107 F.

3d 126

DOCTOR'S ASSOCIATES, INC., Plaintiff-Appellee,

v.
Emily DISTAJO, et al., Defendants-Appellants.
No. 302, Docket 96-7321.

United States Court of Appeals,

Second Circuit.
Argued Nov. 4, 1996.
Decided Feb. 24, 1997.

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:

Plaintiff-appellee Doctor's Associates, Inc. (DAI), a Florida corporation, is the

national franchisor of "Subway" sandwich shops. Defendants-appellants,
present and former Subway franchisees, appeal from orders of the United
States District Court for the District of Connecticut, Peter C. Dorsey, Chief
Judge, dated February 14, 1996, and March 14, 1996, both published at 944
F.Supp. 1010 (D.Conn.1996), granting petitions by DAI to compel arbitration
of claims the franchisees filed against DAI in various state courts. (The term
"the franchisees" is used in this opinion to designate those Subway franchisees
who brought state court actions against DAI and were named below as
respondents in DAI's petitions to compel arbitration.) For reasons set forth
below, we affirm. In a related appeal, No. 96-7011, the franchisees also
challenge the district court's preliminary injunction dated January 3, 1996,
enjoining them from prosecuting their state suits against DAI. By separate order
filed today, we dismiss that appeal as moot.

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.

I. Facts and Prior Proceedings

3

When purchasing franchises from DAI, each franchisee-defendant1 executed a

standard franchise agreement which requires the parties to arbitrate claims
arising under the agreement.2 Most of the franchise agreements state that they
are governed by Connecticut law. Each franchisee-defendant also entered into a
standard sublease with a leasing company affiliated with DAI. The sublease,
which does not contain an arbitration clause, includes a "cross-default"
provision, which allows the leasing company to evict a franchisee for violations
of either the sublease or the franchise agreement.3

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

eviction proceedings, and withholding business information from franchisees,

(2) breach of contract for DAI's failure to arbitrate the disputes underlying the
eviction actions, and for various unrelated violations of the franchise
agreements, and (3) violations of the Illinois Consumer Fraud and Deceptive
Business Practices Act, the Illinois Franchise Disclosure Act and the Lanham
Act. Each franchisee requested compensation and substantial punitive damages.
6

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 appealed both orders to this court. In September 1995, we

issued an opinion (Distajo I) affirming and reversing in part. We upheld the
district court's rulings (1) that it had subject matter (diversity) jurisdiction, (2)
that judgments the franchisees had obtained against DAI in their Illinois and
North Carolina state suits were not entitled to preclusive effect, and (3) that the
arbitration clause was not void for lack of mutuality. On the other hand, we
vacated the district court's ruling rejecting the franchisees' waiver defense to
arbitration and instructed that on remand the district court should determine
whether (1) "the leasing companies were mere alter egos of DAI," (2)
"prosecution of those eviction actions constituted litigation of 'substantial issues
going to the merits,' " and (3) "the franchisees suffered prejudice from the
eviction proceedings." We also held that on remand, the district court--rather
than the arbitrator--should determine whether DAI fraudulently induced the
arbitration clause. Finally, we vacated the preliminary injunctions.

After the district court conducted further proceedings on remand, it filed

opinions on February 14 and March 14, 1996, again granting DAI's petitions to
compel arbitration. The court held that (1) the franchisees had not submitted
sufficient evidentiary facts to entitle them to a jury trial on their defenses to
arbitration, 944 F.Supp. at 1013-14, 1015-16, (2) DAI had not waived its right
to arbitrate by bringing or threatening to bring eviction proceedings, id. at 101822, (3) DAI had not fraudulently induced the arbitration clause, id. at 1017-18,
and (4) there was no reason for the district court to abstain based on the
franchisees' state court litigation, id. at 1022-23. The franchisees challenge all
of these rulings, and raise the additional arguments that (1) issues of fact remain
with respect to their defenses that the arbitration clause is unconscionable and
fails to meet their reasonable expectations, (2) the district court erred by
entering preliminary injunctions on January 3 and March 14, 1996, without
requiring DAI to post bonds, (3) the district court lacked subject matter
jurisdiction to compel arbitration, and (4) the district court lacked personal
jurisdiction over the Kanchwalas.

