Bhakta et al v. Choice Hotels International, Inc.

Filing 11

ORDER granting 4 Motion to Stay Case and compel arbitration. Signed by Magistrate Judge James P. O'Hara on 1/10/2017. (ah)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

DHARMESH BHAKTA, et al.,

)
)
Plaintiffs,
)
)
v.
)
)
CHOICE HOTELS INTERNATIONAL, INC., )
)
Defendant.
)

Case No. 16-1431-EFM

ORDER
Plaintiffs are owners and operators of a Comfort Suites hotel who bring suit against
defendant Choice Hotels International, Inc., the franchisor of the Comfort Suites brand.
Plaintiffs allege defendant negligently failed to inform them that one of defendant’s preapproved vendors had lost that preferred status, resulting in financial injuries to plaintiffs.
Defendant has filed a motion to stay the case and compel arbitration under the parties’
franchise agreement (ECF No. 4). Because plaintiffs’ claim is within the scope of the
arbitration provision in the agreement, the court grants defendant’s motion and stays the case
pending arbitration.
Plaintiffs allege the following facts in their complaint. In 2012, plaintiffs entered into
a franchise agreement with defendant to build and operate a Comfort Suites hotel in Dodge

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City, Kansas.1 The franchise agreement referenced and incorporated “rules and regulations”
regarding defendant’s standards and requirements for constructing, equipping, and furnishing
the hotel.2 Defendant encouraged franchisees to purchase flooring, furniture, fixtures, linens,
and related items from a list of “qualified vendors” posted on defendant’s website.3 Plaintiffs
contracted with one such qualified vendor—RMP Designs, LLC—to purchase various
interior products necessary to comply with the design standards set by defendant.4 After
plaintiffs entered the contract with RMP, defendant terminated RMP’s “qualified vendor”
status.5 But defendant did not notify plaintiffs of the change (or otherwise publish the change
to its franchisees), and plaintiffs continued to work with RMP.6 After plaintiffs made final
payment to RMP, but before RMP delivered contracted-for products, RMP ceased operations
and filed bankruptcy.7 Plaintiffs were forced to purchase the products from other vendors,
and the opening of the hotel was delayed by six months.8

1

Complaint, ECF No. 1-2 at 3.

2

Id.; see also, Franchise Agreement, ECF No. 1-3 at ¶¶ 1(k), 5(a), 6(a).

3

Complaint, ECF No. 1-2 at 3.

4

Id. at 4.

5

Id.

6

Id. at 5.

7

Id.

8

Id. at 6.

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Plaintiffs filed this suit against defendant in the District Court of Ford County,
Kansas, alleging defendant had a duty to notify plaintiffs and other franchisees about the
termination of RMP as a qualified vendor. Plaintiffs state that had they been notified of the
termination, they “never would have completed the contract” with RMP.9 Plaintiffs seek
damages for their lost payment to RMP and for their financial losses resulting from the
delayed hotel opening.
Defendant removed the case to this court and immediately filed a motion to stay the
case and compel arbitration. Defendant contends arbitration is mandated by paragraph 21
of the franchise agreement which, in relevant part, provides for arbitration of disputes as
follows:
Arbitration. . . . [A]ny controversy or claim arising out of or relating to this
Agreement or any other related agreements, or the breach of this Agreement
or any other related agreements, . . . will be sent to final and binding
arbitration.10
Plaintiffs contend this arbitration provision is “limited to agreements between the parties”
and does not encompass plaintiffs’ “wholly independent tort claim” alleged in this case.11
Respectfully, the court disagrees.

9

Id. at 5.

10

Franchise Agreement, ECF No. 1-3 at ¶ 21 (emphasis added).

11

ECF No. 9 at 5.

