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CK Franchising, Inc. v. SAS Services Inc.

United States District Court, E.D. Kentucky, Southern Division

July 10, 2019

SAS SERVICES INC.,[1] Defendant.


          Robert E. Wier United States District Judge.

         The parties filed rival summary judgment motions. Plaintiff CK Franchising, Inc. (CKFI) seeks a declaration that the forum-selection component of the alternative dispute resolution (ADR) provision in its franchise agreement with Defendant SAS Services Inc. (SAS) is valid and enforceable. SAS disagrees. Because the Court finds the ADR forum choice valid and binding on SAS, it grants CKFI's motion and denies Defendant's competing effort.

         A. Factual and Procedural Background

         The material facts of this case are straightforward and not in dispute. CKFI (the “CK” standing for “Comfort Keepers”) is a national franchisor of in-home, nonmedical care services. DE #11 ¶¶ 2, 6. Sarah Short and her mother, Mary Perkins, jointly own SAS, which operates a CKFI franchise in the Somerset, Kentucky area. DE #55-1 (Short Dep.) at 11-15.[2] Short, who formerly worked for a Lexington CKFI franchisee, purchased the Somerset territory in 2007 with Perkins and, accordingly, entered a franchise agreement with CKFI.[3] Id. at 15-16. Before entering the franchise agreement, Short and Perkins reviewed the contract and accompanying Offering Circular (see DE #51-4) and consulted with an attorney about the documents and prospective enterprise.[4] DE #55-1 at 25-26. Short and Perkins are both educated and have experience in the in-home care industry. Short has a master's degree in social work and a specialized certificate in gerontology, and she worked with other CKFI franchisees in less formal capacities before purchasing the Somerset territory. See DE #55-1 at 8-20. Similarly, Perkins is college-educated and familiar with the industry. See id.

         The 2007 CKFI-SAS franchise contract mandated certain ADR procedures. See DE #51-3 at 24 (§§ 12.7-12.8). Relevant here, it provided that mediation and arbitration would occur “in Dayton, Ohio or, if Comfort Keepers has moved its principal place of business, in the city where Comfort Keepers' principal place of business is located.” Id. at 3 (§§ 12.7.3 & 12.8).[5] After reviewing the 2007 contract with Short's attorney (Randall Short), she had a few matters she wished to discuss further with CKFI, but did not recall which issues those were, specifically, or whether the ADR portion of the agreement was one of them. DE #55-1 at 25 (“[W]e had some things within it that [Randall Short] brought to my attention, wanting me to be aware of, negotiate on, what have you[.]”); id. at 26-28 (Sarah Short testifying that she did not recall which matters those were or whether she and Randall Short ever discussed the ADR provision). Per SAS, CKFI was unwilling to alter the 2007 agreement. Id. at 25 (“[E]ssentially the franchise agreement was as it was written. There was no, ‘Well, sure, we'll change that for you, Sarah.' It is what it is, you sign it as it is.”). Nevertheless, SAS entered the franchise agreement with CKFI, and, over the next ten years as a CKFI franchisee, grew to employ thirty people and serve approximately seventy-five clients in the Somerset area. Id. at 8-10.

         The 2007 franchise agreement, with a ten-year term, became subject to optional renewal in 2017. In March 2016, CKFI contacted SAS to alert it to the upcoming contract expiration and inquire whether SAS wished to renew. See DE #55-5. There is no indication in the record that SAS then responded to the March 2016 inquiry. In October 2016, CKFI again reached out to SAS regarding franchise renewal. See DE #55-6. Similarly, the record divulges no SAS response to the October 2016 letter. In late January 2017, Short emailed her regional director (at the time, Emily Jones), noting that her “10 year franchise agreement [wa]s up at the end of April” and asking how to “go about reviewing and signing a new one[.]” DE #55-1 at 48-49. Around this time, Short also became concerned that the Lexington, Kentucky CKFI franchisee was serving clients in her protected Somerset territory. Id. at 51-52; see Id. at 11. Short contacted Jones about the alleged rogue franchisee but states that she received no response. Id. at 51-52 (“I asked . . . Emily to let me know what my provisions of my territory are because we're in dispute and I have a franchise agreement to sign and I want to make sure that I actually have a protected territory, I don't believe I got a response[.]”).

