Doctor's Associates, Inc. v. Emily Distajo, 107 F.3d 126, 2d Cir. (1997)
Doctor's Associates, Inc. v. Emily Distajo, 107 F.3d 126, 2d Cir. (1997)
3d 126
David M. Duree, St. Louis, MO (Reinert & Duree, P.C.; Nicholas Wocl,
Stamford, CT, Tooher, Puzzuoli & Wocl, Co-Counsel), for DefendantsAppellants.
Edward Wood Dunham, New Haven, CT (Wiggin & Dana, Mark R.
Kravitz, of Counsel), for Plaintiff-Appellee.
Before: FEINBERG, LEVAL and PARKER, Circuit Judges.
FEINBERG, Circuit Judge:
We are not the first panel of this court to encounter an appeal by groups of
Subway franchisees, represented by attorney David M. Duree, involving
similar--if not identical--facts and legal issues regarding arbitration of disputes
with DAI. We have already remanded once in this case, Doctor's Associates,
Inc. v. Distajo, 66 F.3d 438 (2d Cir.1995), cert. denied, --- U.S. ----, 116 S.Ct.
1352, 134 L.Ed.2d 520 (1996) (Distajo I ), and two other panels have since
affirmed orders granting DAI's petitions to compel arbitration of claims by
other Subway franchisees. Doctor's Associates, Inc. v. Stuart, 85 F.3d 975 (2d
Cir.1996); Doctor's Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir.1996). At
least one other appeal is pending in this court from a decision compelling
franchisees to arbitrate disputes with DAI. Doctor's Associates, Inc. v. Riggs,
No. 96-9141 (argument not yet scheduled). The parties have also waged battles
in various other courts across the country. See Distajo I, 66 F.3d at 441 n. 1
(listing other DAI/franchisee litigation). After the franchisees submitted their
initial brief in this appeal, we issued our opinion in Stuart, which, as discussed
below, controls some of the legal issues raised in this appeal. Our decision
today resolves several other legal issues in this bitter litigation.
Between 1991 and 1993, many disputes arose between DAI and the franchisees
regarding rents, royalties and advertising fees due under the franchise
agreements and subleases. To recover these monies, DAI instructed its leasing
companies to file eviction actions, primarily in Illinois state court, against
certain franchisees. In addition, all franchisees except the Kanes and Bickels
claim that DAI routinely threatened to bring such eviction proceedings to
recover alleged unpaid fees and rents.
Several months to one year after the close of these eviction proceedings, each
franchisee filed a nearly identical action against DAI in state court in either
Illinois, Pennsylvania, Massachusetts or North Carolina. Each suit alleged,
among other things, (1) fraud with respect to DAI's policies of operating
through assetless leasing companies, avoiding arbitration through use of
Upon notice of each case filed by a franchisee, DAI immediately filed a written
demand for arbitration with the American Arbitration Association in
accordance with that body's Commercial Arbitration Rules (AAA Rules). When
the franchisees refused to arbitrate their disputes, DAI filed the present petitions
to compel arbitration pursuant to the Federal Arbitration Act (FAA), 9 U.S.C.
4. The franchisees conceded that their claims in state court raise arbitrable
issues under the arbitration clause in the franchise agreements. However, they
argued, among other things, that DAI fraudulently induced the arbitration
clause and that DAI waived its right to arbitrate by filing or threatening to file
the prior eviction actions.
In November 1994, the district court granted most of DAI's petitions to compel
arbitration.4 It rejected the franchisees' arguments that the arbitration
agreement was void for lack of mutuality or as a contract of adhesion, that the
agreement was unconscionable, and that DAI had waived its right to arbitrate.
The court also held that the franchisees' defense of fraudulent inducement
should be decided by the arbitrator. By order dated December 9, 1994, the
court enjoined the franchisees from prosecuting their state court actions, in
order to effectuate the judgment compelling arbitration, see 28 U.S.C. 2283.
