FRANLOGIC SCOUT DEVELOPMENT, LLC v. SCOTT HOLDINGS, INC.
2:16-cv-05042
E.D. Pa.Jul 12, 2017Background
- In July 2015 Scott Holdings, Inc. (formed by Brian and Jacqueline Scott) entered an Area Development Agreement (ADA) with Franlogic to develop two Scout and Molly’s stores and contemporaneously executed a Franchise Agreement (FA) for the first store.
- The ADA is the operative, umbrella development contract: it requires separate FAs for each store and contains an internal dispute-resolution and mediation process but no arbitration clause; it also states that its terms control in any conflict with any FA.
- The FA (for the first store) contains an arbitration clause providing for binding AAA arbitration in Philadelphia for "any action arising out of or relating to this Agreement," and contains additional venue/litigation carve-outs.
- Scott Holdings sued Franlogic in California state court (later removed to the Northern District of California), alleging misrepresentations and violations of the California Franchise Investment Law and seeking rescission of the ADA and related relief; Scott Holdings did not bring claims under the FA in that action.
- Franlogic and its officers filed a separate petition in the Eastern District of Pennsylvania to compel arbitration pursuant to the FA; Scott Holdings moved to dismiss that petition arguing the California dispute is not subject to arbitration.
- The Eastern District of Pennsylvania denied the petition and granted Scott Holdings’ motion to dismiss because (a) the ADA governs the dispute and controls over any conflicting FA term, and (b) the FA’s arbitration clause, as written, does not unambiguously cover the California claims (and Petitioners failed to show reformation of the clause by clear and convincing evidence).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the California action falls within the FA arbitration clause | Franlogic: disputes between the parties are governed by the FA arbitration clause, so arbitration should be compelled | Scott Holdings: the California suit seeks rescission of the ADA (not relief under the FA); the ADA governs and excludes arbitration here | Held: ADA controls; Petition to compel arbitration denied because dispute arises under the ADA, not the FA |
| Whether the FA arbitration clause, on its face, covers the dispute (or should be reformed) | Franlogic: the clause should be reformed (a drafting mistake omitted a word) or read to cover the dispute | Scott Holdings: the clause as written does not apply; reformation requires mutual mistake shown by clear and convincing evidence | Held: Clause wording does not unambiguously apply and Petitioners failed to prove mutual mistake; court will not reform the clause |
Key Cases Cited
- Sandvik AB v. Advent Int’l Corp., 220 F.3d 99 (3d Cir. 2000) (FAA establishes strong federal policy favoring arbitration)
- Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (U.S. 1983) (FAA §2 and arbitration enforceability principles)
- Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529 (3d Cir. 2005) (two-step inquiry: existence of agreement and scope of arbitration)
- AT&T Techs., Inc. v. Commc’ns Workers, 475 U.S. 643 (U.S. 1986) (arbitration clause should be interpreted so long as it’s reasonably susceptible to covering the dispute)
- Hinnant v. American Ingenuity, LLC, 554 F. Supp. 2d 576 (E.D. Pa. 2008) (movant bears burden to show dispute falls within arbitration clause)
- Harrison v. Fred S. James, P.A., Inc., 558 F. Supp. 438 (E.D. Pa. 1983) (reformation requires mutual mistake proven by clear and convincing evidence)