Sep 9, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Edible Arrangements Franchisee Forced to Litigate Fraud Claims in Arbitration

Fruit Creations, LLC v. Edible Arrangements, LLC, No. 3:20-cv-00479, 2020 U.S. Dist. LEXIS 156779 (M.D. Tenn. Aug. 27, 2020)

In a recent case in the United States District Court for the Middle District of Tennessee, the Court rejected as ‘meritless’ the Edible Arrangements franchisee’s argument that the franchisee’s claims were not subject to arbitration under the Edible Arrangements franchise agreement stating that “the plaintiff’s claim that a reading of the “Enforcement” section of the contract as a whole leads to a conclusion that the parties did not intend to arbitrate their dispute borders on nonsense.”

Excerpts of the Case:

Fruit Creations, LLC v. Edible Arrangements, LLC

United States District Court for the Middle District of Tennessee, Nashville Division

August 27, 2020, Filed

Case No. 3:20-cv-00479

 

Reporter

2020 U.S. Dist. LEXIS 156779 *

FRUIT CREATIONS, LLC, FRUIT CREATIONS OF CLARKSVILLE, LLC, FRUIT CREATIONS OF NASHVILLE, LLC, TONY CONSTANT, and KIMBERLY CONSTANT, Plaintiffs, v. EDIBLE ARRANGEMENTS, LLC, NETSOLACE, INC., EDIBLE CONNECT, LLC, BERRY DIRECT, LLC, EDIBLE BRANDS, LLC, INCREDIBLE EDIBLES, LLC, and TARIQ FARID, Defendants.

Counsel:  [*1] For Fruit Creations, LLC, Fruit Creations of Clarksville, LLC, Fruit Creations of Nashville, LLC, Tony Constant, Kimberly Constant, Plaintiffs: Colby Conforti, Robert F. Salkowski, Robert Zarco, Zarco Einhorn Salkowski & Brito, P.A., Miami, FL; James R. Tomkins, Smith & Tomkins, One Lakeview Place, Nashville, TN.

For Edible Arrangements, LLC, Netsolace, Inc., Edible Connect, LLC, Berry Direct, LLC, Edible Brands, LLC, Incredible Edibles, LLC, Tariq Farid, Defendants: Kevin C. Klein, Ryan P. Loofbourrow, Klein Solomon, PLLC, Nashville, TN.

Judges: ALETA A. TRAUGER, United States District Judge.

Opinion by: ALETA A. TRAUGER

Opinion

 

MEMORANDUM

Before the court is the Motion to Compel Arbitration, Stay These Proceedings, and Stay Discovery (Doc. No. 18), filed jointly by defendants Edible Arrangements, LLC, Netsolace, Inc., Edible Connect, LLC, Berry Direct, LLC, Edible Brands, LLC, Incredible Edibles, LLC, and Tariq Farid. For the reasons set forth herein, the motion will be granted, and this matter will be stayed pending arbitration.

 

  1. THE ARBITRATION PROVISION

Each Franchise [*7]  Agreement filed as an exhibit to the original Complaint contains an identical arbitration clause, which states in relevant part as follows:

Franchisee and [EA] agree that all controversies, disputes, or claims between [EA] and its affiliates, and their respective owners, officers, directors, agents and/or employees, and Franchisee (and/or its owners, guarantors, affiliates and/or employees) arising out of or related to

(1) this Agreement or any other agreement between them;

(2) [EA]’s relationship with Franchisee;

(3) the scope or validity of this Agreement or any other agreement between Franchisee and [EA] (including the validity and scope of the arbitration obligation under this Subsection, which [EA] and Franchisee acknowledge is to be determined by an arbitrator and not by a court); or

(4) any System Standard;

must be submitted for binding arbitration, on demand of either party, to the American Arbitration Association (“AAA”). The arbitration proceedings will be conducted by one arbitrator and, except as this subsection otherwise provides, according to the AAA’s then current commercial arbitration rules. . . . All matters relating to arbitration will be governed by the United States [*8]  Federal Arbitration Act (9 U.S.C. § § 1 et seq.). Judgment upon the arbitrator’s award may be entered in any court of competent jurisdiction.

. . . .

The provisions of this subsection are intended to benefit and bind certain third party non-signatories and will continue in full force and effect subsequent to and notwithstanding this Agreement’s expiration or termination.

(See, e.g., Doc. No. 1-3 § 20.F (“arbitration clause”.)

 

  1. DISCUSSION
  2. The Parties’ Arguments

In their Motion, the defendants argue that (1) when the plaintiffs entered into the Franchise Agreement, they expressly agreed to arbitrate any and all disputes arising out of or related to the Agreement, the franchise relationship, and any other agreement between the parties, including [*12]  the question of arbitrability; (2) the arbitration clause in the Franchise Agreement is valid and enforceable; (3) the plaintiffs’ claims fall within the scope of the arbitration clause; and (4) as a result, the court must stay this proceeding and discovery under § 3 of the FAA and compel arbitration under § 4.

