Torres et al v. Simpatico, Inc. et al
MEMORANDUM AND ORDER. (see order for details) IT IS HEREBY ORDERED that defendants' motion to compel individual arbitration and to dismiss without prejudice or alternatively to stay this action [# 6 ] is GRANTED, and plaintiffs must submit the ir claims to individual arbitration. IT IS FURTHER ORDERED that the plaintiffs' claims will be dismissed without prejudice on this day in a separate Order of Dismissal. IT IS FURTHER ORDERED that defendants' motion to amend/correct their motion to dismiss case [# 38 ] is granted. IT IS FURTHER ORDERED that defendants' motion to dismiss case with prejudice [# 7 ] is denied. Signed by District Judge Catherine D. Perry on 02/03/2014. (CBL)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
JOSE TORRES, et al.,
SIMPATICO, INC., et al.,
Case No. 4:12CV2373 CDP
MEMORANDUM AND ORDER
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.
Stratus Franchising LLC1 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 franchises2 that bring this RICO class action
against over seventy individuals and entities associated with the Stratus System.
At the outset of this case, Stratus Franchising LLC was owned by parent company Stratus
Building Solutions, Inc. However, as of April 17, 2008, SBS was administratively dissolved,
and counsel for defendants asserts that Stratus Franchising now owns the assets of SBS.
Accordingly, I will grant the defendants‟ motion to amend their motion to dismiss and eliminate,
by interlineation, all references to Stratus Building Solutions, Inc., in favor of Stratus
Jose Torres operated a unit franchise in Missouri and contracted with Master Franchisor
Simpatico, which operates in Missouri and which, together with Stratus Franchising LLC,
conducts business under the name Stratus Business Solutions. Guadalupe Clemente and Luz
Walker each operated a unit franchise in Arizona and contracted with Master Franchisor
PHSCCH SBS, LLC, which does business as Stratus Building Solutions of Metro Phoenix.
Christina Beiter operated a unit franchise of Impressive Cleaning Solutions, which does business
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
as Stratus Building Solutions of Upstate New York. Antonio Carmona operated a unit franchise
of Stratus Building Solutions of Houston.
As stated in footnote 2, above, two plaintiffs contracted with the same Master Franchiser.
Additionally, the complaint alleges that Christina Beiter franchised with Impressive Cleaning
Solutions d/b/a Stratus Business Solutions of Upstate New York. However, the only “Impressive
Cleaning Solutions” included as a defendant was one doing business as Stratus of Buffalo, and
that defendant was dismissed for failure to provide service.
These are: Mark & Jayson Bashforth d/b/a Stratus Building Solutions of San Diego; Colorado
Cleaning Partners Inc. d/b/a Stratus Building Solutions of Southern Colorado; Channen Smith
d/b/a Stratus of Denver; Kukamaehu Inc. d/b/a Stratus of Honolulu; Iowa Building Solutions
LLC d/b/a Stratus of Iowa; Stratus Building Solutions of Maryland; Stratus Building Solutions of
Nebraska; Sunshine Investment Group Inc. d/b/a Stratus of Northern New Jersey; Stratus
Building Solutions of Long Island Inc.; MARRS LLC d/b/a Stratus Building Solutions of
Cincinnati; HolBon Holdings LLC d/b/a Stratus Building Solutions of Philadelphia; Ralph
Sizemore d/b/a Stratus of Upstate Carolina; D&E Holdings LLC d/b/a Stratus Building Solutions
of Nashville; TJM Associates Inc. d/b/a Stratus of Northern Texas; Greg Fishman d/b/a Stratus
of Austin; Tom Baker & Dawn Caudill d/b/a Stratus of Dallas; Stratus Building Solutions of
Northern Utah; and Syddar Inc. d/b/a Stratus Building Solutions of Salt Lake.
Masters are individuals who owned and/or operated Master Franchises. They include:
Channen Smith, Mark Bashforth, Jayson Bashforth, James Van Dyke, Aaron Kahaloa, Leonard
Fazio, Gater Greenwill, Mike Napolitano, Tom Grassi, Tim Tilton, Mark Stocker, Tom Weiss,
Bonnie Coleman, John Coleman, Ralph Sizemore, Ed Lease, David Smith, Jacquelyn Mosley,
Thomas Mosley, Stephen Sheriff, Greg Fisherman, Tom Baker, Dawn Caudill, Lori Sealy, and
Representatives include those individual defendants who were employees or agents of a Master
Franchisor: Lupita Gallego, Ed Nunez, Gonzalo Moreno, Marvin Ashton, Joshua Fletcher, Mert
Smith, Kate Gantier, Michael Fazio, Amy Lundstrum, Luis Morales, Anthony Napolitano,
Carmen Garcia, David Farrell, Marisa Lather, Alen Suljanovic, Chelley Baack, Jim Morrison,
Shawn Vick, Ariss Rogel, Don Gartner, Terry Behrle, Eleazar Quintana, William Ragsdale,
Lucero Flores, Emily Thomas, and Shea Sealy.
