MKJA, INC., v. 123 FIT FRANCHISING, LLC










Filed 1/4/11





CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

MKJA, INC., et al., Plaintiffs and Respondents, v. 123 FIT FRANCHISING, LLC et al., Defendants and Appellants.

D055967 (Super. Ct. No. GIN055734)

APPEAL from an order of the Superior Court of San Diego County, Michael M. Anello, Robert P. Dahlquist, Judges. Reversed.
Snell & Wilmer, Christopher Brent Pinzon, Todd E. Lundell, Elizabeth M. Weldon and Scott E. Sandberg for Defendants and Appellants Ochoa, Goshon, Shukla, Smith, Schaden and 123 Fit Franchising, LLC.
Wilson, Elser, Moskowitz, Edelman & Dicer, Marc Victor Allaria, James Stankowski and Robert Cooper for Defendants and Appellants Severy and Stopp.
Law Offices of Alexander M. Schack, Alexander M. Schack, Geoffrey J. Spreter and Amanda R. Moreno for Plaintiffs and Respondents.
I.
INTRODUCTION
Code of Civil Procedure section 1281.4^[1] requires that a court impose a stay of litigation whenever that court, or another court, has ordered arbitration of a controversy that is an issue in the litigation. The court in which the litigation is pending is required to "stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies." (Ibid.)
In this case, the trial court lifted a stay of litigation that had been imposed pursuant to section 1281.4, on the ground that the plaintiffs could not afford to pay the costs associated with arbitration. We conclude that a party's inability to afford to pay the costs of arbitration is not a ground on which a trial court may lift a stay of litigation that was imposed pursuant to section 1281.4. Accordingly, we reverse the trial court's order lifting the stay.
II.
FACTUAL AND PROCEDURAL BACKGROUND
A. The plaintiffs' complaint
In September 2006, MKJA, Inc., Kris Roberts, Mike Roberts, Julie Dominguez, Inc., Julie Dominguez, John R. Dominguez, Jr., Corefit, Inc., Lezlie Martin, and Krista Crocker (plaintiffs) filed this action against 123 Fit Franchising, LLC (123 Fit), its affiliates, and various officers and/or employees of 123 Fit (defendants). In their complaint, the plaintiffs alleged that the defendants fraudulently induced them to enter into certain health club franchise agreements, and failed to provide them with the operational support that the defendants were to provide pursuant to the terms of the agreements.^[2] The plaintiffs' complaint included claims for violation of the California Franchise Investment Law (Corp. Code, § 3100 et seq.), breach of contract, unfair business practices (Bus. & Prof. Code, § 17200 et seq.), and fraudulent inducement.
B. The defendants' motion to stay the litigation and the plaintiffs' motion
to declare the arbitration provisions unenforceable

On or about November 7, 2006, the defendants filed a motion to stay this action pursuant to section 1281.4. In their motion, the defendants stated that each of the franchise agreements entered into between 123 Fit and the plaintiffs contained an identical arbitration provision that required that all of the claims that the plaintiffs raised in their lawsuit be arbitrated. The defendants stated that on November 2, 2006, 123 Fit had filed a petition in a Colorado court seeking an order compelling arbitration of the plaintiffs' claims against the defendants. The defendants noted that section 1281.4 required the California trial court to stay the litigation in order to allow the Colorado court to rule on the petition to compel, and to allow any subsequent arbitration to proceed. The defendants lodged a copy of the Colorado petition and the relevant franchise agreements with their motion.
Each of the franchise agreements contains an identical arbitration provision that provides in relevant part:
"17F. ARBITRATION

"We and you agree that, except for controversies, disputes, or claims, related to or based on improper use of the Marks or Confidential Information, all controversies, disputes, or claims between us and our affiliates, and our and their respective shareholders, officers, directors, agents, and/or employees, and you (and/or your owners, guarantors, affiliates, and/or employees) arising out of or related to:

"(1) this Agreement or any other agreement between you and us (or our affiliates);

"(2) our relationship with you;

"(3) the validity of this Agreement or any other agreement between you and us (or our affiliates); or

"(4) any System Standard;

"must be submitted for binding arbitration, on demand of either party, to the American Arbitration Association. The arbitration proceedings will be conducted by one arbitrator and, except as this Subsection otherwise provides, according to the then current commercial arbitration rules of the American Arbitration Association. All proceedings will be conducted at a suitable location chosen by the arbitrator in or within fifteen (15) miles of our then existing principal office.[^[3]] All matters relating to arbitration will be governed by the Federal Arbitration Act (9 U.S.C. §§ 1 et seq.). Judgment upon the arbitrator's award may be entered in any court of competent jurisdiction."

