Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Penn.: $645K arbitration award confirmed against Choice Hotels franchisees despite claims of arbitrator misconduct, (Sep 23, 2025)

By Wendy Biddle, J.D.

Challenges to arbitrator's evidence rulings, alleged bias, and late award issuance in franchise dispute were rejected.

The federal district court in Allentown, Pennsylvania confirmed a substantial arbitration award in favor of Choice Hotels International, rejecting franchisees' arguments that the arbitrator engaged in misconduct, displayed evident partiality, and exceeded his authority by issuing a late decision. The ruling reinforced the narrow grounds available for vacating arbitration awards under the Federal Arbitration Act (Choice Hotels International, Inc. v. Jai Sai Baba LLC, No. 2:23-cv-03360-JMG (E.D. Pa. Sept. 11, 2025)).

Background. The dispute originated in June 2020 when franchisees Jai Sai Baba LLC, Dipesh Patel, and MDPD13 Investments LLC filed suit against Choice Hotels International Inc. and Choice Hotels Owners Council. The franchisees alleged fraud and breach of contract claims against the hotel chain.

After Choice Hotels successfully moved to compel arbitration in March 2021, the case proceeded to an eight-day arbitration hearing conducted by Arbitrator Alan Baron in August 2022. The arbitration featured testimony from 13 witnesses and over 170 exhibits, with extensive discovery including thousands of pages of documents.

The arbitration centered on two primary issues: whether Choice Hotels improperly used system fees to fund "key money" loans to prospective franchisees, and whether Choice Hotels breached its obligations to obtain volume discounts for franchisees. On January 12, 2023, Arbitrator Baron issued an award denying all franchisee claims and awarding Choice Hotels $645,770.43 in fees, costs, and expenses.

Choice Hotels filed an application for Confirmation of Arbitral Award and the franchisees filed a motion to Vacate the Arbitral Award.

Key money dispute. The franchisees' challenge focused heavily on Arbitrator Baron's handling of evidence regarding key money loans. During the hearing, Choice Hotels' Vice President Michael Shemer testified that key money loans were funded from a broader system fund comprising various revenue sources, not exclusively from system fees paid by franchisees. The franchisees argued this testimony contradicted public statements made by Choice executives on August 3, 2022, shortly after Shemer's testimony.

Following the alleged contradictory statements, Arbitrator Baron ordered both parties to submit briefing on the key money issue. Choice Hotels included an affidavit from Frank Cuomo, Senior Director of SEC Reporting, which confirmed Shemer's testimony and explained that the public statements did not contradict it. The franchisees did not provide comparable evidentiary support in their brief.

On August 19, 2022, Arbitrator Baron resolved the key money issue in Choice Hotels' favor. The franchisees requested reconsideration, which was denied, and then sought to cross-examine Cuomo. Arbitrator Baron denied this request as well.

Misconduct claims. The court applied the established standard that arbitrator misconduct under Section 10(a)(3) of the FAA requires an error "which so affects the rights of a party that it may be said that he was deprived of a fair hearing." The court emphasized that arbitrators have wide latitude in conducting proceedings and are not constrained by formal rules of procedure or evidence.

The court found that the franchisees received an adequate opportunity to present their case, noting that the hearing was extended from five to eight days at their request. The court distinguished the case from situations requiring vacatur, explaining that while the franchisees were limited in their ability to cross-examine Cuomo, they had extensive opportunities to present evidence through other means.

Significantly, the court noted that Arbitrator Baron relied on multiple sources of evidence beyond Cuomo's affidavit, including Shemer's testimony (who was the franchisees' own witness), documentary evidence such as financial statements, and the plain language of the franchise agreement. The court emphasized that cross-examination rights are not absolute in arbitration proceedings, citing Third Circuit precedent.

Evident partiality. The franchisees' second challenge alleged that Arbitrator Baron displayed evident partiality due to his previous professional relationship with Choice Hotels. Baron had served as arbitrator in twelve prior cases involving Choice Hotels, all limited to franchise agreement defaults rather than the complex issues in this case.

The court applied the demanding "evident partiality" standard, which requires bias that is "sufficiently obvious that a reasonable person would easily recognize it" along with "proof of circumstances powerfully suggestive of bias." Crucially, the court noted that both parties were aware of Baron's prior relationship with Choice Hotels before the arbitration began. Baron disclosed this information and answered all questions the franchisees posed about it, after which they expressly stated they would not object and wished to proceed.

The court noted that parties should be free to proceed with an arbitrator despite apparent bias if they choose to do so. The court rejected the franchisees' attempt to challenge the very information they had previously accepted, noting that Baron's prior professional relationship merely indicated industry experience and demand as an arbitrator.

The court also addressed the franchisees' dissatisfaction with Baron's rulings on volume discounts, where he interpreted the franchise agreement's use of "may" as permissive rather than mandatory language regarding Choice Hotels' obligation to obtain volume discounts. The court concluded that the franchisees' arguments amounted to disagreement with Baron's conclusions rather than evidence of bias.

Timeliness challenge. The franchisees' final argument claimed Baron exceeded his powers by issuing the award after the applicable deadline. The parties disputed whether the award was 10 days late (under Petitioners' calculation) or 80 days late (under Respondents' calculation), with the discrepancy stemming from different interpretations of when the hearing record closed.

The court noted that while the parties' contract incorporated the Commercial Arbitration Rules of the American Arbitration Association, which require awards within 30 days of closing the hearing, the contract included no language specifying consequences for late issuance. The court found guidance in circuit court precedent suggesting that timing deadlines serve as goals to encourage prompt resolution rather than jurisdictional limits.

The court determined that the arbitrator's delay was reasonable given the complexity of post-hearing briefing requirements and the need to address attorneys' fees and costs. The court emphasized that the franchisees failed to demonstrate actual prejudice from the delay, noting their general claim about additional briefing costs lacked specific evidence.

Having rejected all three grounds for vacatur, the court confirmed the entire arbitral award pursuant to Section 9 of the FAA.

The Case is No. 2:23-cv-03360-JMG.

Judge: Gallagher, J.

Attorneys: Virginia A. Gibson (Hogan Lovells US LLP) for Choice Hotels International, Inc. Robert H. Kline (White and Williams, LLP) for Jai Sai Baba LLC.

Companies: Choice Hotels International, Inc.; Jai Sai Baba LLC

Cases: FranchisingDistribution PennsylvaniaNews