Court Watch

Federal District Court Has Jurisdiction to Confirm $59K Arbitration Award

In Choice Hotels Int'l, Inc. v. Shiv Hospitality, L.L.C., 491 F.3d 171 (4th Cir. 2007), the Fourth Circuit held that a federal district court had subject matter jurisdiction to confirm an arbitration award of less than $75,000, the threshold for jurisdiction in a diversity case. The court based its jurisdictional finding on the amount-in-controversy originally pleaded in the franchisor's complaint.

The franchisor, Choice Hotels, and the defendant franchisee, Shiv, entered into a franchise agreement in 1998 authorizing Shiv to operate a Quality Inn in Denham Springs, LA. After Shiv defaulted on payments of various franchise fees required by the franchise agreement, Choice Hotels terminated the agreement in June 2000.

In November 2000, Choice Hotels filed suit in federal district court in Maryland, seeking $116,432.28 in damages, plus interest, fees, and costs. Based on another case interpreting the arbitration clause found in all of Choice Hotels' franchise agreements, the district court stayed the case and ordered the parties to proceed with arbitration. The case then went through arbitration proceedings, with each party making claims against the other. The arbitration hearing was held in March 2003 and resulted in an award for Choice Hotels for $59,208.75.

Nine months after the award was issued, Choice Hotels requested that the district court reopen the stayed case and confirm the award. The franchisee opposed the motion and requested that the arbitration award be vacated. Shiv argued in part that because the award was less than $75,000, the district court lacked subject matter jurisdiction. The district court rejected Shiv's argument and confirmed the award, reasoning that the amount in controversy exceeded $75,000 because it had to take into account both the $59,208.75 awarded to Choice Hotels and the $36,935 that Shiv was now requesting in attorneys' fees. With respect to Shiv's motion to vacate the award, the district court found that the motion was barred because Shiv failed to challenge the award within three months. Shiv appealed.

The Fourth Circuit affirmed the district court's finding of subject matter jurisdiction, but on different grounds. The appellate court first examined cases considering similar issues ' where a party applied to a federal court to confirm or vacate an arbitration award, and the court had to determine the amount in controversy. Some courts base the amount-in-controversy question solely on the amount awarded in the arbitration. Other courts base it on the amount sought in the arbitration. Finally, most courts take a mixed approach when a party is seeking to vacate an award and reopen the arbitration ' under which the amount in controversy is the amount awarded, in addition to the amount that would be at stake if the arbitration were reopened.

The Fourth Circuit found the present case distinguishable from that precedent, because it had already been commenced in district court and was simply stayed for arbitration. The Fourth Circuit decided that the amount in controversy should not be based on the arbitration award, but rather on the amount originally pleaded in the complaint. The court analogized to two other circumstances where a federal court does not lack jurisdiction ' the first where a federal appellate court has jurisdiction over an appeal even when the judgment in the district court was less than $75,000, and the second that a federal court does not lose jurisdiction to approve a settlement that is less than $75,000. The Fourth Circuit thus held that a federal district court is not divested of jurisdiction to confirm an arbitration award that is less than $75,000. Because the complaint requested more than $75,000, the district court had subject matter jurisdiction to confirm this arbitration award, regardless of the amount awarded.

The appellate court also affirmed the district court's decision that Shiv's motion to vacate the award was untimely. Under the Federal Arbitration Act, a party has one year to confirm an arbitration award, but there is a three-month deadline for motions to vacate an award. Once that time has expired, a party cannot challenge the award even in opposition to a later motion to confirm it.

Franchisee Loses Bid to Transfer Litigation to Its Home State

In Travelodge Hotels, Inc. v. Mangat Houston Race Track, LLC, 2007 WL 2156367 (D. N.J. July 25, 2007), the court denied a Texas franchisee's motions to dismiss and to transfer an action filed by a Delaware franchisor from the federal district court in New Jersey to the federal district court for the Southern District of Texas. The plaintiff hotel franchisor is a Delaware corporation with its principal place of business in New Jersey. It commenced this action against the franchisee company and Mangat, an individual guarantor, alleging breach of contract based on the franchisee's premature termination of the parties' agreement.

