Esguerra-Aguilar, Inc. v. Shapes Franchising, LLC

Background

Esguerra-Aguilar, Inc. and Avi Minkoff sued Shapes Franchising, LLC, and four individuals—Rory O’Dwyer, David Schaefers, Debbie Harris, and Scott Weber. The plaintiffs alleged that the defendants made misrepresentations and omitted material facts in promotional materials and a 2017 Franchise Disclosure Document to persuade them to enter into Shapes franchise relationships. The alleged misrepresentations concerned the required initial investment, revenue and membership projections, and the resources Shapes would provide.

Minkoff signed a franchise agreement for a Shapes franchise in Concord, California. Denise Esguerra-Aguilar signed another agreement for a location in San Jose, California, and later assigned that agreement to Esguerra-Aguilar, Inc. The plaintiffs sought rescission of the franchise agreements and related agreements, recovery of money paid to Shapes, damages, and attorney fees and costs. Their claims included alleged violations of California and Florida franchise and consumer-protection laws, fraudulent inducement, and negligent misrepresentation.

Arbitration provisions and the parties’ arguments

The franchise agreements contained arbitration clauses covering disputes between the parties, including allegations of fraud, misrepresentation, and violations of state or federal law, arising under or connected with the agreements or Shapes clubs. The agreements referred to both the American Arbitration Association’s commercial arbitration rules and the National Arbitration Forum’s franchise-dispute procedures.

The defendants argued that those rules clearly assigned questions about whether the arbitration agreements existed, were valid, or covered particular disputes to the arbitrator. The plaintiffs argued that the references to two different sets of rules prevented a clear and unmistakable assignment of those questions. The plaintiffs also argued that the arbitration clauses were unenforceable and that their claims fell outside the clauses’ scope.

Court’s analysis

The court granted the defendants’ request for judicial notice of the American Arbitration Association rules and the National Arbitration Forum procedures. It then concluded that incorporating either set of rules clearly and unmistakably assigned arbitrability questions to the arbitrator. “Arbitrability” means questions about whether a dispute must be arbitrated, including questions about the arbitration agreement’s existence, validity, and scope.

Because those questions had been assigned to the arbitrator, the court did not decide the plaintiffs’ arguments that the arbitration clauses were unenforceable or that their claims were outside the clauses’ scope. The court stated that the defendants had moved only to stay the case so the plaintiffs could submit their claims to arbitration; the question of which arbitration forum would handle the dispute was not before the court.

The individual defendants were not parties to the franchise agreements. The court nevertheless concluded that they could invoke the arbitration provisions. It found that the plaintiffs’ allegations described the individuals as Shapes officers and directors who directed and supervised the sale of the franchises. The court determined that the alleged wrongful acts were within their agency responsibilities and related to the franchise sales. It also concluded that the claims against Shapes and the individual defendants involved interdependent conduct connected with the franchise agreements, so allowing the claims against the individuals to proceed separately could result in duplicative litigation.

Disposition

The court GRANTED Defendants’ Motion to Stay Pending Arbitration at ECF 13. The plaintiffs must submit their claims for arbitration within 90 days of the order. The court did not dismiss the lawsuit or decide the plaintiffs’ underlying fraud, misrepresentation, franchise-law, or consumer-protection claims.