In December 2006, the plaintiffs filed a motion to declare the arbitration provisions unenforceable. The plaintiffs also filed an opposition to the defendants' motion to stay the litigation.
In January 2007, the trial court entered an order granting the defendants' motion to stay the action pursuant to section 1281.4 and denying the plaintiffs' motion to declare the arbitration provisions unenforceable. In its order, the trial court noted that 123 Fit had filed a petition to compel arbitration in Colorado. The court stated that section 1281.4 "requires this Court to stay this action pending Colorado's decision on the Petition to Compel Arbitration." The trial court also ruled that it did not have jurisdiction to make a determination concerning the enforceability of the arbitration provisions, and stated, "If the Plaintiffs desire to argue that the Arbitration Clause is unconscionable or against California's public policy, they may raise such arguments before the Colorado court."
C. The plaintiffs' September 2008 motion to lift the stay and to declare the
arbitration provisions unconscionable

In September 2008, the plaintiffs filed a motion to lift the stay of this action and for a declaration that the arbitration provisions in the franchise agreements are unconscionable in the California trial court. In their motion, the plaintiffs noted that the Colorado court had granted the defendants' motion to compel arbitration in October 2007. The plaintiffs claimed that they had attempted to initiate arbitration of their disputes, but had determined that the costs of arbitration would be prohibitive.
The defendants filed an opposition to the motion in which they argued that section 1281.4 required that the case remain stayed until the plaintiffs complied with the Colorado court's order compelling arbitration.
In November 2008, the trial court denied the plaintiffs' motion to lift the stay. The court stated that its order was "without prejudice to the possibility of plaintiffs bringing a motion to lift the stay again in the future . . . ." The court explained:
"This court is concerned that the arbitration has not yet occurred, and that the plaintiffs may be financially unable to proceed with the arbitration. The plaintiffs are obviously entitled to have their dispute heard on the merits in some forum, whether in arbitration or otherwise. However, the Court is not persuaded, on the present record, that it would be appropriate for this Court to lift its stay and proceed with litigation on the merits of plaintiffs' claims when a Colorado court has ordered the matter to arbitration, and the plaintiffs have not returned to the Colorado court for relief and/or have arguably not exhausted all means of attempting to proceed with the ordered arbitration."

D. The plaintiffs' August 2009 motion to lift the stay and for a declaration
that the arbitration provisions are unconscionable

In August 2009, the plaintiffs filed another motion to lift the stay and for a declaration that the arbitration provisions are unconscionable in the California trial court. In their brief in support of their motion, the plaintiffs argued that section 1281.4 provided the trial court with discretion to lift the stay prior to the completion of the arbitration. The plaintiffs claimed that lifting the stay of litigation in California was warranted because they could not afford the costs of arbitrating their cases in Colorado.
With respect of the costs to arbitrate in Colorado, the plaintiffs stated:
"The total cost of the arbitration would . . . include a $6,000 filing fee, a $2,500 case service fee, the estimated cost of $10,000-$14,000 in arbitrator's fees, and unknown facility fees. Attorneys' fees and travel and accommodation fees have not been determined but are believed to be in excess of $20,000. (This includes attorney time to bring a Colorado attorney up to speed). Total costs to arbitrate in Colorado are estimated at $38,500-$42,500 per case."