The franchisees argue that the district court erred in denying them a jury trial
under 9 U.S.C. 4 on their defenses of fraud, waiver, unconscionability and
failure of the contract to meet their reasonable expectations. In February 1996,
the district court granted DAI's motion to forgo trial and decide these issues as
a matter of law, finding that the franchisees had not shown that material facts
were in dispute with respect to their defenses of fraud and waiver.5 944 F.Supp.
at 1013-15. The franchisees then filed additional affidavits purportedly
substantiating these defenses, and moved for reconsideration. In March, the
district court denied that motion, observing that the franchisees had waited five
to 23 months from the time DAI filed its petitions to submit such affidavits. Id.
at 1016. Nevertheless, the court agreed to consider the facts alleged in their
"belated" affidavits in ruling on their defenses as a matter of law. Id.
11
Although a party may demand a jury trial when issues respecting arbitrability
are "in issue," 9 U.S.C. 4, we have cautioned that "[a] party resisting
arbitration ... 'bears the burden of showing that he is entitled to a jury trial.' "
Stuart, 85 F.3d at 983 (citing Dillard v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 961 F.2d 1148, 1154 (5th Cir.1992)). As when opposing a motion for
summary judgment under Fed.R.Civ.P. 56, the party requesting a jury trial
must "submit evidentiary facts showing that there is a dispute of fact to be
tried." Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352, 358 (2d Cir.1995);
Stuart, 85 F.3d at 983-84 (party must demonstrate a "genuine" issue); see
Manning v. Energy Conversion Devices, Inc., 833 F.2d 1096, 1103 (2d
Cir.1987).
12
Even after conducting discovery on their defenses, the franchisees have failed
to satisfy this burden. The district court diligently complied with our direction
in Distajo I that it "consider[ ]" the franchisees' jury demands. 66 F.3d at 456 n.
13. As discussed separately below, the franchisees have not shown, even in
their most recent affidavits, that material facts are in dispute regarding their
fraud and waiver defenses. Moreover, by submitting the bulk of their affidavits
at the last minute, the franchisees utterly failed to "alert [the] district court[ ]
promptly and fully" to the facts underlying these claims. Manning, 833 F.2d at
1103. We thus affirm the district court's decision to proceed without a jury trial
and rule on the defenses as a matter of law.
All the franchisees except the Bickels and Kanes argue that DAI waived its
right to compel arbitration of their state-court claims based on DAI's conduct in
connection with prior litigation proceedings. Specifically, DAI obtained
judgments of eviction against certain franchisees.6 944 F.Supp. at 1019-20.
Brenes, the Rothmunds and the Kanchwalas all lost their franchises as a result
of these eviction proceedings. Eviction actions against another group of
franchisees7 were dismissed at an early stage because, under state law, DAI's
unregistered leasing companies could not file lawsuits in the relevant states. Id.
DAI has never filed eviction proceedings against a third group of franchisees.8
Id. at 1019. However, the franchisee-defendants (except the Kanes and Bickels)
allege that DAI routinely threatened them with eviction in order to resolve its
claims under the franchise agreements and subleases. The district court found
that there were no material issues of fact in dispute, and held that as a matter of
law DAI did not waive its right to compel arbitration of franchisees' claims. 944
F.Supp. at 1020-22. We agree.
15
We review de novo the issue whether a party waived its right to compel
arbitration. Stuart, 85 F.3d at 981 (citing Leadertex, Inc. v. Morganton Dyeing
& Finishing Corp., 67 F.3d 20, 25 (2d Cir.1995)). "The factual determinations
upon which to base the waiver determination, however, will not be reversed
unless clearly erroneous." Stuart, 85 F.3d at 981. Because of the strong federal
policy favoring arbitration, courts resolve doubts as to whether waiver occurred
in favor of arbitration. Id. (citing Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-42, 74 L.Ed.2d 765
(1983)). In Stuart, we cautioned that "[t]he waiver determination must be based
on the circumstances and context of the particular case, 'with a healthy regard
for the policy of promoting arbitration.' " Stuart, 85 F.3d at 981(quoting
17
We have often stated the general rule that waiver of the right to arbitrate occurs
when a party "engages in protracted litigation that results in prejudice to the
opposing party." Cotton v. Slone, 4 F.3d 176, 179 (2d Cir.1993) (citing Kramer
v. Hammond, 943 F.2d 176, 179 (2d Cir.1991)); Sweater Bee By Banff, Ltd. v.