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“Under the Federal Arbitration Act (‘FAA’),12 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.’”13 Thus, federal policy favors arbitration agreements and
requires the court to “rigorously enforce” them.14 On a motion to compel arbitration under
the FAA, the court should compel arbitration if it finds (1) a valid arbitration agreement
exists between the parties, and (2) the dispute before it falls within the scope of the
agreement.15
In this case, plaintiffs don’t dispute the franchise agreement contains a valid
agreement to arbitrate. Instead, plaintiffs argue that their legal claim against defendant falls
outside the scope of the arbitration provision.16 Where the existence of a valid arbitration

12

9 U.S.C. §§ 1–3.

13

In re Cox Enters., Inc. Set-top Cable Television Box Antitrust Litig., 790 F.3d 1112,
1116 (10th Cir. 2015) (quoting 9 U.S.C. § 2), cert. denied sub nom. Cox Commc’ns, Inc. v.
Healy, 136 S. Ct. 801 (2016).
14

Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987); see also In re
Cox, 790 F.3d at 1116 (quoting Hill v. Ricoh Ams. Corp., 603 F.3d 766, 777 (10th Cir.
2010)).
15

9 U.S.C. §§ 2–3. The parties agree that, in the instant circumstances, the question
of whether the arbitration provision applies is one for the court. See ECF No. 5 at 3–6, ECF
No. 9 at 3.
16

ECF No. 9 at 1 (“[T]he subject of this action—Plaintiffs’ negligence claim—is not
covered by the arbitration provision in the Franchise Agreement between the parties.”).
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agreement is undisputed, courts apply a strong presumption in favor of arbitration.17 The
court must resolve “any ‘doubts concerning the scope of arbitrable issues . . . in favor of
arbitration.’”18 The presumption “applies with even greater force when . . . a broad
arbitration clause is at issue.”19 The clause at issue here—requiring arbitration of “any
controversy or claim arising out of or relating to” the franchise agreement or related
agreement20—is a “broad” arbitration clause as the Tenth Circuit defines that term.21 Thus,
the court may find the presumption overcome only if “it may be said with positive assurance
that the arbitration clause is not susceptible of an interpretation that covers the asserted
dispute.”22

17

ARW Expl. Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995); G.W. Van Keppel
Co. v. Dobbs Imps., LLC, No. 14-2236-JAR, 2014 WL 5302974, at *3 (D. Kan. Oct. 15,
2014).
18

In re Cox, 790 F.3d at 1116 (quoting Nat’l Am. Ins. Co. v. SCOR Reinsurance Co.,
362 F.3d 1288, 1290 (10th Cir. 2004)). The court disagrees with plaintiffs’ assertion that the
presumption of arbitrability only applies when the claim implicates issues of contract
construction.
19

P & P Indus., Inc. v. Sutter Corp., 179 F.3d 861, 871 (10th Cir. 1999) (quoting
Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 121 (2d Cir.1991)).
20

Franchise Agreement, ECF No. 1-3 at ¶ 21.

21

See P & P Indus., 179 F.3d at 871 (finding a “broad” arbitration clause where the
parties agreed to arbitrate “[a]ny controversy, claim, or breach arising out of or relating to
this Agreement”) (emphasis in original); see also Brown v. Coleman Co., 220 F.3d 1180,
1184 (10th Cir. 2000) (finding an arbitration clause governing “all disputes or controversies
arising under or in connection with this Agreement” to be “the very definition of a broad
arbitration clause”).
22

ARW Expl., 45 F.3d at 1462.

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In plaintiffs’ words, they’ve alleged a “negligence claim . . . that Defendant breached
an independent duty owed to them based on Defendant’s qualification and subsequent
dequalification of [RMP] as a ‘qualified vendor.’”23 Plaintiffs contend defendant’s duty to
notify them of the change in RMP’s status didn’t arise under the franchise agreement, but
instead arose because defendant “induced plaintiffs into a contract with [RMP].”24 Plaintiffs
argue that their dispute is independent of the franchise agreement and therefore not subject
to the arbitration provision therein.
Although plaintiffs arguably may be correct that defendant’s alleged duty to notify
them of the removal of a vendor from defendant’s pre-approved list does not “arise out of”
the franchise agreement (a question the court need not decide), this argument does not
address the broader provision of the arbitration clause requiring arbitration for any claim
even “relating to” the franchise agreement or a related agreement. Plaintiffs’ claim is
premised on their assertion that they contracted with RMP because the “rules and
regulations” explicitly incorporated in the franchise agreement set defendant’s requirements
for equipping and furnishing the hotel, and encouraged franchisees to work with preapproved vendors to meet these requirements.25 The franchise agreement specifically
23

ECF No. 9 at 1–3.