The plaintiffs stated that they had attempted to obtain fee waivers from the arbitration association, but had been largely unsuccessful. Each group of plaintiffs also submitted a declaration stating that it could not afford the costs of arbitration. The declarations emphasized the economic losses that the plaintiffs had suffered as a result of their failed franchises. Julie Dominguez stated that she had "incurred at least $208,000 in personal debt because of 123 Fit." Lezlie Martin stated that she and Krista Crocker had invested over $253,000 in their franchise, and that she had filed this lawsuit to "try and recoup some of my lost monies." Kris Roberts claimed that she and Mike Roberts had "incurred approximately $300,000-$320,000 in personal debt due to our involvement in the Defendant 123 Fit Franchise." The plaintiffs' counsel also submitted a declaration in which counsel outlined the basis for the plaintiffs' estimation of the Colorado arbitration costs, and described counsel's attempts to obtain fee waivers from the arbitration association.
The plaintiffs argued that the "court should lift the stay and determine whether the subject arbitration clause is unconscionable and/or otherwise unenforceable and against California's public policy." The plaintiffs claimed that the arbitration provisions were unconscionable for a number of reasons, including that the provisions lacked mutuality and required that the plaintiffs waive nonwaivable statutory rights.
The defendants filed an opposition to the plaintiffs' motion in which they urged the trial court to again deny the plaintiffs' request to lift the stay. The defendants argued that once 123 Fit filed its petition to compel arbitration, section 1281.4 mandated that the court impose the stay, and that the statute further "mandate[d] that the stay remain intact until Plaintiffs comply with the Colorado court's order [to arbitrate]." The defendants maintained that lifting the stay prior to completion of the arbitration would violate the purpose of section 1281.4 by allowing the plaintiffs to disregard their obligation to arbitrate in Colorado. The defendants also argued that lifting the stay would contravene the Colorado court's order compelling arbitration, and would thereby violate the full faith and credit clause (U.S. Const., art. IV, § 1). Finally, in the event that the trial court determined that it had jurisdiction to rule on the plaintiffs' claims of unconscionability, the defendants contended that the arbitration provisions were not unconscionable.
The plaintiffs filed a reply brief in which they reiterated their argument that it was within the trial court's discretion to lift the stay pursuant to section 1281.4. The plaintiffs also argued that lifting the stay would not violate the full faith and credit clause. With respect to unconscionability, the plaintiffs raised the additional argument that the arbitration provisions were unconscionable under Winter v. Window Fashions Professionals, Inc. (2008) 166 Cal.App.4th 943 (Winter). In Winter, the court affirmed a denial of a petition to compel arbitration on the ground that there was no meeting of the minds as to an arbitration provision in a franchise agreement because the franchisor had provided the prospective franchisees with a uniform franchise offering circular that stated that the arbitration provision might not be enforceable in California. (Id. at p. 945.) The plaintiffs argued that the defendants had provided them with a similarly worded uniform franchise offering circular in this case, and that the arbitration provisions in their franchise agreements were therefore unenforceable under the holding in Winter.
The trial court held a hearing on the plaintiffs' motion and subsequently entered an order lifting the stay of litigation and declaring the arbitration provisions unenforceable and/or unconscionable. In its order, the court reasoned in part as follows:
"Each of the three sets of plaintiffs has sought to commence an arbitration with AAA [the American Arbitration Association] in Colorado but they have been unable to pay the fees associated with such arbitration. The estimated costs of each arbitration include a $6,000 filing fee, a $2,500 case service fee and an estimated $10,000 ─ $14,000 in arbitrator's fees and facility fees of an unknown amount. The AAA apparently does not allow consolidation of cases, so each of the three sets of plaintiffs will have to separately pay for, and conduct, his/her own arbitration. Each of the individual plaintiffs asserts that he/she is in financial distress and unable to pay the fees and costs of the arbitration.

"The plaintiffs have sought a waiver of filing fees from AAA; a deferral of some fees was granted but a waiver of the fees was denied. The plaintiffs have also been advised that AAA will not defer or waive the other costs of arbitration, such as the arbitrator's fees and expenses.

[¶] . . . [¶]

". . . The Court is now satisfied that plaintiffs have exhausted all reasonable options for attempting to proceed with the arbitration despite their financial distress. The Court is satisfied that plaintiffs have not been able to arbitrate their claims with AAA due to their financial inability to pay the fees and costs associated with those arbitrations. [¶] . . . [¶] . . . The Court is unaware of any controlling appellate authority addressing whether a financial inability of a party to pay the costs of arbitration is a circumstance that warrants lifting [the] stay. . . . In the absence of such authority, the Court believes the Legislature's use of the phrase 'such earlier time as the court specifies [in section 1281.4]' grants discretion to the Court to lift the stay of litigation in an appropriate case of this type. Therefore, looking at the totality of the circumstances of this case, the Court believes that it would be appropriate to lift the stay at this time as authorized by [section] 1281.4."