The court first considered whether the personal jurisdiction and venue provision of the license agreement applied to Mangat through the guaranty. The guaranty incorporated '17.4 of the license agreement, stating that the parties 'acknowledge that Section 17 of the Agreement, including Sections 17.4 (Remedies, Choice of Venue, and Consent to Jurisdiction)' applies to the guaranty. In the license agreement, however, '17.4 was titled simply 'Remedies.' Although the section did state that the franchisee consented to and waived objection to personal jurisdiction and venue in New Jersey, 'Choice of Venue' and 'Consent to Jurisdiction' were not included in the title of the section. Therefore, Mangat argued that because of the limited title, '17.4 did not apply to him personally under the guaranty. The court rejected this argument, finding that the guaranty unambiguously incorporates all of '17.4, which specifically addresses jurisdiction and venue.

The court then considered the defendants' motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2). The defendants argued that the New Jersey court lacked personal jurisdiction over them because the forum selection clause was unenforceable. The court noted that forum selection clauses are enforced unless the moving party shows that the clause is unreasonable by establishing: 1) that it is the result of fraud; 2) that it violates the public policy of the forum; or 3) that jurisdiction would be so inconvenient as to be unreasonable.

The defendants argued that the clause was fraudulently induced. The court rejected this argument because, while the defendants had submitted some documents alleging fraudulent statements with respect to the agreement as a whole, there was no evidence to support the allegation that the forum selection clause, specifically, was fraudulently induced. Therefore, the court denied the motion to dismiss for lack of personal jurisdiction. Similarly, the court found the choice of venue clause to be enforceable.

Finally, the court considered the defendants' motion to transfer the case to the federal district court for the Southern District of Texas. The New Jersey court stated that there is no list of required factors in deciding whether to transfer an action, but the court should consider both private and public factors. Examples of private factors are the plaintiff's choice of forum, the defendant's preference, where the claims arose, the convenience of the forum to the parties and witnesses, and the location of the books and records. Public factors include relative court congestion, practical considerations for expediting trial, local interest in deciding local controversies, and the judge's familiarity with the applicable law.

In its analysis of the private factors, the court stated that the plaintiff's choice of forum is a paramount consideration, but is not the only consideration. The forum selection clause in the parties' agreement provided that the franchisee 'consents and waives its objection to the non-exclusive personal jurisdiction of and venue in the New Jersey state courts in Morris County, New Jersey and the United States District Court for the District of New Jersey.' The defendants argued that because the forum selection clause was non-exclusive, it was permissive and not mandatory, and therefore it should be given less weight. The court agreed that the clause was permissive, but nonetheless found that it weighed against transfer. With respect to where the case arose and the convenience of the parties, the court acknowledged that the defendants had never been to New Jersey, the franchisor had sought out the defendants in Texas, and the franchised business was located in Texas. But because the court did not consider the case to be complex, such that the documents would be difficult to transport, and because there was no good reason that the defendants' witnesses could not travel to New Jersey, the court did not give weight to the defendants' argument.

With respect to the public factors, the court found that the choice-of-law consideration weighed against the requested transfer, because the parties did not dispute that New Jersey law applied pursuant to a choice-of-law provision in the parties' agreement. The court also found that each state had an interest in trying a breach of contract case involving its own citizens, and therefore, the localized interest factor did not favor either party.

The court found that both the public and private factors weighed against the transfer and denied the motion.

Franchisor's Request for Temporary Restraining Order Denied on 'Notice' Grounds

In Larry's Giant Subs, Inc. v. Gaston Capital Investments, Inc., CCH ' 13,715 (M.D. Fla. Sept. 18, 2007), the federal district court for the Middle District of Florida refused to grant or even consider a request for a temporary restraining order where notice was not provided to the defendants. The plaintiff, Larry's Giant Subs, Inc. ('LGSI'), is a franchisor of Larry's Giant Subs sandwich shops. In 2003, LGSI and defendants entered into a franchise agreement under which Gaston Capital Investments ('GCI') was licensed to operate a Larry's Giant Subs shop in Warner Robins, GA.