In their Response, the plaintiffs do not contest the existence of the arbitration clause in the Franchise Agreement, that the Franchise Agreement implicates interstate commerce, the assumption that the defendants are all affiliated entities entitled to demand arbitration, or that the claims asserted in the Amended Complaint fall within the scope of the arbitration clause. Instead, the plaintiffs argue that the Motion to Compel should be denied because: (1) Tennessee procedural and substantive law applies to this dispute, including to the question of whether the parties agreed to arbitrate; (2) under Tennessee law, the Connecticut choice-of-law provision in the Franchise Agreement is unenforceable because it violates Tennessee public policy and bears no reasonable relationship to the parties or the Franchise Agreement; and (3) “in reading and interpreting the highly unique ‘Enforcement’ [*13]  Provisions in the Franchise Agreement in a manner that interprets and sheds light on one another and gives effect to each of the provisions, it is clear that the parties did not contractually agree to arbitrate their disputes.” (Doc. No. 30, at 2.)

Regarding this third contention more specifically, the plaintiffs argue that the “Enforcement” section of the Franchise Agreement, of which the arbitration clause is but one subsection (§ 20.F), when read as a whole in a “way that gives effect” to each of the subsections within the “Enforcement” section, “it becomes evident that the Parties never agreed to arbitrate the claims that are the subject of this action.” (Doc. No. 30, at 12.) Specifically, they contend that the arbitration clause must be “read in conjunction” with the “Severability Provision” (§ 20.A) and the “Cumulative Remedies Provision” (§ 20.E).

The portion of the severability clause to which they point states:

[I]f, under any applicable and binding law or rule of any jurisdiction, any provision of this Agreement . . . is invalid, . . . the notice and/or other action required by the law or rule will be substituted for the comparable provisions of this Agreement, and [EA] may modify the invalid [*14]  or unenforceable provision . . . to the extent required to be valid and enforceable or delete the unlawful provision in its entirety. Franchisee agrees to be bound by any promise or covenant imposing the maximum duty the law permits which is subsumed within any provision of this Agreement, as though it were separately articulated in and made a part of this Agreement.

(Doc. No. 30, at 14 (quoting Franchise Agreement, Doc. No. 1-3 § 20.A).) And the “Cumulative Remedies” clause provides that the parties’ “rights under this Agreement are cumulative, and their exercise or enforcement of any right or remedy under this Agreement will not preclude their exercise or enforcement of any other right or remedy which they are entitled by law to enforce.” (Id. at 15 (quoting Doc. No. 1-3 § 20.E).) The plaintiffs argue that (1) these provisions grant the plaintiffs “all rights and remedies available under Tennessee law, and any provision that violates Tennessee law will be substituted by Tennessee law to the extent required for the contract to be valid and enforceable under the laws of Tennessee” (id.); and (2) “[b]ecause Tennessee law provides that Plaintiffs cannot waive their right to a jury trial and have the right [*15]  to bring their claims before this Court, this Court cannot compel arbitration, as the parties did not contractually agree to arbitrate this dispute” (id. at 17).

The plaintiffs do not actually provide any case citations for their pronouncement that Tennessee law protects them from any waiver of their right to a jury trial, but, construing their Response broadly, the court understands them to be cross-referencing the TCPA, specifically Tenn. Code Ann. §§ 47-18-109 and – 113, and a Tennessee law governing the termination of franchise relationships, Tenn. Code Ann. §§ 47-25-1507(a) and – 1509.3 (See Doc. No. 30, at 16 (citing these provisions and referring to the choice-of-law discussion at pages 9-11 of their brief).) Relying on Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989), and Frizzell Construction Co. v. Gatlinburg, L.L.C., 9 S.W.3d 79, 82 (Tenn. 1999), they also argue that Tennessee law applies to the construction of the arbitration clause and that, under Tennessee law, their claim of fraudulent inducement cannot be submitted to arbitration. (Doc. No. 30, at 14 (citing).)

In their Reply, the defendants maintain that the only question legitimately before this court is whether an arbitration agreement was formed, which is always a matter for the court to decide and which the plaintiffs do not actually contest, and that any questions regarding whether the arbitration clause [*16]  is enforceable or pertains to a particular claim have expressly been delegated to the arbitrator. Consequently, they argue, the plaintiffs’ arguments are simply beside the point. More substantively, they contend that (1) the question of which jurisdiction’s substantive law governs the interpretation of the Franchise Agreements as a whole is immaterial to their Motion to Compel, because the FAA, not any state’s law, governs enforcement of the arbitration clause, and the enforceability of the choice-of-law provision governing construction of each Franchise Agreement as a whole is a matter of contract interpretation reserved for the arbitrator; (2) the plaintiffs are simply incorrect in asserting that their state law claims, whether for fraudulent inducement or under the TCPA, are not arbitrable; and (3) reading the “Enforcement” section as a whole and harmonizing its provisions compels a conclusion that the parties intended to arbitrate any disputes arising from their franchise relationship.