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.
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. Mortensen 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
The unit franchise agreement was entered between each plaintiff and his or
her respective master franchisor and states, in relevant part,
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
this Agreement or any other agreement between
you and us;
our relationship with you; [or]
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. . . .
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
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.
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, 131 S. Ct. 1740, 1746 (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
The parties do not address whether the law of states other than Missouri should be applied here.
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
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., 133 S. Ct. 2304, 2312 (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 prohibitivly expensive “bears the burden of showing the likelihood of such
costs.” Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (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 adopted, requires a claimant seeking under $10,000 in
damages to pay a filing fee of $775. Plaintiffs estimate that each case will require
a three-day hearing in addition to whatever other time an arbitrator might require to
decide the case. Plaintiffs also provide the average daily fee charged by arbitrators
in five jurisdictions: Chicago ($1800), Colorado ($1442), Ohio ($1468) and
Indiana ($1308). I find that plaintiffs have not carried their burden of showing,
through specific evidence, that the arbitration agreements foreclose pursuit of any
remedy. While plaintiffs do provide some evidence of what an arbitrator might
charge in the Midwest, they provide no evidence as to costs in New York, Texas,
or Arizona. Moreover, I agree with defendants that the average daily fee does not
necessarily reflect the likely cost to arbitrate as there necessarily will be some AAA
approved arbitrators whose costs are below average. Even if those fees reflected
the likely costs to arbitrate, plaintiffs provide no specific evidence that they are
unable to pay the arbitration costs.8 Finally, the arbitration agreement grants the
Counsel for plaintiff provided an affidavit stating that “[b]ased upon my personal knowledge of
the financial circumstances of the Plaintiffs and hundreds of putative class members, I am of the
opinion that none of them can afford the costs required to adequately proceed with an individual
claim for arbitration.” This statement is void of any specifics with which a court could
adequately determine a plaintiff‟s actual financial condition. Moreover, I have serious doubts as
arbitrator the discretion to allocate costs and expenses amongst the parties. I
cannot find that the arbitration clause is unconscionable on this basis. See Kenner
v. Career Educ. Corp., No. 4:11CV00997 AGF, 2011 WL 5966922 (E.D. Mo.
Nov. 29, 2011).
As to the potential for the prevailing party to be reimbursed for costs or fees,
defendants admit that that potentiality would only happen in the case where a party
sought to enforce the unit franchise agreement. In other situations, as here, the
arbitrator retains the discretion, subject to appellate review, to allocate fees and
costs amongst the parties. I do not find this section to be per se unconscionable.
Plaintiff‟s position that the limitation of remedies provision makes the entire
arbitration agreement unconscionable also fails. The validity of provisions such as
this is to be determined by the arbitrator and not by the district court. See Arkom
Digital Corp. v. Xerox Corp., 289 F.3d 536, 539–40 (8th Cir. 2002).
Disputes Subject to Arbitration
Having determined that a valid agreement to arbitrate exists between the
enumerated parties, I must next determine whether the specific dispute falls within
the agreement. Houlihan v. Offerman & Co., Inc., 31 F.3d 692, 694–95 (8th Cir.
1994). Each of the unit arbitration agreements contains an arbitration provision
that requires all claims related to the unit franchise agreement or the master
franchisee‟s relationship to the unit franchisee be submitted to binding arbitration.
to how counsel could have personal knowledge of the financial circumstances of hundreds of
“putative” class members.
RICO claims may be subjected to arbitration, Larry’s United Super, Inc. v.
Werries, 253 F.3d 1083, 1086 (8th Cir. 2001). Because plaintiffs‟ RICO claims
allege that they were defrauded, in part, by operation of the unit franchise
agreement, the arbitration agreement encompasses those claims. Compare
Rosemann v. Sigillito, 877 F. Supp. 2d 763, 776 (E.D. Mo. 2012) (finding RICO
claims arbitrable where arbitration agreement covered all disputes between parties
to agreement) with PRM Enterprises Energy Systems, Inc., v. Prime Energy LLC,
592 F.3d 830, 837 (8th Cir. 2010) (holding tort claims arbitrable where arbitration
agreement covered claims arising from underlying contract) and Webb v. R.
Rowland & Co., 613 F. Supp. 1123, 1124 (E.D. Mo. 1985) (compelling arbitration
of fraudulent misrepresentation claims).