         In April 2017, Short and Perkins received a letter regarding franchise renewal (dated April 10), which enclosed the new franchise agreement. DE #55-7. The letter directed SAS (if renewing) to return the executed new agreement to CKFI by April 28, 2017. Id. The 2017 franchise renewal agreement (here referred to as “the Agreement”) contained forum-selection clauses within the “Mediation” and “Arbitration” sections (grouped together in the ADR portion of the Agreement) that closely resembled the 2007 language. The Agreement provided that “mediation must take place in the city where CKFI's principal place of business is then located[, ]” and further stated that “arbitration must be brought in the city where CKFI's principal place of business is then located.” DE #51-7 at 3-4 (§§ 12.7.3 & 12.7.4). SAS did not discuss the 2017 Agreement with an attorney, nor did it seek to negotiate any provision in the Agreement with CKFI. See DE #55-1 at 51 (“I could have, but I knew how this worked. You take it, read it, sign it, turn it back. There's no changing of things, so what does it matter in the end?”); id. at 59 (Short responding that she did not seek to negotiate the ADR provision in the 2017 Agreement due to “the experience of '07 where you don't negotiate it”). Regardless, SAS signed the 2017 renewal Agreement and returned the executed copy to CKFI. Id. at 52 (“I signed the document anyway because you got a business . . . You can't just shut down your business.”); see also DE #51-7 at 5 (2017 Agreement signatures). Short, did, however, personally read and review the 2017 Agreement. See DE #55-1 at 50, 56-59.[6]

         In December 2017, after SAS entered the Agreement, CKFI announced that it would be relocating its corporate headquarters from Dayton, Ohio to Irvine, California. DE #51-10 at 1. Thereafter, SAS initiated the ADR process to address the issue of the encroaching CKFI franchisee, and CKFI sought to enforce the forum-selection component within the Agreement's ADR provision. DE #55-1 at 74 (“I started the ADR in good faith. We were told . . . that CKFI was not budging on this . . . it had to be in California, it could not be in Dayton[.]”); id. at 77 (“[W]e were told exclusively it had to be done in California[.]”).

         Ultimately, the parties failed to reach a consensus on the ADR location issue; this action followed. CKFI requests a declaratory judgment that the ADR forum-selection elements are valid and enforceable as written. DE #11 (Amended Complaint). After limited discovery to place the (undisputed) relevant facts in the record, the parties each sought summary judgment on their respective legal theories. DE ##51 & 52. Both motions are fully briefed and ripe for decision. See DE ## 56, 57, 58, 59.

         B. Summary Judgment Standard

         A court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A reviewing court must construe the evidence and draw all reasonable inferences from the underlying facts in favor of the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 106 S.Ct. 1348, 1356 (1986); Lindsay v. Yates, 578 F.3d 407, 414 (6th Cir. 2009). Additionally, the court may not “weigh the evidence and determine the truth of the matter” at the summary judgment stage. Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2511 (1986).

         The burden of establishing the absence of a genuine dispute of material fact initially rests with the moving party. Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2553 (1986) (requiring the moving party to set forth “the basis for its motion, and identify[] those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate an absence of a genuine issue of material fact”); Lindsay, 578 F.3d at 414 (“The party moving for summary judgment bears the initial burden of showing that there is no material issue in dispute.”). If the moving party meets its burden, the burden then shifts to the nonmoving party to produce “specific facts” showing a “genuine issue” for trial. Celotex Corp., 106. S.Ct. at 2253; Bass v. Robinson, 167 F.3d 1041, 1044 (6th Cir. 1999). However, “Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp., 106 S.Ct. at 2552; see also Id. at 2557 (Brennan, J., dissenting) (“If the burden of persuasion at trial would be on the non-moving party, the party moving for summary judgment may satisfy Rule 56's burden of production in either of two ways. First, the moving party may submit affirmative evidence that negates an essential element of the nonmoving party's claim. Second, the moving party may demonstrate to the Court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim.” (emphasis in original)).