Manhattan Indus., 754 F.2d 457, 461 (2d Cir.1985) ("[L]itigation of substantial
issues going to the merits may constitute a waiver of arbitration."). The
"prejudice" that supports a finding of waiver can be "substantive" prejudice to
the legal position of the party opposing arbitration, such as when the party
seeking arbitration "loses a motion on the merits and then attempts, in effect, to
relitigate the issue by invoking arbitration," Kramer, 943 F.2d at 179, or obtains
information through discovery procedures not available in arbitration, Cotton, 4
F.3d at 179. Additionally, we have held that a party may be prejudiced by the
"unnecessary delay or expense" that results when an opponent delays
invocation of its contractual right to arbitrate. Id. (citing Kramer, 943 F.2d at
179).
18
proceedings, it did not litigate "substantial issues going to the merits" of the
franchisees' current claims. The franchisees vigorously contend that the
doctrine of "law of the case" prevents our reaching this argument because we
stated in Distajo I that
19 the alleged violations of the subleases were premised on violations of the
[i]f
franchise agreement (which DAI was contractually bound to resolve through
arbitration) then DAI did litigate substantial issues going to the merits, and the only
remaining question will be whether the franchisees suffered prejudice from the
eviction proceedings.9
20
Distajo I, 66 F.3d at 457. The district court rejected the franchisees' waiver
defense solely on the ground that they had not proven sufficient prejudice. 944
F.Supp. at 1019-21.
21
22
First, we can easily dispose of the argument that DAI waived its right to
arbitrate claims brought by franchisees against whom DAI never instituted
eviction proceedings. In Stuart, we held that DAI "obviously" had not waived
its right to arbitrate claims brought by franchisees against whom DAI had never
instituted " 'particular eviction proceedings.' " Stuart, 85 F.3d at 982. The
franchisees nevertheless insist that waiver occurred when, unlike in Stuart, DAI
threatened certain franchisees with eviction, allegedly to "extort" payments
from them. However, mere threats of litigation do not even constitute
"litigation," and thus certainly cannot be considered "substantial litigation on
the merits" for waiver analysis. Cf. Lawrence v. Comprehensive Bus. Servs.
Co., 833 F.2d 1159, 1165 (5th Cir.1987) (statement suggesting party would not
arbitrate did not "constitute action inconsistent with arbitration").
24
The remaining franchisees' waiver defenses also fail. We first note that the
district court found that DAI's eviction actions against certain franchisees
(listed above) were dismissed at an early stage, before any adjudication of the
merits occurred.11 944 F.Supp. at 1019-20. DAI's participation in these suits did
not constitute "protracted" litigation, which could result in a waiver of its right
to arbitrate. Compare Leadertex, 67 F.3d at 26 (waiver when defendant
engaged in "energetic pursuit of discovery" for seven months and requested
arbitration "at the eleventh hour" before trial), and Cotton, 4 F.3d at 179-80
(waiver when defendant "actively litigated" dispute by taking depositions and
making substantive motions), with Lecopulos, 553 F.2d at 845 (filing an action
does not waive arbitration, at least until opponent "has answered on the
merits").
25
In any event, we hold that DAI did not waive its right to arbitrate because in
none of the eviction proceedings--even those four actions in which DAI won
judgments of eviction--did DAI engage in litigation on the merits of the issues
now raised in the franchisees' state suits. DAI persuasively argues that
26
[t]here
is no conceivable policy justification for a rule that, by exercising the
reasonable business judgment to sue to evict someone from leased premises or to
collect a debt of less than $10,000, a party waives for all time its right to arbitrate
every other dispute imaginable, including multimillion dollar punitive damage
claims of which the party has no knowledge when it files the eviction action.