24

Id. at 4.

25

Franchise Agreement, ECF No. 1-3 at ¶1(k) (“‘Rules and Regulations’ means our
then-current published rules and regulations, as updated and/or modified by us in our
discretion, from time to time (and any supplements) and brand guidelines (including any
manuals or policies that we may publish) containing, among other things, our standards and
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required plaintiffs to construct and furnish the hotel “according to the Agreement and the
Rules and Regulations.”26 The rules and regulations, according to plaintiffs,27 “required that
plaintiffs either use ‘qualified vendors’” to meet defendant’s specifications or obtain preapproval of vendors not on the “qualified vendors” list.28 The court has little trouble
concluding that plaintiffs’ negligence claim arising from defendant’s un-noted change to the
“qualified vendors” list “relates to” plaintiffs’ obligations under the franchise agreement.29
The court disagrees with plaintiffs’ assertion that to reach this conclusion the court
must “read the arbitration clause to require the parties to arbitrate any dispute arising between
them,” such as an assault claim wholly independent from the franchise agreement.30 Rather,
the court is simply giving effect to the parties’ intent that they arbitrate claims “relating to”
agreements between them. The court need not imagine if an assault claim could fall into this

requirements for constructing, equipping, furnishing, supplying, operating, maintaining and
marketing the Hotel.”), ¶6(a) (“You will during the Term . . . Comply with the requirements
of this Agreement and the Rules and Regulations, which you acknowledge we may modify
and/or update in our sole discretion from time to time.”).
26

Id. at ¶ 6(b).

27

Neither party has supplied the court with a copy of the rules and regulations.

28

Complaint, ECF No. 1-2 at ¶ 8–9.

29

See P & P Indus., 179 F.3d at 871 (“[A]ll claims with ‘a significant relationship to
the [Agreement,] regardless of the label attached’ to them, arise out of and are related to the
Agreement.”) (quoting Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d
88, 93 (4th Cir. 1996)).
30

ECF No. 9 at 6 (emphasis added) (citing Coors Brewing Co. v. Molson Breweries,
51 F.3d 1511, 1516 (10th Cir. 1995)).
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category because the actual claim asserted in this case—a tort claim rooted in the franchise
agreement and its incorporated rules and regulations—does. In a case construing the broad
arbitration language at issue here, i.e., “arising out of or relating to this Agreement,” the
Tenth Circuit ruled that “tort-based claims” are arbitrable if they “arise out of, or relate to,
the Agreement.”31 Such is the situation here.
Applying the presumption of arbitrability, the court cannot say “with positive
assurance that the arbitration clause is not susceptible of an interpretation that covers the
asserted dispute.”32 Thus, the court finds in favor of arbitration and grants defendant’s
motion. As required by the FAA, the court stays this action pending the arbitration.33
IT IS THEREFORE ORDERED that defendant’s motion to compel arbitration and
stay proceedings is granted, and all proceedings in this matter shall be STAYED pending
arbitration of the claim presently asserted by plaintiffs.
IT IS FURTHER ORDERED that this court shall retain jurisdiction to review, modify,
or vacate any arbitration awards, should any party choose to seek such action as permitted
by the FAA, and shall retain jurisdiction to dismiss this lawsuit if plaintiffs fail to initiate
arbitration within 30 days of the entry of this order.

31

P & P Indus., 179 F.3d at 871.

32

ARW Expl., 45 F.3d at 1462.

33

See 9 U.S.C. § 3.

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IT IS FURTHER ORDERED that the parties shall file a joint status report, not less
than once every six months (to begin six months from the date of this order), regarding the
progress of the arbitration.
Dated January 10, 2017, at Kansas City, Kansas.
s/ James P. O’Hara
James P. O’Hara
U.S. Magistrate Judge

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