Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. D. N.J.: Arbitration awards against former Subway franchisee confirmed, (Apr 8, 2016)

By Michael Menzhuber, J.D., LL.M.

A Chancery court’s preliminary injunction, barring enforcement of four arbitration awards that terminated a former franchisee’s Subway franchise agreements and required her to pay fees due and certain costs of arbitration, was vacated by the U.S. Bankruptcy Court in Newark, New Jersey (In Re: Patwari, April 7, 2016, Sherwood, J.).

Jesal Patwari, formerly Jesal Desai (Desai-Patwari), entered into four separate franchise agreements with Doctor’s Associates, Inc. (DAI) for the operation of Subway sandwich shops in northern New Jersey and separate subleases for each store with Subway Real Estate Corp. (SREC). Each franchise agreement contained an arbitration clause that required arbitration of all claims except landlord tenant actions commenced by SREC and claims by DAI for injunctive relief related to its trademarks. The clause further precluded Desai-Patwari from suing any of DAI’s agents (Yogesh Dave and Subway Development Co.) for disputes related to the franchise agreements.

After the stores were in operation, Desai-Patwari fell behind on the rent. DAI brought four landlord-tenant actions against her and then arbitration proceedings against her and each of the stores. Desai-Patwari failed to appear at the final arbitration hearing and four arbitration awards were entered against her. The relief granted included: (1) termination of the franchise agreements; (2) de-identification of the stores as Subway stores; and (3) payment by Desai-Patwari of under-reported fees, royalties, advertising fees, and certain costs of arbitration.

Desai-Patwari filed a complaint in Chancery court to enjoin enforcement of the arbitration awards and termination of the four franchised Subway stores, alleging that arbitration awards violated the New Jersey Franchise Practices Act (NJFPA). The four landlord-tenant actions were consolidated with the Chancery action. The Chancery judge subsequently issued a preliminary injunction to enjoin enforcement of the award.

DAI filed a complaint in district court seeking a preliminary injunction preventing Desai-Patwari from continuing to operate the Subway franchise stores and a claim for trademark infringement. DAI also removed the Chancery action to the district court. Desai-Patwari filed affirmative defenses against DAI, as well as a counterclaim asserting that the arbitration clause was unconscionable and, therefore, unenforceable.

The bankruptcy court determined that Desai-Patwari’s reliance on the NFJPA and the injunction issued in the Chancery action were misplaced because the Federal Arbitration Act (FAA) precludes resorting to state court for matters the parties agreed to arbitrate. Because the NFJPA was preempted, the court vacated the preliminary injunction issued by the Chancery court.

With respect to the argument that the arbitration clause was unconscionable, the bankruptcy court determined that the arbitration clause was not procedurally unconscionable because: (1) Desai-Patwari was neither uneducated nor unsophisticated as to business matters; (2) she had several other food franchises to choose from if she disagreed with the terms of the franchise agreements and arbitration provisions; (3) there was no evidence that the franchise agreement was presented to her on an “as is” basis; and (4) she entered into four franchise agreements between 2002 and 2006 and, thus had multiple opportunities to have legal assistance with the terms of the franchise agreements.

Furthermore, the limitation restricting Desai-Patwari to the arbitration forum was not unconscionable because a single forum for resolution of all franchise matters was in keeping with the goals of the American Arbitration Association (AAA) and costs would only be imposed if she proceed in an a different forum. Also, the site for the arbitration hearing was easily accessible to her and she did, in fact make an initial appearance at the hearing.

Finally, the bankruptcy court found that Desai-Patwari sought relief in the wrong forum when she sought a preliminary injunction in Chancery court. Therefore, the preliminary injunction that enjoined enforcement of the arbitration award should be vacated.

The case is No. 08-26178 (JKS).

Attorneys: Forrest Scott Turkish (Law Office of Forrest Scott Turkish) for Doctor's Associates Inc. Susheela Verma (Law Offices of Susheela Verma) for Jesal Desai a/k/a Jesal A. Patwari.

Companies: Doctor's Associates Inc.

Cases: FranchisingDistribution NewJerseyNews