 2013, Edison instituted an action in New Jersey state court against DAI,
Patel, and Subway Real Estate Corporation (“SREC”), a DAI affiliate. See Ex. A to Pl.‟s
Pet. (“State Compl.”) (Doc. No. 1-2); Pl.‟s Pet. ¶ 13. Edison‟s State Complaint includes
claims against SREC for breach of contract and against DAI for breach of contract,
fraud, violations of the New Jersey Consumer Fraud Act (“NJCFA”), negligent
misrepresentation, and violations of the covenant of good faith and fair dealing. See
State Compl. ¶¶ 30-35, 56-95.
In the New Jersey Lawsuit, Edison alleges that it entered into “an oral franchise
agreement” with DAI, whereby Edison would pay the costs of outfitting the premises as
well as franchise and transfer fees to Patel in exchange for “all of the benefits of
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ownership of the Subway franchise business.” Id. ¶¶ 31-32. Edison further alleges that
Patel, both individually and on behalf of DAI, fraudulently induced Edison to enter into
this oral franchise agreement with DAI through a series of material misrepresentations
and omissions, id. ¶¶ 65-71; that Edison began to operate its Subway franchise in
October 2009, id. ¶ 14; and that Patel and DAI breached the terms of their oral
franchise agreement with Edison by, inter alia, involuntarily ejecting Edison from the
premises in December 2011, id. ¶¶ 26, 33.
II.

DISCUSSION
Section 2 of the FAA “makes written arbitration agreements „valid, irrevocable,

and enforceable, save upon such grounds as exist at law or in equity for the revocation
of a contract.‟” Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 629-30 (2009) (quoting 9
U.S.C. § 2). Courts in this Circuit follow a two-part test, asking whether the parties are
bound by a valid arbitration agreement and, if so, whether the instant dispute falls within
the scope of the arbitration agreement. In re Am. Exp. Fin. Advisors Sec. Litig., 672
F.3d 113, 128 (2d Cir. 2011). Because the record before the court does not support the
conclusion that Edison is bound by DAI‟s Franchise Agreement with Patel, the court
need not reach whether Edison‟s claims fall within the scope of arbitrable claims
covered by that agreement.
Passage of the FAA was motivated by Congress‟ desire to enforce consensual
agreements to resolve disputes by arbitration. See Volt Info. Sciences, Inc. v. Bd. of
Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989) (citing Dean Witter
Reynolds Inc. v. Byrd, 470 U.S. 213, 220 (1985)). Hence, “the FAA does not require
parties to arbitrate when they have not agreed to do so.” Id.; see also In re Am. Exp.
Fin. Advisors Sec. Litig., 672 F.3d 113, 127 (2d Cir. 2011) (“Despite the liberal federal
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policy favoring arbitration agreements, arbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not agreed so to
submit.” (citations and internal quotations marks omitted)); Smith/Enron Cogeneration
Ltd. P'ship, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 97 (2d Cir. 1999) (“[A]
court should be wary of imposing a contractual obligation to arbitrate on a noncontracting party.”).
The fact that Edison did not sign the Franchise Agreement is undisputed. As
both parties acknowledge, however, Edison may be bound by the Franchise
Agreement, including its dispute resolution provisions, under certain common law
principles of contract and agency. See Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64
F.3d 773, 776 (2d Cir. 1995). The Second Circuit recognizes, in particular, five theories
under which a signatory, like DAI, may compel a nonsignatory, like Edison, to arbitrate:
(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego;
and (5) estoppel. Id.; see also Denney v. BDO Seidman, LLP, 412 F.3d 58, 71 (2d Cir,
2005). Only the last of these—estoppel—is potentially relevant here.
“Under the estoppel theory, a company knowingly exploiting an agreement with
an arbitration clause can be estopped from avoiding arbitration despite having never
signed the agreement.” MAG Portfolio Consultant, GMBH v. Merlin Biomed Group LLC,
268 F.3d 58, 61 (2d Cir. 2001) (citation, alterations, and internal quotation marks
omitted). This Circuit distinguishes between cases in which a nonsignatory to the
agreement seeks to compel a signatory and cases in which the inverse is true. See
Thomson-CSF, 64 F.3d at 778-79. Where, as here, a signatory seeks to compel a