         A fact is “material” if the underlying substantive law identifies the fact as critical. Anderson, 106 S.Ct. at 2510. Thus, “[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Id. A “genuine” issue exists if “there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.” Id. at 2511; Matsushita Elec., 106 S.Ct. at 1356 (“Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.'”) (citation omitted). Such evidence must be suitable for admission into evidence at trial. Salt Lick Bancorp v. FDIC, 187 Fed.Appx. 428, 444-45 (6th Cir. 2006).

         The summary judgment standard remains the same where the parties pursue cross-motions; the Court “must evaluate each party's motion on its own merits” and, in doing so, “draw all reasonable inferences against the party whose motion is under consideration.” Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991) (citation omitted); accord Lansing Dairy Inc. v. Espy, 39 F.3d 1339, 1347 (6th Cir. 1994). Likewise, the selfsame summary judgment standard applies equally in the declaratory judgment context. See, e.g., Olympic Arms v. Magaw, 91 F.Supp.2d 1061, 1066 (E.D. Mich. 2000), aff'd sub nom. Olympic Arms, et al. v. Buckles, 301 F.3d 384 (6th Cir. 2002) (applying ordinary summary judgment standard in declaratory judgment action); Cont'l Cas. Co. v. Auto Plus Ins. Agency, LLC, 676 F.Supp.2d 657, 661 (N.D. Ohio 2009) (same); Cameron v. Hess Corp., 974 F.Supp.2d 1042, 1049 (S.D. Ohio 2013) (same). Here, given the lack of any factual dispute surrounding the contractual ADR forum issue, the parties (and the Court) agree that summary judgment is appropriate. See Terry Barr Sales Agency, Inc. v. All-Lock Co., 96 F.3d 174, 179 (6th Cir. 1996) (“In contract actions, summary judgment may be appropriate when the documents and/or evidence underlying the contract are undisputed and there is no question as to intent.”).

         C. FAA Applicability and Subject Matter Jurisdiction

         The parties dispute whether the Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq., or the Kentucky Uniform Arbitration Act (KUAA), governs the Agreement's ADR provisions. SAS argues in its summary judgment motion that, under the KUAA (which SAS-without substantive analysis-deems the authority applicable to § 12.7 of the Agreement), Kentucky courts lack subject matter jurisdiction to enforce an agreement to arbitrate outside of Kentucky. See DE #52 at 14-15. In its response to CKFI's summary judgment motion, however, SAS concludes that the FAA/KUAA applicability question “is a secondary issue which the court does not need to address to reach a decision[, ]” DE #56 at 1, presumably because SAS primarily argues that the at-issue forum-selection clause in § 12.7 of the Agreement is unconscionable (and thus unenforceable), regardless.[7] Given the Court's conclusion infra that the ADR forum-selection component of § 12.7 is not unconscionable, it is appropriate at the outset to settle the threshold issue of which law properly frames the analysis and to resolve the raised jurisdictional concerns.

         “The FAA applies to ‘[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction[.]” Stutler v. T.K. Constructors Inc., 448 F.3d 343, 345 (6th Cir. 2006) (quoting 9 U.S.C. § 2). “[T]he term ‘involving commerce' in the FAA [i]s the functional equivalent of the more familiar term ‘affecting commerce'-words of art that ordinarily signal the broadest permissible exercise of Congress' Commerce Clause power.” Citizens Bank v. Alafabco, Inc., 123 S.Ct. 2037, 2040 (2003). The Supreme Court thus found it “perfectly clear that the FAA encompasses a wider range of transactions than those actually . . . ‘within the flow of interstate commerce.'” Id. (quoting Allied-Bruce Terminix Companies, Inc. v. Dobson, 115 S.Ct. 834, 839 (1995)). Here, it is entirely unnecessary to consider the bounds of that range, as the CKFI-SAS franchise transaction is decidedly already within the narrower “flow of interstate commerce.” The Agreement memorializes an ongoing business relationship between corporations from different states-one a national franchisor-and plainly contemplates an interstate business. See, e.g., § 12.2 (DE #11-1 at 5) (anticipating a franchisee “located outside of the State of Ohio[, ]” where CKFI's principal place of business was located at the time the Agreement was executed). Indeed, SAS is incorporated and has its principal place of business in Kentucky, while CKFI is incorporated in Ohio and has its (current) principal place of business in California. See DE #11 (Amended Complaint) at ¶¶ 2-3. There can be no doubt that the parties' Agreement is one “evidencing a transaction involving [interstate] commerce[.]” Stutler, 448 F.3d at 345.