Any arbitration must be conducted on an individual basis in accordance with
the terms of the arbitration agreement. Cf. Owen v. Bristol Care, Inc., 702 F.3d
1050, 1055 (enforcing arbitration agreement containing class waiver in Fair Labor
Standards Act cases); In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 287 (4th
Cir. 2007) (enforcing arbitration agreement with class waiver as to federal antitrust
Non-Signatory Defendants Can Enforce Arbitration
Plaintiffs contend that because only the master franchisors with whom they
respectively franchised signed the arbitration agreement, the other defendants
cannot compel them to arbitrate. The ability of a non-signatory to enforce
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arbitration agreements against signatories is determined by state contract law.
Donaldson Co. Inc. v. Burroughs Diesel, Inc., 581 F.3d 726, 732 (8th Cir. 2009)
(citing Arthur Anderson LLP v. Carlisle, 556 U.S. 624, 630 (2009)). However,
both parties cite only to Eighth Circuit precedent in support of their arbitration
arguments. Under Missouri law, third-party beneficiaries may enforce the terms of
the contract where the contract clearly expresses an intent to benefit that party “or
an identifiable class of which the party is a member.” Verni v. Cleveland
Chiropractic Coll., 212 S.W.3d 150, 153 (Mo. banc 2007).9
I find that Stratus Franchising and the non-signatory master franchisees are
intended third-party beneficiaries to the unit franchise agreement. The portion of
the contract housing the arbitration agreement states that it is “intended to benefit
and bind certain third party non-signatories . . . .” The unit franchise agreements
require the unit franchisee to purchase insurance policies naming Stratus
Franchising as an additional insured and provide for the indemnity of “Stratus and
other Stratus franchises.” Because the arbitration agreement reflects the signees‟
This result appears to be the same under any of the potentially - relevant states‟ laws. Compare
S. Texas Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007) (“A third party may only
enforce a contract when the contracting parties themselves intend to secure some benefit for the
third party and entered into the contract directly for the third party‟s benefit.”) with Supplies for
Industry, Inc. v. Christensen, 659 P.2d 660, 662 (Ariz. Ct. App. 1983) (“A third party intended
beneficiary is found where recognition of the right to performance in the beneficiary is
appropriate to effectuate the intention of the parties, and the circumstances indicate that the
promisee intended to give the beneficiary the benefit of the promised performance.”) (citing
Restatement (Second) Contracts, §§ 302, 304 (1982)) and Debary v. Harrah’s Operating Co.,
Inc., 465 F. Supp. 2d 250, 263 (S.D.N.Y. 2006) (finding New York law follows the
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intent to benefit some third parties and the unit franchise agreement clearly confers
benefits upon Stratus Franchising and the other master franchisees, those parties
may enforce the arbitration agreement.
The remaining defendants are alleged to be owners, operators, agents,
officers, or employees of the master franchises or of Stratus Franchising. Under
the terms of the arbitration agreement, plaintiffs‟ claims against them are equally
“The FAA generally requires a federal district court to stay an action
pending an arbitration, rather than to dismiss it.” Green v. SuperShuttle Intern.,
Inc., 653 F.3d 766, 769 (8th Cir. 2011) (citing 9 U.S.C. § 3). Where all the claims
against all parties are subject to arbitration, dismissal of the action is proper. See
Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991) (affirming
dismissal without prejudice under 9 U.S.C. § 3). However, where there is
ambiguity as to whether all contested issues between the parties will be resolved by
arbitration, it is an abuse of discretion for the district court to dismiss the action in
lieu of staying it pending completion of the arbitration. Green, 653 F.3d at 769.
“[A] nonnamed class member is [not] a party to the class-action litigation
before the class is certified.” Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345,
1349 (2013) (alterations in original) (emphasis omitted). Because I have not
certified a class, the only parties are the named plaintiffs and defendants, and there
exists no ambiguity as to whether the contested issues between the parties are
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subject to arbitration. I will therefore dismiss the plaintiffs‟ claims without
IT IS HEREBY ORDERED that defendants‟ motion to compel individual
arbitration and to dismiss without prejudice or alternatively to stay this action [#6]
is GRANTED, and plaintiffs must submit their claims to individual arbitration.
IT IS FURTHER ORDERED that the plaintiffs‟ claims will be dismissed
without prejudice on this day in a separate Order of Dismissal.
IT IS FURTHER ORDERED that defendants‟ motion to amend/correct
their motion to dismiss case [#38] is granted.
IT IS FURTHER ORDERED that defendants‟ motion to dismiss case with
prejudice [#7] is denied.
CATHERINE D. PERRY
UNITED STATES DISTRICT JUDGE
Dated this 3rd day of February, 2014.
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