27
28
Other circuits seem to agree that waiver can only occur when a party has
previously litigated the same claims it now seeks to arbitrate. The Seventh
Circuit has held that a franchisor who brought an unlawful detainer action
against its franchisee had not waived its right to arbitrate other claims brought
by the franchisee--including breach of contract, failure to pay royalties and
advertising fees, and several Lanham Act claims--because the two suits
"involved different issues." Gingiss Int'l, Inc. v. Bormet, 58 F.3d 328, 330-332
(7th Cir.1995); but see Midwest Window Sys., Inc. v. Amcor Indus., Inc., 630
F.2d 535, 537 (7th Cir.1980). Similarly, in Lawrence, Judge Alvin B. Rubin
held that a franchisor, who had previously secured a judgment against a
franchisee to recover $5,000 for services provided, had not waived its right to
arbitrate subsequent claims by the franchisee that the franchise agreement was
illegal and unenforceable. Lawrence, 833 F.2d at 1164-65 (earlier action had
not "prejudiced their present claim"). Finding waiver where a party has
previously litigated an unrelated yet arbitrable dispute would effectively
abrogate an arbitration clause once a party had litigated any issue relating to the
underlying contract containing the arbitration clause.
29
The franchisees apparently argue that even under this rule we should find
waiver because their current suits and the eviction actions "aris[e] out of the
same core facts, i.e., the franchise agreement and franchise relationship." We
disagree. According to DAI, the eviction actions were simple collection
proceedings to recover relatively small amounts of unpaid fees and rents under
the franchise agreements and subleases. The only issues involved in these
disputes pertained to whether (and how much) the franchisees owed DAI. In
contrast, the franchisees' state suits, filed several months to one year after the
evictions, allege various violations by DAI of the franchise agreement and
attack the validity of the franchise agreement and arbitration clause on a host of
different federal and state law grounds. Significantly, the franchisees did not
raise these claims as counterclaims in the eviction actions, nor do they now
dispute that they owed the fees and/or rents which DAI sought to collect by
filing eviction actions. Thus, the district court properly found that "the disputes
involved in the eviction actions are not the same as the disputes involved in the
franchisees' state court actions." 944 F.Supp. at 1022. In view of the strong
federal policy of enforcing agreements to resolve disputes through arbitration,
we find that DAI did not litigate substantial issues going to the merits of the
franchisees' current claims, and thus did not waive arbitration.
30
Finally, the franchisees argue strenuously that they suffered various types of
prejudice from these evictions, including the legal expense of defending the
actions, the risk of losing their entire investment in their franchises and, for
some of the franchisees, the money judgments or actual loss of their stores.
Strictly speaking, in view of our holding above, it is not necessary for us to
decide whether the franchisees suffered prejudice from being subject to these
eviction actions. It is nevertheless clear to us that they did not suffer the type of
prejudice that supports a finding of waiver.
31
We do not overlook the fact that several franchisees lost their entire investments
in their franchises as a result of the judgments of possession DAI obtained.
However, prejudice as defined by our cases refers to the inherent unfairness--in
terms of delay, expense, or damage to a party's legal position--that occurs when
the party's opponent forces it to litigate an issue and later seeks to arbitrate that
same issue. Stated in these terms, the franchisees have not shown any prejudice
warranting a finding of waiver. First, the franchisees admit that DAI did not
delay in moving to compel arbitration of their present claims in state court. 944
F.Supp. at 1021. Moreover, legal expenses inherent to litigation, "without
more," do not constitute prejudice requiring a finding of waiver. Leadertex, 67
F.3d at 26. Finally, the franchisees have not shown that they will suffer
"substantive" prejudice to their state-court claims if they are forced to arbitrate.
See Lawrence, 833 F.2d at 1165. DAI has neither conducted discovery with
respect to these claims nor made any motions going to the merits of the claims.
Significantly, DAI has assured us that, in arbitration, it will not oppose any of
the franchisees' claims on res judicata or collateral estoppel grounds due to the
franchisees' failure to raise them in the prior eviction actions.
32
On these facts, we hold that DAI did not waive its right to compel arbitration of
the franchisees' claims.