LGSI terminated the franchise agreement in April 2007 after GCI failed to make royalty payments. After termination, however, GCI continued to operate under the Larry's Giant Subs name. On Sept. 14, 2007, LGSI commenced a lawsuit against GCI and, at the same time, filed a motion for a temporary restraining order, seeking to enjoin GCI from continuing to use the Larry's Giant Subs name. LGSI did not provide notice to the defendants of its request for a temporary restraining order.

The court reasoned that under Federal Rule of Civil Procedure 65(b) a temporary restraining order may be granted without notice only if '(1) it clearly appears from specific facts shown by affidavit or by the verified complaint that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party or that party's attorney can be heard in opposition, and (2) the applicant's attorney certifies to the court in writing the efforts, if any, which have been made to give the notice and the reasons supporting the claim that notice should not be required.'

LGSI did not show that any efforts had been made to provide notice to the defendants. LGSI argued only that GCI's continued use of the Larry's Giant Subs name is causing and will continue to cause irreparable harm to LGSI's goodwill and its ability to re-enter the market. It argued that this harm would continue to accrue during the delay caused by notice and a hearing.

The court found LGSI's argument insufficient to dispense with the notice requirement. The purpose of a temporary restraining order is to maintain the status quo until a hearing can be held and, in this case, LGSI was seeking to alter the status quo rather than preserve it. Acceptable reasons for dispensing with notice include where the defendant is not known or could not be located in time for a hearing or where notice would frustrate prosecution of the case, such as where the defendant is likely to destroy critical evidence before the hearing. LGSI did not present evidence of either of these reasons for not notifying the defendants. The court declined to grant the temporary restraining order, scheduled a hearing on the motion for a temporary restraining order for Sept. 25 (11 days after the motion was filed), and directed LGSI to promptly notify the defendants.

Cynthia M. Klaus is an attorney at Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. She can be contacted at [email protected] or 952-896-3392.

Federal District Court Has Jurisdiction to Confirm $59K Arbitration Award

In Choice Hotels Int'l, Inc. v. Shiv Hospitality, L.L.C. , 491 F.3d 171 (4th Cir. 2007), the Fourth Circuit held that a federal district court had subject matter jurisdiction to confirm an arbitration award of less than $75,000, the threshold for jurisdiction in a diversity case. The court based its jurisdictional finding on the amount-in-controversy originally pleaded in the franchisor's complaint.

The franchisor, Choice Hotels, and the defendant franchisee, Shiv, entered into a franchise agreement in 1998 authorizing Shiv to operate a Quality Inn in Denham Springs, LA. After Shiv defaulted on payments of various franchise fees required by the franchise agreement, Choice Hotels terminated the agreement in June 2000.

In November 2000, Choice Hotels filed suit in federal district court in Maryland, seeking $116,432.28 in damages, plus interest, fees, and costs. Based on another case interpreting the arbitration clause found in all of Choice Hotels' franchise agreements, the district court stayed the case and ordered the parties to proceed with arbitration. The case then went through arbitration proceedings, with each party making claims against the other. The arbitration hearing was held in March 2003 and resulted in an award for Choice Hotels for $59,208.75.

Nine months after the award was issued, Choice Hotels requested that the district court reopen the stayed case and confirm the award. The franchisee opposed the motion and requested that the arbitration award be vacated. Shiv argued in part that because the award was less than $75,000, the district court lacked subject matter jurisdiction. The district court rejected Shiv's argument and confirmed the award, reasoning that the amount in controversy exceeded $75,000 because it had to take into account both the $59,208.75 awarded to Choice Hotels and the $36,935 that Shiv was now requesting in attorneys' fees. With respect to Shiv's motion to vacate the award, the district court found that the motion was barred because Shiv failed to challenge the award within three months. Shiv appealed.