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nonsignatory, the nonsignatory must have directly benefitted from the agreement to
trigger estoppel. Id. at 778.
Under MAG, a nonsignatory must, therefore, have “knowingly accepted the
benefits” of the unsigned agreement, and the benefits must be direct. MAG, 268 F.3d at
61 (quoting Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064
(2d Cir. 1993)). Absent notice or knowledge of the agreement and direct benefits to the
nonsignatory, “a signatory may not estop a nonsignatory from avoiding arbitration
regardless of how closely affiliated that nonsignatory is with another signing party.” Id.
at 62; see also Fresh Express Inc. v. Sardilli Produce & Dairy Co., Inc., No. 3:09-CV1420 (SRU), 2010 WL 3724543, at *3 (D. Conn. Sept. 15, 2010) (“In order for a
signatory to compel a non-signatory to participate in arbitration as a matter of estoppel,
the non-signatory must have „knowingly exploit[ed] the agreement‟ by, firstly, receiving
notice of the agreement that contains the arbitration provision and, secondly, knowingly
accepting that agreement's benefits.” (citing Deloitte, 9 F.3d at 1064)).
As applied by courts in this Circuit, the doctrine of direct benefit estoppel is a
narrow one. See MAG, 268 F.3d at 61-62. Such benefits must flow directly from the
written agreement. See id. at 61. Indirect benefits—that is, “where the nonsignatory
exploits the contractual relation of parties to an agreement, but does not exploit (and
thereby assume) the agreement itself”—are not a basis to estop the nonsignatory from
avoiding arbitration. Id. Thus, the fact that a nonsignatory is merely a signatory‟s
successor or corporate parent need not trigger estoppel. Id. at 61-63; Thomson-CSF,
64 F.3d at 778-80. However, a nonsignatory can be estopped from refusing to arbitrate
if it had notice of the unsigned agreement‟s terms and, for example, used a trade name

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or received significantly lower insurances rates pursuant to that agreement. See, e.g.,
Deloitte, 9 F.3d at 1064; American Bureau of Shipping v. Tencara Shipyard S.P.A., 170
F.3d 349, 353 (2d Cir. 1999). The doctrine‟s purpose is to prevent a nonsignatory from
“cherry-picking” the terms that it likes and “ignoring other provisions that don't benefit it
or that it would prefer not to be governed by (such as an arbitration clause).” Invista
S.A.R.L. v. Rhodia, S.A., 625 F.3d 75, 85 (3d Cir. 2010) (citing Tencara, 170 F.3d at
353).
DAI argues that Edison has directly benefited from the Franchise Agreement
and, therefore, should be estopped from avoiding the arbitration clause. See Pl.‟s Mem.
at 6-8; Pl.‟s Reply (Doc. No. 17) at 2-7. Edison argues that the New Jersey Lawsuit
essentially sounds in fraud, not contract, and in no way asserts or relies on the
existence of the Franchise Agreement signed by Patel. See Def.‟s Opp‟n at 8-9.
In a prior case before this court to which both parties refer, Doctor‟s Associates
Inc. v. Zuchowski, No. 3:12-CV-195 (JCH), DAI sought to compel nonsignatories to
arbitrate similar claims brought in state court. The court held that the Zuchowskis were
not bound to arbitrate because they were only prospective franchisees, whose claims
were premised on the failure of an expected business relationship to materialize. See
id., Doc. No. 24, at 15-18.
In the present case, however, Edison indisputably held itself out to be a
franchisee. See State Compl. ¶ 14 (“Edison . . . began operation at the leased
premises as a Subway franchisee on October 16, 2009.”). Edison also indisputably
alleges the receipt of benefits—including a comprehensive Subway Operations Manual
and the right to operate a Subway franchise using DAI‟s vendors, marks, and