         Congress (pursuant to its commerce clause powers) enacted the FAA for the “purpose of overcoming judicial hostility to arbitration[, ]” Circuit City Stores, Inc. v. Adams, 121 S.Ct. 1302, 1305 (2001), and ensuring ADR provision enforcement per agreement. See Perry v. Thomas, 107 S.Ct. 2520, 2525 (1987) (“Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements.” (citation omitted)). Thus, absent an ADR provision's clear intent otherwise, “the FAA generally preempts inconsistent state laws and governs all aspects of arbitrations concerning ‘transaction[s] involving commerce[.]'” Savers Prop. & Cas. Ins. Co. v. Nat'l Union Fire Ins. Co. of Pittsburg, PA, 748 F.3d 708, 715 (6th Cir. 2014). However, “parties may agree to abide by state rules of arbitration, and ‘enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA.'” Id. at 715-16 (quoting Muskegon Cent. Dispatch 911 v. Tiburon, Inc., 462 Fed.Appx. 517, 522-23 (6th Cir. 2012) (citations omitted)). “The central inquiry in this choice-of-law determination is whether the parties unambiguously intended to displace the FAA with state rules of arbitration[.]” Id. at 716.

         In the 2007 CKFI-SAS franchise agreement, the “Governing Law” provision expressly provided that Ohio law governed all parts of the contract except the ADR portion. See DE #51-3 at 2 (§ 12.2 providing that “the arbitration provisions of this Agreement are expressly and exclusively governed by and should be construed in accordance with the Federal Arbitration Act”). The ADR provision, itself, was silent as to governing law. See Id. at 2-4. In the 2017 iteration, however, the “Governing Law” provision made no exception for the ADR clause. See DE #11-1 at 5 (§ 12.2 simply providing that “[t]his Agreement is made in the State of Ohio and its provisions shall be governed by and enforced and interpreted exclusively under the laws of that state”). The ADR portion again makes no mention of any applicable (state or federal) law. See Id. at 5-7 (§ 12.7 of the Agreement). The 2017 Agreement, thus, is considerably less clear regarding the FAA's applicability to the contract's ADR section than the 2007 version.[8]

         Nevertheless, the 2017 Agreement's general “Governing Law” section-applying Ohio law to the Agreement as a whole-is insufficient to establish that the parties unambiguously intended to displace the FAA as applied to the ADR provisions. See, e.g., Martis v. Dish Network Serv., L.L.C., 597 Fed.Appx. 301, 304 (6th Cir. 2015) (applying the FAA where an arbitration agreement “state[d] that it [wa]s governed by both the FAA and Michigan's substantive law” and noting that “[a]mbiguities are resolved in favor of the federal standard”); see Id. (citing Uhl v. Komatsu Forklift Co., Ltd., 512 F.3d 294, 303 (6th Cir. 2008) and referencing Uhl's conclusion that, “where the parties' choice of law provision referenced both the FAA and Michigan law, the FAA governed”); cf. Savers, 748 F.3d at 716 (finding the FAA unambiguously displaced by Michigan law where, under both the “general choice-of-law provision and the arbitration clause, both parties agreed that any arbitration shall be ‘subject to the laws of the State of Michigan'”); Muskegon Cent. Dispatch 911 v. Tiburon, Inc., 462 Fed.Appx. 517, 523 (6th Cir. 2012) (discerning unambiguous intent to apply Michigan law where the arbitration agreement did not reference the FAA but, rather, contemplated “final and binding arbitration . . . pursuant to the provisions of MCL 600.5001-600.5035 [the Michigan Arbitration Act]”).