II. Demand for a Jury Trial

10

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.

III. Waiver of the Right to Compel Arbitration

13
14

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

Leadertex, 67 F.3d at 25).

16

On appeal, the franchisees make an elaborate argument that either Illinois or

Connecticut law should apply, or at least "have some significance," on the
waiver issue. However, they apparently waived this choice-of-law argument by
not raising it in the district court. In any event, the Supreme Court has held that
the FAA creates a "body of federal substantive law of arbitrability, applicable to
any arbitration agreement within the coverage of the Act." Moses Cone, 460
U.S. at 24, 103 S.Ct. at 941; National Union Fire Ins. Co. of Pittsburgh v. Belco
Petroleum Corp., 88 F.3d 129, 133 (2d Cir.1996); see Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Lecopulos, 553 F.2d 842, 845 n. 4 (2d Cir.1977)
(applying federal law to waiver issue). The franchisees do not contest that the
FAA applies to this dispute, nor could they because the franchise agreements
between DAI, a Florida corporation, and franchisees from various other states
"evidence[ ] a transaction involving commerce." 9 U.S.C. 1, 2; Allied-Bruce
Terminix Comps. v. Dobson, 513 U.S. 265, 274-78, 115 S.Ct. 834, 840-41, 130
L.Ed.2d 753 (1995) ( 2's "involving commerce" standard reaches to limits of
Commerce Clause power). As we recently explained, even the inclusion in the
contract of a general choice-of-law clause does not require application of state
law to arbitrability issues, unless it is clear that the parties intended state
arbitration law to apply on a particular issue. See Belco, 88 F.3d at 134-35
(citing Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, ---- - ----,
115 S.Ct. 1212, 1217-19, 131 L.Ed.2d 76 (1995)).

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

Initially, we must determine the effect of our opinion in Distajo I on resolution

of the franchisees' waiver arguments. DAI argues on appeal that, in the eviction

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

We do not believe we are so constrained. The doctrine of "law of the case"

instructs that " 'if a court decides a rule of law, that decision should continue to
govern in subsequent stages of the same case.' " Sagendorf-Teal v. County of
Rensselaer, 100 F.3d 270, 277 (2d Cir.1996) (citing DiLaura v. Power
Authority of State of New York, 982 F.2d 73, 76 (2d Cir.1992)). However, the
doctrine "is, at best, a discretionary doctrine, which does not constitute a
limitation on the court's power but merely expresses the general practice of
refusing to reopen what has been decided." United States v. Martinez, 987 F.2d
920, 923 (2d Cir.1993) (citations and internal quotations omitted). For instance,
a court may properly reconsider a prior statement of law when new evidence
indicates that its prior view was unsound. See Sagendorf-Teal, 100 F.3d at 277.

22

In Distajo I, responding to two issues raised by the district court's November

1994 order compelling arbitration, we focused on (1) the relationship between
DAI and the leasing companies that filed the eviction proceedings, and (2)
whether the court or the arbitrator should rule on the franchisees' waiver
defense. After a thorough discussion of the latter issue, we held that the district
court should decide whether DAI had waived arbitration. 66 F.3d at 453-56.
We apparently assumed that the franchisees brought their state suits in direct
response to DAI's eviction actions, and that their state suits and the eviction
actions raised identical issues. However, DAI argues--without contradiction
from the franchisees--that neither the parties nor the court focused in that
appeal on the similarity (or lack thereof) of the issues raised in DAI's eviction
actions and the franchisees' state suits. This factor is, of course, significant in
considering whether DAI litigated "substantial issues going to the merits" of the
claims it now seeks to arbitrate. In view of our clearer understanding now, after
remand, of the nature and scope of prior litigation by DAI, it would serve no

justifiable purpose to adhere blindly to a statement in Distajo I that was based

on an incomplete picture of the relevant facts.10 Cf. Cotton, 4 F.3d at 179
(waiver "necessarily depends upon the facts of the particular case"). We thus
feel compelled to explore more fully whether DAI engaged in the type of prior
litigation which results in waiver of its right to arbitrate.
23

