Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ohio App. Ct.: Hair salon franchisor did not waive right to arbitrate claims of franchisee, (Mar 5, 2014)

By Peter Reap, J.D., LL.M.

An Ohio state trial court did not abuse its discretion in deciding that hair salon franchisor Salon Lofts, LLC, and Salon Lofts Franchising, LLC did not waive its right to arbitrate claims for breach of franchise agreement and declaratory relief (Counts two and three of the complaint) brought by a terminated franchisee, Sean A. Stoner and his company Buckheel Investments, LLC, according to an Ohio appellate court (Stoner v. Salon Lofts, LLC, March 4, 2014, O’Grady, A.). However, although the parties did not raise the issue, the trial court erred by only staying part of the proceedings instead of the entire proceeding pending arbitration. Thus, the trial court’s judgment was reversed to the extent the court stayed only a portion of the proceedings and the case remanded for the court to enter an order staying the entire action until arbitration was completed.

Background. The franchisee worked as general counsel and vice president of investor relations for Salon Lofts from April 2007 until his termination on August 24, 2010. The franchisee also owned 5 percent of the franchisor. At some point, the franchisee paid $30,000 for the franchisor’s Charlotte franchise.

In September 2010, the franchisee filed a complaint against the franchisor. In Count 1, he alleged breached of his employment agreement. In Count 2, the franchisee alleged breach of franchise agreement, and Count 3 requested a declaratory judgment confirming his 5 percent interest in the franchisor.

In November 2010, the franchisor filed an answer, counterclaims, and a jury demand. In their twelfth defense to the complaint, the franchisor stated: “Some or all of the claims in Plaintiffs’ Complaint are subject to mandatory arbitration and should be dismissed.” The franchisor also raised ten counterclaims.

In April 2013, over two years after appellees filed the motion to stay, the trial court ruled that Counts 2 and 3 were subject to arbitration. The court found the eighth counterclaim was subject to arbitration to the extent it sought monetary damages, as opposed to injunctive relief. The court found the totality of the circumstances did not establish waiver. The franchisee appealed, asserting that the trial court erred in rejecting its waiver argument and in compelling arbitration.

Arbitration

The General Assembly endorsed the strong policy in favor of arbitration of disputes in R.C. 2711.01(A), which provides that an arbitration agreement shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract, the court noted. R.C. 2711.02 provides for enforcement of an arbitration agreement. A party to such an agreement may obtain a stay of litigation in favor of arbitration under R.C. 2711.02(B).

A party asserting waiver must prove that the waiving party knew of the existing right to arbitrate and, based on the totality of the circumstances, acted inconsistently with that known right. In determining whether the totality of the circumstances supports a finding of waiver, a court may consider such factors as: (1) whether the party seeking arbitration invoked the court’s jurisdiction by filing a complaint or claim without first requesting a stay; (2) the delay, if any, by the party seeking arbitration to request a stay; (3) the extent to which the party seeking arbitration has participated in the litigation; and (4) whether prior inconsistent acts by the party seeking arbitration would prejudice the non-moving party.

The franchisee did not challenge the trial court’s finding that Counts 2 and 3 of the complaint and the franchisor’s eighth counterclaim, to the extent it sought monetary damages, were subject to arbitration. Instead, the franchisee argued that the court erred when it found the franchisor did not waive arbitration.

The franchisor raised the issue of arbitration in its answer, but it did not immediately request a stay. Instead, it invoked the trial court’s jurisdiction by filing ten counterclaims and a jury demand. The franchisor argued that this action, by itself, was sufficient to support a finding of waiver.

The trial court found that the franchisor timely requested a stay within five months of filing their responsive pleading. This finding was supported by the fact that the franchisor made its request about three months before the discovery cut-off date, before any dispositive motions were filed, and over five months before the trial date.

The franchisee contended that the franchisor extensively participated in the litigation process and highlighted the fact that the franchisor sought and received two extensions to answer, move or otherwise plead. However, the appellate court failed to see how a request for more time to respond to a complaint was inherently inconsistent with the pursuit of arbitration.

The franchisee complained that the parties engaged in substantial discovery on Counts 2 and 3, asserting that the parties exchanged around 20,000 documents, “many of which were directly related” to Counts 2 and 3. In addition, the franchisee argued that the franchisor issued several broadly-worded subpoenas to third-parties that required production of documents related to Counts 2 and 3.

As the trial court found, the franchisor asserted, and the franchisee “have not denied, that the vast majority of the discovery exchanged [is] * * * related to Count I, which is not subject to the arbitration provisions at issue,” the appellate court explained. Moreover, the franchisee had the burden to prove waiver, and it was not clear how much of the discovery and protection order related solely to arbitrable claims, particularly when Counts 1 and 3 “overlap significantly.”

The franchisee also contended that in April 2011, the franchisor participated in a status conference “without mentioning their intent to move to stay the proceedings and compel arbitration.” However, the franchisor’s failure to explicitly mention a motion it already filed and served on the franchisee did not demonstrate waiver, the court determined.

Next, the franchisee generally cited over 115 items in the record as proof that the franchisor actively litigated Counts 2 and 3 after filing the motion to stay. The franchisee did not make this argument at the trial level and could not make it for the first time on appeal, the court held. Moreover, it was apparent that many of the documents cited related to nonarbitrable issues, such as the preliminary injunction.

Because not all of the claims in this lawsuit were arbitrable, filing a disclosure of witnesses was not necessarily inconsistent with the pursuit of arbitration, the court said. Even if some of the named witnesses possess information on the arbitrable claims, that did not necessarily mean they lack knowledge of the non-arbitrable claims.

The franchisee argued that arbitration ran contrary to public policy in this case because arbitration would not be economical or expeditious. It suggested that the time and expense to arbitrate now would prejudice the franchisee. The trial court found the franchisee did not allege any prejudice, and the trial court did not find any. Although the franchisee generally claimed arbitration would not be an inexpensive or quick resolution to the parties’ conflict, the franchisee did not make any of the more specific arguments that he made on appeal and thus he waived them, the court decided.

There was nothing unreasonable, arbitrary or unconscionable in the trial court’s finding that the franchisor did not prejudice the franchisee. While arbitration could entail additional expenses, such as a fee for the arbitrator, those expenses would have existed even if the franchisor had immediately filed a motion to stay. Further, the discovery that had already occurred in this case could be useful in arbitration. Based on the foregoing, the trial court did not abuse its discretion in finding that, based on the totality of the circumstances, the franchisor did not act inconsistently with the right to arbitrate.

The case is No. 13AP-437.

Attorneys: Charles H. Cooper (Cooper & Elliott, LLC) for Sean A. Stoner. Thomas M.L. Metzger (Littler Mendelson) for Salon Lofts, LLC.

Companies: Salon Lofts, LLC; Buckheel Investments, LLC

Cases: FranchisingDistribution OhioNews