34
The franchisees argue that the district court erred in rejecting, as a matter of
law, their defense that DAI fraudulently induced them to accept the arbitration
clause. Specifically, they claim that DAI (1) falsely represented in its offering
circulars and franchise agreements that arbitration is a "condition precedent" to
litigation, and (2) concealed the material fact that DAI "controls" its franchisees
by instructing its assetless leasing companies to threaten or institute eviction
proceedings. The district court found--even after considering the franchisees'
last-minute affidavits--that there were no material issues of fact in dispute, and
held that the franchisees had not "offered evidence from which it could be
found" that DAI had made any false representations that induced their
agreement to arbitrate. 944 F.Supp. at 1017-18.
35
36
37
sufficient facts indicating that they were defrauded into agreeing to arbitrate."
Stuart, 85 F.3d at 980. We explained that before purchasing their franchise,
each franchisee received copies of DAI's standard franchise agreement and
sublease, and that the relevant clauses pertaining to arbitration and eviction
"were not camouflaged." Id. We thus found that DAI had not made any false
representations to the franchisees regarding the possibility of eviction for
violation of the franchise agreement.
38
The district court made identical factual findings in this case with respect to the
franchisees' access to copies of the franchise agreement and sublease and the
contents of those documents. It concluded that "[a]t most, [the franchisees]
lacked understanding of the ramifications of two documents which they had
ample opportunity to read and understand.... They cannot hold DAI as
misrepresenting what is plainly stated in the documents nor the legal
ramifications thereof." 944 F.Supp. at 1018; see Stuart, 85 F.3d at 980.
39
On this record, we too "find that the district court properly held, as a matter of
law, that DAI did not fraudulently induce [the franchisees] into signing the
agreement to arbitrate." Id.
The franchisees argue that issues of fact remain with respect to their defenses
that the arbitration clause is void and unenforceable because it is (1)
unconscionable, and (2) fails to meet their reasonable contractual expectations,
see Restatement (Second) of Contracts 211. In their answers in the district
court, most of which were filed in October 1994, the franchisees alleged that
the franchise agreement was an adhesion contract that effectively forced them
to arbitrate disputes under the agreement, yet allowed DAI to resolve such
disputes through eviction proceedings. They also complained that the contract
did not mention the alleged "excessive" costs of arbitration. Id.
42
The franchisees waived this argument by not raising it in the district court in
their papers opposing DAI's motion, filed in February 1996, to forgo trial and
receive judgment as a matter of law on all defenses to arbitration. In any event,
the franchisees' claims are meritless. They urge us to "remain attuned to wellsupported claims that the agreement to arbitrate resulted from the sort of fraud
or overwhelming economic power that would provide grounds 'for the
revocation of any contract.' " Mitsubishi Motors Corp. v. Soler ChryslerPlymouth, Inc., 473 U.S. 614, 627, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444
(1985). Yet the franchisees have not presented a "well-supported" claim in this
The franchisees argue that the district court abused its discretion by issuing
preliminary injunctions in January and March 1996, without requiring DAI to
post bonds pursuant to Fed.R.Civ.P. 65(c). In January 1996, after our remand in
Distajo I, the district court enjoined the franchisees from prosecuting their state
cases, finding that this relief was "necessary in aid of" federal jurisdiction. 944
F.Supp. 1007, 100809 (citing 28 U.S.C. 2283). In its March 14 order
compelling arbitration, the district court continued the injunction to "effectuate"
that order. 944 F.Supp. at 1023. The district court did not require DAI to post a
bond for either injunction because it found that the franchisees would not suffer
damage or loss from being forced to arbitrate in lieu of prosecuting their statecourt cases.
Rule 65(c) states, in relevant part, that
45 restraining order or preliminary injunction shall issue except upon the giving of
[n]o
security by the applicant, in such sum as the court deems proper, for the payment of
such costs and damages as may be incurred or suffered by any party who is found to
have been wrongfully enjoined or restrained.