         The Agreement's failure to specifically note Ohio law applicability to arbitration in its general choice-of-law provision is telling and sharply contrasts with the Circuit cases finding clear intent to displace the FAA. Unlike in Savers and Tiburon, the Agreement does not apply Ohio law in the ADR context, but, rather, simply to the contract generally. And, the ADR provision itself is silent on the issue. The choice of law governing the parties' ADR agreement is thus, at best, ambiguous. Accordingly-given the default to FAA application in the face of contractual choice-of-law ambiguity-the FAA governs the ADR agreement in the CKFI-SAS 2017 franchise contract. See Tiburon, 462 Fed.Appx. at 523 (quoting Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S.Ct. 1396, 1405 n.6 (2008)) (“In making a choice of law determination, the central inquiry is whether the parties' agreement evinces an unambiguous intent to ‘predicate[ ] the court's judicial action on the parties' having agreed to specific standards' . . . Ambiguities are resolved in favor of the federal standard.” (citing E.E.O.C. v. Waffle House, Inc., 122 S.Ct. 754, 764 n.9 (2002)). On this record, and in particular given the lack of advocacy by SAS on the key analysis, the Court finds the FAA applicable.[9]

         The FAA does not provide an independent jurisdictional basis, but it allows federal district courts to hear challenges to the enforceability or validity of an ADR provision:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.

9 U.S.C. § 4; see also Pine Tree Villa, LLC v. Coulter, No. 3:15-CV-00815-CRS, 2016 WL 3030185, at *2 (W.D. Ky. May 25, 2016). CKFI and SAS are completely diverse, and the amount in controversy exceeds the federal jurisdictional minimum; accordingly, the Court has subject matter jurisdiction over the case pursuant to 28 U.S.C. § 1332. Consequently, CKFI is entitled to petition this Court “for an order directing that [] arbitration proceed in the manner provided for” under the Agreement's terms (which include, of course, the agreed-upon arbitration location). 9 U.S.C. § 4. Contrary to SAS's argument, the Kentucky Supreme Court's opinion in Ally Cat, LLC v. Chauvin, 274 S.W.3d 451 (Ky. 2009)-holding that Kentucky courts have jurisdiction to enforce arbitration agreements under the KUAA only where they provide for arbitration in Kentucky-has no bearing here. The KUAA, not the FAA, governed the arbitration agreement in Ally Cat.[10] The FAA applies here-permitting CKFI to seek a declaration that the forum choice in § 12.7 of the Agreement binds SAS as written-and this Court undoubtedly has subject matter jurisdiction to enforce it. See Pine Tree Villa, 2016 WL 3030185, at *1-*2.

         D. Unconscionability Defense

         Even FAA-governed ADR agreements remain subject to generally applicable state law contract defenses. “An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.'” Stutler, 448 F.3d at 345 (citing Perry v. Thomas, 107 S.Ct. 2520, 2527 n.9 (1987). The state law defense must pertain to contracts generally and not be intentionally hostile to arbitration, as would be inconsistent with the purpose of the FAA. See Id. (noting that the “state law . . . is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.”). SAS invokes only the defense of unconscionability, arguing that the at-issue forum-selection component of the ADR provision is both procedurally and substantively unconscionable.

         1. Choice of Law

         The parties mildly debate whether Kentucky or Ohio law supplies the proper unconscionability standard.[11] As previously discussed, the “Governing Law” section of the (2017) Agreement expressly provides generally for application of Ohio law. See DE #11-1 at 5, § 12.2. Typically, a federal court sitting in diversity applies the substantive law of the state in which it sits. See, e.g., Banek Inc. v. Yogurt Ventures U.S.A., Inc., 6 F.3d 357, 361 (6th Cir. 1993). In preliminarily assessing enforceability of the CKFI-SAS choice-of-law provision, the Court applies Kentucky law. See Wallace Hardware Co. v. Abrams, 223 F.3d 382, 391 (6th Cir. 2000) (“[A]s the lower court correctly observed, the choice-of-law rules of the forum state, Kentucky, govern the determination whether to enforce the Guaranty's selection of Tennessee law.”). The Court therefore considers: “(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) ...

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