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

Moreover, our prior decisions do not compel a finding of waiver here. If

anything, they support the view that only prior litigation of the same legal and
factual issues as those the party now wants to arbitrate results in waiver of the
right to arbitrate. In Gilmore v. Shearson/Am. Express, Inc., 811 F.2d 108 (2d
Cir.1987), we clearly suggested that defendant Shearson's explicit waiver of its
right to arbitrate certain claims would not necessarily waive arbitration of other
claims raised in an amended complaint filed after Shearson agreed to this
waiver. Id. at 113. We held that because the amended complaint did not "alter
the scope or theory" of the claims as to which Shearson had already waived
arbitration, Shearson could not renounce its waiver and compel arbitration. Id.
at 114; cf. Kramer, 943 F.2d at 178 (waiver based in part on party's prior
litigation in an "identical" suit); Shearson Lehman Hutton, Inc. v. Wagoner, 944
F.2d 114, 122 (2d Cir.1991) (no waiver when prior litigation was brought by a
separate party and involved "legally distinct claims").

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.

IV. Fraudulent Inducement of the Arbitration Agreement

33

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

It is clear that a court, not an arbitrator, resolves a claim that an arbitration

clause--as opposed to the contract as a whole--was fraudulently induced. Distajo
I, 66 F.3d at 457 (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967)). We apply
state law "concerning the validity, revocability, and enforceability of contracts
generally" to the issue whether DAI fraudulently induced the arbitration
agreement. See Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 2527
n. 9, 96 L.Ed.2d 426 (1987); Stuart, 85 F.3d at 979-80 (applying, without
discussion, Connecticut law to franchisees' fraudulent inducement claim);
Progressive Casualty Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela,
991 F.2d 42, 45-46 (2d Cir.1993) (state law applies to whether parties agreed to
arbitrate).

36

The franchisees maintain that we should apply Illinois law on fraudulent

inducement. The district court applied Connecticut law pursuant to the choiceof-law clause in most of the relevant franchise agreements. It noted with respect
to certain franchisees, whose contracts designated Florida or Illinois law as
controlling, that DAI claimed, "without contradiction, that Florida and Illinois
law do[ ] not differ" from Connecticut law on fraudulent inducement. 944
F.Supp. at 1017 n. 2. Thus, the franchisees waived this issue, and, as in Distajo
I, 66 F.3d at 451, and Stuart, 85 F.3d at 979-80, we apply Connecticut law to
their fraud claims.

37

It is well-settled under Connecticut law that to prove fraudulent inducement, a

party must show "(1) that a false representation was made as a statement of
fact; (2) that it was untrue and known to be untrue by the party making it; (3)
that it was made to induce the other party to act on it; and (4) that the latter did
so act on it to his injury." Stuart, 85 F.3d at 979 (citing Miller v. Appleby, 183
Conn. 51, 438 A.2d 811, 813 (1981)). In Stuart, we held that Subway
franchisees making similar allegations "utterly failed to allege, much less prove,

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.