The Fourth Circuit affirmed the district court's finding of subject matter jurisdiction, but on different grounds. The appellate court first examined cases considering similar issues ' where a party applied to a federal court to confirm or vacate an arbitration award, and the court had to determine the amount in controversy. Some courts base the amount-in-controversy question solely on the amount awarded in the arbitration. Other courts base it on the amount sought in the arbitration. Finally, most courts take a mixed approach when a party is seeking to vacate an award and reopen the arbitration ' under which the amount in controversy is the amount awarded, in addition to the amount that would be at stake if the arbitration were reopened.

The Fourth Circuit found the present case distinguishable from that precedent, because it had already been commenced in district court and was simply stayed for arbitration. The Fourth Circuit decided that the amount in controversy should not be based on the arbitration award, but rather on the amount originally pleaded in the complaint. The court analogized to two other circumstances where a federal court does not lack jurisdiction ' the first where a federal appellate court has jurisdiction over an appeal even when the judgment in the district court was less than $75,000, and the second that a federal court does not lose jurisdiction to approve a settlement that is less than $75,000. The Fourth Circuit thus held that a federal district court is not divested of jurisdiction to confirm an arbitration award that is less than $75,000. Because the complaint requested more than $75,000, the district court had subject matter jurisdiction to confirm this arbitration award, regardless of the amount awarded.

The appellate court also affirmed the district court's decision that Shiv's motion to vacate the award was untimely. Under the Federal Arbitration Act, a party has one year to confirm an arbitration award, but there is a three-month deadline for motions to vacate an award. Once that time has expired, a party cannot challenge the award even in opposition to a later motion to confirm it.

Franchisee Loses Bid to Transfer Litigation to Its Home State

In Travelodge Hotels, Inc. v. Mangat Houston Race Track, LLC, 2007 WL 2156367 (D. N.J. July 25, 2007), the court denied a Texas franchisee's motions to dismiss and to transfer an action filed by a Delaware franchisor from the federal district court in New Jersey to the federal district court for the Southern District of Texas. The plaintiff hotel franchisor is a Delaware corporation with its principal place of business in New Jersey. It commenced this action against the franchisee company and Mangat, an individual guarantor, alleging breach of contract based on the franchisee's premature termination of the parties' agreement.

The court first considered whether the personal jurisdiction and venue provision of the license agreement applied to Mangat through the guaranty. The guaranty incorporated '17.4 of the license agreement, stating that the parties 'acknowledge that Section 17 of the Agreement, including Sections 17.4 (Remedies, Choice of Venue, and Consent to Jurisdiction)' applies to the guaranty. In the license agreement, however, '17.4 was titled simply 'Remedies.' Although the section did state that the franchisee consented to and waived objection to personal jurisdiction and venue in New Jersey, 'Choice of Venue' and 'Consent to Jurisdiction' were not included in the title of the section. Therefore, Mangat argued that because of the limited title, '17.4 did not apply to him personally under the guaranty. The court rejected this argument, finding that the guaranty unambiguously incorporates all of '17.4, which specifically addresses jurisdiction and venue.

The court then considered the defendants' motion to dismiss for lack of personal jurisdiction under Rule 12(b)(2). The defendants argued that the New Jersey court lacked personal jurisdiction over them because the forum selection clause was unenforceable. The court noted that forum selection clauses are enforced unless the moving party shows that the clause is unreasonable by establishing: 1) that it is the result of fraud; 2) that it violates the public policy of the forum; or 3) that jurisdiction would be so inconvenient as to be unreasonable.

The defendants argued that the clause was fraudulently induced. The court rejected this argument because, while the defendants had submitted some documents alleging fraudulent statements with respect to the agreement as a whole, there was no evidence to support the allegation that the forum selection clause, specifically, was fraudulently induced. Therefore, the court denied the motion to dismiss for lack of personal jurisdiction. Similarly, the court found the choice of venue clause to be enforceable.

Finally, the court considered the defendants' motion to transfer the case to the federal district court for the Southern District of Texas. The New Jersey court stated that there is no list of required factors in deciding whether to transfer an action, but the court should consider both private and public factors. Examples of private factors are the plaintiff's choice of forum, the defendant's preference, where the claims arose, the convenience of the forum to the parties and witnesses, and the location of the books and records. Public factors include relative court congestion, practical considerations for expediting trial, local interest in deciding local controversies, and the judge's familiarity with the applicable law.