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methods—in exchange for payment of certain franchise fees. See id. ¶¶ 10, 15, 77, 8082. Furthermore, although some of Edison‟s claims in the New Jersey Lawsuit rest on
conduct which preceded the alleged franchise relationship between Edison and DAI,
see id. ¶¶ 64-91 (Counts Six through Eight), others clearly concern conduct subsequent
to Edison‟s alleged ownership and operation of a Subway franchise starting in October
2009, see id. ¶¶ 30-63 (Counts One through Five).
While the present case is thus distinguishable from Zuchowski, Edison, like the
Zuchowskis, cannot be compelled to arbitrate because there is still no evidence in the
record to support a finding that Edison “knowingly exploit[ed]” the Franchise Agreement
containing the arbitration clause. MAG, 268 F.3d at 61 (emphasis added); see also
Hirsch v. Citibank, N.A., 13-1172-CV, 2013 WL 5716397 (2d Cir. Oct. 22, 2013) (“Mere
acceptance of a benefit can constitute assent, but only where the „offeree makes a
decision to take the benefit with knowledge [actual or constructive] of the terms of the
offer.‟” (quoting Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004)).
It is true that Edison attached to its State Complaint a copy of the Franchise
Agreement. See State Compl. ¶ 7; Pl.‟s Reply at 6. However, DAI nowhere alleges or
offers evidence that Edison, prior to allegedly receiving any benefits as a franchisee,
had received a copy of the Franchise Agreement. Edison explicitly represents that, on
the contrary, it did not receive the Franchise Agreement. See Def.‟s Opp‟n at 3.
Edison‟s New Jersey Lawsuit is based on an alleged oral franchise agreement entered
into by itself, Patel, and DAI, and a fair reading of the State Complaint is that the
benefits Edison alleges to have received were received pursuant to that alleged oral

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franchise agreement. See Pl.‟s Reply (citing State Compl. ¶¶ 10, 13-15, 26, 31-33, 6568, 70, 77-83).
DAI also nowhere alleges or offers evidence that Edison otherwise had notice of
the terms of the written Franchise Agreement signed by Patel. Indeed, far from being
rooted in actual or constructive knowledge of such terms, Edison‟s claims against Patel
and DAI are largely premised on Patel‟s and DAI‟s alleged failures to disclose material
information. See State Compl. ¶¶ 66-67, 70-71, 78, 89-91. Hence, even assuming the
benefits claimed by Edison as a franchise could be construed as direct, on the current
record, the court cannot find that they were “knowingly accepted.” MAG, 268 F.3d at 61
(emphasis added).
DAI argues, in effect, that Subway franchise agreements always require
arbitration—regardless of whether transferred from an existing to a new franchisee or
entered into de novo with another party—and that a party claiming to be a franchisee
should, therefore, necessarily be compelled to arbitrate. See Pl.‟s Reply at 6. That
argument is unavailing in the Second Circuit, however, absent a signed agreement
containing an arbitration provision or proof that the case falls within one of the common
law exceptions recognized by this Circuit. See Thomson-CSF, 64 F.3d at 776.2
Because DAI has yet to establish that Edison knowingly exploited the Franchise

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Not only do the cases relied on by DAI all come from outside this Circuit; on the court‟s reading,
they are not to the contrary of this Circuit‟s requirement of knowing exploitation to warrant estopping a
nonsignatory. See Pl.‟s Reply at 6 (citing Meena Enterprises, Inc. v. Mail Boxes Etc., Inc., No. CIV. A.
DKC 12-1360, 2012 WL 4863695 (D. Md. Oct. I I , 2012); Seney v. Rent-a-Center, Inc., 909 F. Supp. 2d
444 (D. Md. 2012); Mac Tools v. Diaz, No. 2:1 l-cv-940, 2012 WL 1409395 (S.D. Ohio Apr. 23, 2012);
Lemiis v. CMH Homes, Inc., 798 F. Supp. 2d 853 (S.D. Tex. 2011). In Meena Enterprises, the
nonsignatories, in fact, “acknowledged that they had received copies of the Franchise Agreements and
were familiar with their terms and conditions.” 2012 WL 4863695, at *1.

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Agreement, Edison cannot be estopped from refusing to arbitrate its claims in the New
Jersey Lawsuit.
III.

CONCLUSION
For the reasons set forth above, the court DENIES plaintiff‟s Motion for Injunction

(Doc. No. 2).
SO ORDERED.
Dated at New Haven, Connecticut this 3rd day of January, 2014.

/s/ Janet C. Hall
Janet C. Hall
United States District Judge

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