40 Unconscionability and Failure of the Contract to Meet the Parties' Reasonable

V.
Expectations
41

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

regard. In Doctor's Associates, Inc. v. Jabush, 89 F.3d 109 (2d Cir.1996), we

rejected a claim by Subway franchisees, who had been sued by DAI in eviction
proceedings, that the arbitration clause was unconscionable. Id. at 112-13. We
explained that the franchisees were not unfairly surprised or oppressed by
DAI's resort to eviction proceedings because the "plain terms" of the sublease
authorized such action. Id. at 113 (citing David L. Threlkeld & Co. v.
Metallgesellschaft Ltd., 923 F.2d 245, 249 (2d Cir.1991)). In Stuart, we
rejected the franchisees' argument that the costs of arbitration rendered the
contract unconscionable, observing that the franchise agreement clearly stated
that the franchisees would have to pay standard arbitration costs. Stuart, 85
F.3d at 980-81. Thus, even if the franchisees had properly raised these
arguments, they would fail under the reasoning of our prior cases.
VI. Imposing Preliminary Injunctions Without Requiring a Bond
43
44

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

DAI to post bonds.

VII. Personal Jurisdiction over the Kanchwala Franchisees
47
48

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.

VIII. Rooker-Feldman Doctrine

50

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

"avoid" judgments the franchisees obtained in Illinois state court.

51

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

Some explanation of the tangled proceedings in the Bickel case is necessary. In

December 1994, the Bickels filed an action against DAI in the Circuit Court of
Madison County, Illinois, alleging fraud and various breaches of the franchise
agreement and seeking a declaration that the arbitration clause was
unenforceable. In mid-January 1995, DAI promptly filed both a demand with
the AAA for arbitration of the Bickels' claims and its present petition to compel
arbitration. Because DAI did not appear in the Illinois action, the Bickels
moved for and obtained from the Illinois court on February 7, 1995, a default
judgment against DAI. That court scheduled a damage hearing for April.

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

Thereafter, on December 5, 1995, the district court entered a temporary

restraining order (TRO), again enjoining the Bickels from prosecuting their
state suit. The Bickels admit that they did not advise the Illinois court of this
TRO. Consequently, on December 6, 1995, stating that it had been "advised"
that our decision in Distajo I lifted the injunction against the Bickels, the
Illinois court awarded the Bickels $400,000 in damages. The Bickels now
argue that this $400,000 state court judgment strips the district court of subject
matter jurisdiction to entertain DAI's petition to compel arbitration.

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

DAI complains that the franchisees' Rooker-Feldman argument merely restates

their argument on appeal in Distajo I that the district court should have given
preclusive effect to state court judgments holding the franchise agreements to
be void and unenforceable. We rejected that argument because the Illinois
judgments were not final under that state's rule until the time for appeal had
expired, and therefore not entitled to preclusive effect. Distajo I, 66 F.3d at 44951.

57

Nevertheless, we cannot dismiss the franchisees' Rooker-Feldman argument

based on the preclusion analysis applied in Distajo I. We did recently hold that
the Rooker-Feldman doctrine "at a minimum" is coextensive with preclusion
principles. Moccio, 95 F.3d at 199-200. Thus, subsequent litigation in federal
court "will be barred under the Rooker-Feldman doctrine if it would be barred
under the principles of preclusion." Id. at 200. However, a district court may
lack subject matter jurisdiction under the Rooker-Feldman doctrine even when
that court would not be precluded, under res judicata or collateral estoppel
principles, by a prior state judgment. "It cannot be the meaning of RookerFeldman that, while the inferior federal courts are barred from reviewing final
decisions of state courts, they are free to review interlocutory orders."
Campbell v. Greisberger, 80 F.3d 703, 707 (2d Cir.1996) (Rooker-Feldman
challenge to interlocutory order); Gentner v. Shulman, 55 F.3d 87, 89 (2d
Cir.1995) ( Rooker-Feldman applies whether an order is "final or interlocutory
in nature"). Thus, our holding in Distajo I that preclusion did not attach to
Illinois judgments that were not final does not resolve the franchisees' RookerFeldman claim.