The trial court also concluded that lifting the stay would not violate the full faith and credit clause. In addition to lifting the stay, the trial court concluded that the arbitration provisions were unconscionable and/or unenforceable under Winter, stating that the "facts of this case are indistinguishable from those in [Winter]."
E. The defendants' appeal
The defendants timely appealed from the trial court's September 10, 2009 order lifting the stay and declaring the arbitration provisions unconscionable and/or unenforceable.
III.
DISCUSSION
A. Appealability
We first consider the threshold issue of whether this court has appellate jurisdiction over the defendants' appeal. The defendants seek to appeal a trial court's order in which the court both lifted a stay of litigation pending arbitration pursuant to section 1281.4, and declared the arbitration provisions in the franchise agreements unenforceable.
1. Governing law
a. The appealability of an order that is the functional
equivalent of an order denying a petition to compel
arbitration

Section 1294 provides in relevant part: "An aggrieved party may appeal from: [¶] (a) [a]n order dismissing or denying a petition to compel arbitration."
In Henry v. Alcove Investment, Inc. (1991) 233 Cal.App.3d 94, 99 (Henry), the court concluded that an order that was "the functional equivalent of an order refusing to compel arbitration" was appealable pursuant to section 1294, subdivision (a). In Henry, the plaintiff (Henry) filed a lawsuit against a defendant mortgage loan broker (Alcove) and Alcove's alleged agent (Hazan). (Henry, supra, at pp. 97-98.) In his complaint, Henry claimed that Hazan had told him that Hazan's company would perform various improvement projects on Henry's home and that Hazan would arrange for a loan to finance the work. (Id. at p. 97.) Henry claimed that Hazan and Alcove defrauded him in connection with his loan application. (Ibid.) Alcove initiated arbitration proceedings against Henry with the American Arbitration Association pursuant to an arbitration provision in Henry's loan application. (Id. at p. 98.) Henry filed a motion to stay the arbitration based on several grounds, including that a stay was warranted pursuant to section 1281.2, subdivision (c)^[4] due to the possibility of conflicting rulings in the arbitration and the litigation. (Henry, supra, at p. 98.) The trial court granted the motion to stay arbitration, and Alcove appealed. (Ibid.)
On appeal, Henry claimed that the court had to dismiss Alcove's appeal because the appeal was taken from a nonappealable order. (Henry, supra, 233 Cal.App.3d at p. 98.) The Court of Appeal disagreed, holding that "an order staying arbitration under . . . section 1281.2 should be treated the same as an order denying a petition to compel arbitration[,] which is appealable under section 1294, subdivision (a)." (Henry, supra, at p. 98, fns. omitted.) In reaching this conclusion, the Henry court reasoned in part:
"An order refusing to compel arbitration, if not reviewed immediately, would significantly delay arbitration and defeat its purpose. The order would force the party seeking arbitration to proceed with a potentially lengthy and costly trial and, if dissatisfied with the result, appeal from the final judgment. [Citation.] By the time the Court of Appeal overturned the trial court's order, the value of the right to arbitrate would be significantly diminished by the delay and expense of litigation. The Legislature's dissatisfaction with this result led it to enact section 1294, subdivision (a) which specifically authorizes an appeal from an order 'dismissing or denying a petition to compel arbitration. . . .' [Citation.] As the court recognized in [The Energy Group, Inc. v. Liddington (1987) 192 Cal.App.3d 1520], an order staying arbitration is merely the flip side of an order refusing to compel arbitration and should be treated the same for purposes of appellate review." (Henry, supra, at pp. 99-100; accord International Film Investors v. Arbitration Tribunal of Directors Guild (1984) 152 Cal.App.3d 699, 704 ["Permitting an appeal from a judgment granting a petition for an injunction [preventing arbitration] . . . would of course be consistent with the spirit and purpose of Code of Civil Procedure section 1294"].)

b. An order denying a stay of litigation pending arbitration
may be reviewed in an appeal from an appealable order
when the order denying the stay affects the appealable order

Section 1294.2 provides in relevant part, "Upon an appeal from any order or judgment under this title, the court may review the decision and any intermediate ruling, proceeding, order or decision which involves the merits or necessarily affects the order or judgment appealed from, or which substantially affects the rights of a party."
An order denying a stay of litigation pending arbitration may be reviewed pursuant to section 1294.2 upon an appeal from an order made appealable pursuant to section 1294. (E.g. Valentine Capital Asset Management, Inc. v. Agahi (2009) 174 Cal.App.4th 606, 612, fn. 5.)



TO BE CONTINUED AS PART II….


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