In its analysis of the private factors, the court stated that the plaintiff's choice of forum is a paramount consideration, but is not the only consideration. The forum selection clause in the parties' agreement provided that the franchisee 'consents and waives its objection to the non-exclusive personal jurisdiction of and venue in the New Jersey state courts in Morris County, New Jersey and the United States District Court for the District of New Jersey.' The defendants argued that because the forum selection clause was non-exclusive, it was permissive and not mandatory, and therefore it should be given less weight. The court agreed that the clause was permissive, but nonetheless found that it weighed against transfer. With respect to where the case arose and the convenience of the parties, the court acknowledged that the defendants had never been to New Jersey, the franchisor had sought out the defendants in Texas, and the franchised business was located in Texas. But because the court did not consider the case to be complex, such that the documents would be difficult to transport, and because there was no good reason that the defendants' witnesses could not travel to New Jersey, the court did not give weight to the defendants' argument.

With respect to the public factors, the court found that the choice-of-law consideration weighed against the requested transfer, because the parties did not dispute that New Jersey law applied pursuant to a choice-of-law provision in the parties' agreement. The court also found that each state had an interest in trying a breach of contract case involving its own citizens, and therefore, the localized interest factor did not favor either party.

The court found that both the public and private factors weighed against the transfer and denied the motion.

Franchisor's Request for Temporary Restraining Order Denied on 'Notice' Grounds

In Larry's Giant Subs, Inc. v. Gaston Capital Investments, Inc., CCH ' 13,715 (M.D. Fla. Sept. 18, 2007), the federal district court for the Middle District of Florida refused to grant or even consider a request for a temporary restraining order where notice was not provided to the defendants. The plaintiff, Larry's Giant Subs, Inc. ('LGSI'), is a franchisor of Larry's Giant Subs sandwich shops. In 2003, LGSI and defendants entered into a franchise agreement under which Gaston Capital Investments ('GCI') was licensed to operate a Larry's Giant Subs shop in Warner Robins, GA.

LGSI terminated the franchise agreement in April 2007 after GCI failed to make royalty payments. After termination, however, GCI continued to operate under the Larry's Giant Subs name. On Sept. 14, 2007, LGSI commenced a lawsuit against GCI and, at the same time, filed a motion for a temporary restraining order, seeking to enjoin GCI from continuing to use the Larry's Giant Subs name. LGSI did not provide notice to the defendants of its request for a temporary restraining order.

The court reasoned that under Federal Rule of Civil Procedure 65(b) a temporary restraining order may be granted without notice only if '(1) it clearly appears from specific facts shown by affidavit or by the verified complaint that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party or that party's attorney can be heard in opposition, and (2) the applicant's attorney certifies to the court in writing the efforts, if any, which have been made to give the notice and the reasons supporting the claim that notice should not be required.'

LGSI did not show that any efforts had been made to provide notice to the defendants. LGSI argued only that GCI's continued use of the Larry's Giant Subs name is causing and will continue to cause irreparable harm to LGSI's goodwill and its ability to re-enter the market. It argued that this harm would continue to accrue during the delay caused by notice and a hearing.

The court found LGSI's argument insufficient to dispense with the notice requirement. The purpose of a temporary restraining order is to maintain the status quo until a hearing can be held and, in this case, LGSI was seeking to alter the status quo rather than preserve it. Acceptable reasons for dispensing with notice include where the defendant is not known or could not be located in time for a hearing or where notice would frustrate prosecution of the case, such as where the defendant is likely to destroy critical evidence before the hearing. LGSI did not present evidence of either of these reasons for not notifying the defendants. The court declined to grant the temporary restraining order, scheduled a hearing on the motion for a temporary restraining order for Sept. 25 (11 days after the motion was filed), and directed LGSI to promptly notify the defendants.

Cynthia M. Klaus is an attorney at Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. She can be contacted at [email protected] or 952-896-3392.