  1. DISCUSSION

The court appreciates the creativity of the plaintiffs’ convoluted arguments, but they are wholly without merit. First, the plaintiffs’ arguments that Tennessee law should govern interpretation [*17]  of the Franchise Agreement as a whole, including the arbitration clause, and that the Franchise Agreement’s adoption of Connecticut law to govern construction of the contract is unenforceable as contrary to Tennessee’s choice-of-law rules are largely academic, as these matters involve the interpretation of the Franchise Agreement and are clearly reserved for the arbitrator. (See Doc. No. 1-3 § 20.F (requiring arbitration of any disputes “related to” the Franchise Agreement).)

Second, the plaintiffs’ claim that a reading of the “Enforcement” section of the contract as a whole leads to a conclusion that the parties did not intend to arbitrate their dispute borders on nonsense. The severability clause to which they point is clearly intended to permit severability or modification of any provisions of the Franchise Agreement deemed unenforceable, while permitting enforcement of the remainder. It has no bearing on the arbitration clause, particularly because the plaintiffs present no viable argument that the arbitration clause is unenforceable under any state’s law. Likewise, the cumulative rights clause simply appears to mean that, for example, bringing claims for breach of the Franchise Agreement [*18]  would not extinguish or affect a party’s ability to enforce other “rights or remedies” to which it is entitled by contract or under the applicable law. The clause does not detract from, or affect, the enforceability of the arbitration clause.

More critically, these provisions cannot be read to contradict or override the clearly expressed intention of the parties, as set forth in the arbitration clause, that “all controversies, disputes, or claims” “arising out of or related to” the Franchise Agreement, the franchise relationship, or “the scope or validity” of the Franchise Agreement—”including the scope and validity of the arbitration obligation” itself—”must be submitted for binding arbitration, on demand of either party.” (Doc. No. 1-3 § 20.F.) This provision clearly and unmistakably delegates to the arbitrator the authority to determine “the scope or validity of the arbitration obligation”—that is, the authority to determine threshold questions of arbitrability. In addition, the arbitration clause provides that the arbitration shall be conducted in accordance with the rules of the American Arbitration Association (“AAA”) and governed by the FAA. (Id.) The Sixth Circuit has held that “the [*19]  incorporation of the AAA Rules [into an arbitration agreement] provides ‘clear and unmistakable’ evidence that the parties agreed to arbitrate ‘arbitrability.'” Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 844 (6th Cir. 2020); see also McGee v. Armstrong, 941 F.3d 859, 866 (6th Cir. 2019) (relying on the incorporation of the AAA Rules to find that the parties had “clearly and unmistakably” agreed to arbitrate “arbitrability” (citation omitted)); In re: Auto. Parts Antitrust Litig., 951 F.3d at 382 (reading McGee as holding that the incorporation of the AAA Rules “shows that the parties ‘clearly and unmistakably’ agreed that the arbitrator would decide questions of arbitrability” (citation omitted)). In this case, the clear language of the arbitration clause itself delegates to the arbitrator questions of arbitrability, and the incorporation of the AAA Rules simply reaffirms that intention.

The plaintiffs implicitly are arguing that their fraudulent inducement and TCPA claims, in particular, are not subject to arbitration and that Tennessee franchise law does not permit waiver of certain rights. These arguments too are without merit. TCPA claims may be subject to arbitration. See Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351, 361 (Tenn. Ct. App. 2001) (holding that claims under the Tennessee Consumer Protection Act are subject to arbitration and recognizing that, to the extent that TCPA prohibits arbitration because it [*20]  is an unlawful waiver of a plaintiff’s right to proceed in a judicial forum, the TCPA is preempted by the FAA (citing Southland Corp. v. Keating, 465 U.S. 1, 12, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984))). And the franchise statutes to which the plaintiffs cite provide that certain rights pertaining to the termination of franchises are non-waivable. See Tenn. Code Ann. §§ 47-25-1507(a) & -1509. The plaintiffs have not shown that their termination or renewal rights are implicated here or that these statutes actually prohibit arbitration of franchise-related claims. Moreover, even if the statutes were applicable and could be construed as prohibiting arbitration of certain claims, they too would be preempted by the FAA. See Concepcion, 563 U.S. at 341 (“When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”)

Finally, while the Tennessee Supreme Court has indeed recognized that, under Tennessee law, fraudulent inducement claims are for the court rather than the arbitrator, see Frizzell Constr., 9 S.W.3d at 85, the United States Supreme Court has held that, when an arbitration clause is governed by the FAA, a claim of fraudulent inducement of the entire contract may be resolved through arbitration, in the absence of evidence that the contracting parties intended [*21]  to withhold that claim from arbitration. Rent-A-Ctr., 561 U.S. at 70; see also Prima Paint Corp. v. Flood & Conklin Mfg., 388 U.S. 395, 403, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967). On the other hand, if a plaintiff claims that the arbitration clause itself was fraudulently induced, the court in which the complaint was filed should generally address that claim prior to compelling arbitration. Rent-A-Ctr., 561 U.S. at 71.