46
Id. In Stuart, we flatly rejected an identical argument that the district court
should have required such a bond. Rule 65(c) gives the district court wide
discretion to set the amount of a bond, and even to dispense with the bond
requirement "where there has been no proof of likelihood of harm, or where the
injunctive order was issued 'to aid and preserve the court's jurisdiction over the
subject matter involved.' " Stuart, 85 F.3d at 985 (citations omitted). As in
Stuart, both circumstances apply in this case. We therefore hold that the district
court did not abuse its discretion by entering the injunctions without requiring
The Kanchwala franchisees argue that the district court did not have personal
jurisdiction over them. They allege that DAI violated 9 U.S.C. 4 and
Fed.R.Civ.P. 4(c) and 4(e)(1) by serving the Kanchwalas by mailing a copy of
the summons and complaint to Mr. Duree, their attorney, instead of personally
serving them. The Kanchwala franchisees also claim that the district court did
not have personal jurisdiction and venue "by contract" because the validity of
the arbitration contract was in dispute. They base this argument on the fact that
in October 1995 an Illinois court held that the arbitration clause in the
Kanchwalas' franchise agreement was void and unenforceable. Finally, they
argue that "at the very least" the district court should have held a hearing under
Fed.R.Civ.P. 12(d) to determine personal jurisdiction.
49
By not raising these issues in their papers filed in opposition to DAI's motion
for judgment as a matter of law and by failing to request in the district court a
hearing under Rule 12(d), the Kanchwalas consented to personal jurisdiction. In
any event, faced with identical arguments in Stuart, we applied the longstanding principle that a party who agrees to arbitrate in a state (such as
Connecticut) in which the FAA makes arbitration agreements enforceable also
consents to jurisdiction in whatever court could compel arbitration in that state.
Stuart, 85 F.3d at 979 (citing Victory Transp. Inc. v. Comisaria General de
Abastecimientos y Transportes, 336 F.2d 354, 363 (2d Cir.1964)). Moreover,
we held that the AAA Rules, incorporated into all Subway franchise
agreements, governed service of process and specifically allowed service by
mail on a party's representative. Id. at 982. Finally, we decided that the district
court had handled the question of personal jurisdiction correctly from a
procedural point of view by holding a hearing on whether the arbitration
agreement was enforceable. Id.; cf. AAACON Auto Transp., Inc. v. Klee, 356
F.Supp. 319, 321 (S.D.N.Y.1973) (district court may hold hearing to ascertain
whether parties entered an agreement to arbitrate). We see no logical reason to
reach a different result here, and thus hold that the district court did have
personal jurisdiction over the Kanchwala franchisees.
The franchisees argue, for the first time on appeal, that the district court lacked
subject matter jurisdiction under the Rooker-Feldman doctrine to order them to
arbitrate and to enjoin them from prosecuting their state suits. They contend
that DAI's petitions to compel arbitration represent impermissible attempts to
After DAI filed petitions in the district court to compel arbitration, two Illinois
courts issued orders granting summary judgment to certain franchisees. Shino v.
Doctor's Associates, Inc., No. 93-L-1293 (Cir. Ct. Madison County, Oct. 24,
1994); Kanchwala v. Doctor's Associates, Inc., No. 95-L1292 (Cir. Ct. Madison
County, Oct. 13, 1995). The Illinois courts held that DAI waived its right to
arbitrate claims by those franchisees against whom DAI had filed eviction
actions. The courts also held that the arbitration clauses in the franchise
agreements were void and unenforceable because they (1) were
unconscionable, (2) failed to meet the parties' reasonable contractual
expectations, and (3) lacked mutuality.
52
53
Only days later, on February 13, the district court granted DAI's petition to
compel arbitration of the Bickels' claims, and entered a preliminary injunction
by endorsement enjoining the Bickels from further prosecuting their Illinois
suit. In September 1995, in Distajo I, we reversed the district court's order
compelling arbitration and vacated the preliminary injunction. Distajo I, 66
F.3d at 458. The mandate issued on November 29, 1995.