58

Nevertheless, we hold that the Rooker-Feldman rationale does not bar

jurisdiction over DAI's petitions to compel arbitration. We cannot say that DAI
is attempting to appeal from any of the state court decisions. See GASH Assoc.
v. Village of Rosemont, 995 F.2d 726, 728 (7th Cir.1993) ( Rooker-Feldman
prohibits a district court from exercising an appellate function over a state
court). Indeed, DAI filed its petitions to compel arbitration of the franchisees'
state actions before the state courts had made any rulings on the merits in those
actions. See Texaco, Inc. v. Pennzoil Co., 784 F.2d 1133, 1143 (2d Cir.1986),
rev'd on other grounds, 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987)
(Rooker-Feldman applicable "[o]nce a litigant has received an adverse
adjudication" on an issue); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Doe,
868 F.Supp. 532, 538 (S.D.N.Y.1994) (plaintiff was not seeking review of state
court TRO because it filed its federal action before the state court issued the
TRO). Moreover, with respect to the Bickels' $400,000 default judgment, the
Bickels admit that they did not tell the Illinois court of the TRO entered by the
district court after the remand in Distajo I. Finally, the parties have not cited,
nor have we found, any cases applying the Rooker-Feldman doctrine to deprive
a district court of subject matter jurisdiction over a petition to compel
arbitration under 9 U.S.C. 4. On these facts, we cannot say that the district
court lacked jurisdiction under Rooker-Feldman to adjudicate DAI's petitions to
compel arbitration.

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

We review a district court's decision not to abstain for abuse of discretion.

Tribune Co. v. Abiola, 66 F.3d 12, 15 (2d Cir.1995); see Sheerbonnet, Ltd. v.
American Exp. Bank Ltd., 17 F.3d 46, 48 (2d Cir.), cert. denied, 513 U.S. 813,
115 S.Ct. 67, 130 L.Ed.2d 23 (1994). This review is less "rigorous" than that
required when a district court does abstain, because the district court has
"considerably broader discretion" when denying a party's motion to abstain.

Tribune, 66 F.3d at 15.

61

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.

This appeal involves numerous individual cases, each brought by the

franchisees from a particular Subway store: Doctor's Associates, Inc. v. Distajo,
No. 3:94-CV-349; Doctor's Associates, Inc. v. Brenes, No. 3:94-CV-511;
Doctor's Associates, Inc. v. Guerrero, No. 3:94-CV-514; Doctor's Associates,
Inc. v. Youmaran, No. 3:94-CV-515; Doctor's Associates, Inc. v. Shino, No.
3:94-CV-516; Doctor's Associates, Inc. v. Loennecke, No. 3:94-CV-517;
Doctor's Associates, Inc. v. Johnson, No. 3:94-CV-803; Doctor's Associates,
Inc. v. Kane, No. 3:94-CV-948; Doctor's Associates, Inc. v. Gianinni, No. 3:94CV-1108; Doctor's Associates, Inc. v. Rothmund, No. 3:94-CV-1456; Doctor's
Associates, Inc. v. Papaleo, No. 3:94-CV-1457; Doctor's Associates, Inc. v.
Bickel, No. 95-CV-120; Doctor's Associates, Inc. v. Kanchwala, No. 95-CV1915

The clause provides, in relevant part, that:

[a]ny controversy or claim arising out of or relating to this contract or the
breach thereof shall be settled by Arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association at a
hearing to be held in Bridgeport, Connecticut, and judgment upon an award
rendered by the Arbitrator(s) may be entered in any court having jurisdiction
thereof. The commencement of arbitration proceedings by an aggrieved party to
settle disputes arising out of or relating to this contract is a condition precedent
to the commencement of legal action by either party....

The sublease provides, in relevant part, that:

If at any time during the term of this Sublease, Sublessee shall default in the
performance of any of the terms, covenants or conditions of the aforesaid

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

The district court granted DAI's petitions to compel arbitration of claims

brought by the Bickels and Kanchwalas in February 1995 and March 1996,
respectively

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

We note that this panel includes a member of the panel in Distajo I

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)