This principle pertains irrespective of which state’s law may govern construction of the underlying contract of which the arbitration provision is a part. Accord SL Tenn., LLC v. Ochiai Ga., LLC, No. 3:11-CV-340, 2012 U.S. Dist. LEXIS 13996, 2012 WL 381338, at *5 (E.D. Tenn. Feb. 6, 2012) (rejecting the plaintiff’s argument that, because the parties’ contract contained a Tennessee choice-of-law provision, Tennessee law governed whether its claim for fraud in the inducement was arbitrable under the contract). This is because “the underlying issue of arbitrability [is] a question of substantive federal law: ‘Federal law in the terms of the [FAA] governs that issue in either state or federal court.'” Southland Corp., 465 U.S. at 12 (quoting Moses H. Cone, 460 U.S. at 25 n.32). Thus, the Sixth Circuit has held under very similar circumstances that the inclusion of a choice-of-law clause in a contract, calling for application of a particular state’s law in interpreting the contract, does not preclude application of the FAA or make the issue of whether the plaintiff [*22]  was fraudulently induced to enter a contract non-arbitrable. Ferro Corp. v. Garrison Industries, Inc., 142 F.3d 926, 937 (6th Cir. 1998).

In Ferro, the court held that the district court had erred in relying on Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989), to reach a contrary conclusion, both because Volt is distinguishable and because it has been narrowed by more recent holdings. Relying instead on Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995), the Sixth Circuit found, in light of the “conspicuously broad” arbitration provision at issue there, which applied to “[a]ll controversies and claims arising out of or relating to this Agreement,” that the choice-of-law provision was not an “‘unequivocal inclusion’ of the Ohio rule which arguably holds that the issue of fraudulent inducement is one for a court, and not an arbitrator, to decide.” Ferro, 142 F.3d at 937.

Ferro and the cases upon which it relies are binding here. Consequently, the plaintiffs’ reliance in this case on Volt and on Frizzell is unpersuasive. The Sixth Circuit and later Supreme Court opinions have rejected the construction of Volt that the plaintiffs propose. And Frizzell, though it stands for the principle that, under Tennessee law, fraudulent inducement claims are non-arbitrable, is simply not binding on this court. As a sister district court within this state has noted under similar circumstances: [*23]

The Court acknowledges that the analysis and holding of Frizzell, which neither cites nor discusses Ferro, supports plaintiff’s argument. However, the Court finds Ferro to be the controlling analysis for this Court given the applicability of the FAA in both state and federal courts. Ferro contains an extensive review of the Supreme Court’s recent FAA decisions in regard to the interaction between a state law and the FAA when the laws are in conflict, when the contract at issue contains a generic choice-of-law provision which fails to specify whether it governs the arbitration clause, and where the arbitration clause contains language very similar to that at issue in this case.

SL Tenn., 2012 U.S. Dist. LEXIS 13996, 2012 WL 381338, at *8.

Of course, in the case at bar, the Franchise Agreement does not even contain a Tennessee choice-of-law provisions, much less a choice-of-law provision that unequivocally pertains to the arbitration clause itself. Rather, the arbitration clause provides that it is to be construed under the FAA, which simply further bolsters this court’s conclusion that federal law applies. And the plaintiffs do not claim that the arbitration clause was fraudulently induced; they allege that the Franchise Agreement as a whole was [*24]  fraudulently induced. (See Doc. No. 1-22 ¶ 153 (“[T]he Franchisor’s false representations that it would provide a franchise system to Plaintiffs were made knowingly and were intended to induce Plaintiffs to enter into franchise agreements . . . .”).) It is clear that federal law applies to the question of arbitrability in this case, and federal law provides that “any challenge to the validity of the Agreement as a whole [is left] for the arbitrator.” Rent-A-Ctr., 561 U.S. at 72.

 

See Tenn. Code Ann. § 47-25-1501 (“It is the intent of the general assembly that small businesses operating within Tennessee pursuant to franchise agreements should be provided uniform rights and procedures to prevent arbitrary and capricious business practices by franchisors seeking to terminate or modify their franchise relationships or failing to renew existing franchise relationships.”).

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