54
55
A challenge to a federal court's subject matter jurisdiction under the RookerFeldman doctrine "may be raised at any time by either party or sua sponte by
the court." Moccio v. New York State Office of Court Admin., 95 F.3d 195,
198 (2d Cir.1996) (citing Ritter v. Ross, 992 F.2d 750, 752 (7th Cir.1993)). The
doctrine evolved from the Supreme Court's opinions in D.C. Court of Appeals
v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983), and Rooker
v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923). It rests
on the principle that "a United States District Court has no authority to review
final judgments of a state court in judicial proceedings." Feldman, 460 U.S. at
482, 103 S.Ct. at 1315; Rooker, 263 U.S. at 416, 44 S.Ct. at 150. The Feldman
Court thus held that a district court lacked subject matter jurisdiction to
entertain a federal suit attacking a state court judgment against a particular
individual. Feldman, 460 U.S. at 483-86, 103 S.Ct. at 1315-17. However, the
Court held that a plaintiff could still bring in federal district court a general
challenge to a state rule, id., unless the issues raised were "inextricably
intertwined" with those resolved in the state judgment against the individual, id.
at 482 n. 16, 103 S.Ct. at 1315 n. 16.
56
57
58
IX. Abstention
59
The Bickels argue that, in view of the $400,000 Illinois state court judgment
described above, the district court abused its discretion by not abstaining from
exercising jurisdiction over DAI's petition to compel arbitration. The district
court observed that this argument was a "slightly modified version" of the
Bickels' unsuccessful argument that the district court was precluded from
exercising jurisdiction by reason of the Illinois court's judgment. 944 F.Supp. at
1022. In addition, the district court held that abstention under Moses Cone was
not warranted because the Illinois court had not engaged in "substantial
proceedings" in entering the default judgment against DAI, compared to the two
years of proceedings already completed in the district court in these
consolidated cases. Id. at 1022-23.
60
The franchisees have failed to articulate any persuasive reason why abstention
would be proper in this case. Certainly, as the district court found, the Illinois
default judgment, entered without an evidentiary hearing, does not constitute a
"substantial" state proceeding warranting abstention under Moses Cone. See
460 U.S. at 21-22, 103 S.Ct. at 939-40. We hold that the district court did not
abuse its discretion by exercising jurisdiction over DAI's petition to compel
arbitration of the Bickels' state-court claims.X. Conclusion
62
We have considered all of the franchisees' arguments, and they are without
merit. We affirm the judgment of the district court.
Franchise Agreement ... Sublessor, at its option, may terminate this lease ... and
upon such termination, Sublessee shall quit and surrender the leased premises
to the Sublessor, but Sublessee shall remain liable for the balance of the rent
due as provided in this Sublease.
4
As discussed in Part V below, the franchisees did not submit the issues of
unconscionability and failure of the contract to meet their expectations to the
district court at that time
Jose Brenes, Wesam and Linda Youmaran, Ronald and Patricia Rothmund, and
Michael and Anver Kanchwala and Azim Hemani
Emily and Renato Distajo and Constantine and Milo Lamando, Alvaro and
Maria Guerrero, Bruno Giannini, and John Papaleo. DAI dismissed the action
against Papaleo, who abandoned his store and ceased operation as a Subway
franchisee for financial reasons while the eviction action was pending
Julie and Johnson Shino and Albert and Laylan Yonan, Louis Loenneke and
Mary Ann Bookout, Michael Johnson, Gregory and Deborah Kane, and
Raymond and Sandra Bickel
Except with respect to the Kanchwalas, both parties agree that the eviction
actions were premised, at least in part, on violations of the franchise
agreements. We also held in Distajo I that waiver could only apply if "DAI was
responsible for the eviction proceedings" brought by its leasing companies. 66
F.3d at 457. DAI has since stipulated to responsibility for such actions
10
11
The district court found that in the eviction action against the Kanchwala
defendants, DAI claimed only unpaid rent due under the sublease, a
nonarbitrable issue. 944 F.Supp. at 1020. The district court correctly held that
litigation of non-arbitrable claims does not waive a party's right to arbitrate
other, arbitrable claims. Sweater Bee, 754 F.2d at 463; Seguros Banvenez, S.A.
v. S/S Oliver Drescher, 761 F.2d 855, 862 (2d Cir.1985)