5:20-cv-02823
E.D. Pa.Mar 19, 2021Background:
- Ninety hotel franchisees sued Choice Hotels International and the Choice Hotels Owners’ Council (CHOC) alleging RICO, Sherman Act, §1981, breach, fraud, and state franchise-act claims based on allegedly coercive franchising practices, inflated vendor pricing, discriminatory treatment of South Asian–owned franchises, and impediments to leaving the system.
- Each plaintiff executed a Choice Franchise Agreement containing a Maryland-seat, mandatory arbitration clause; most agreements also contain class-action waivers.
- Plaintiffs conceded the arbitration clauses cover their claims but argued the clauses are unenforceable under the FAA because arbitration would prevent effective vindication (due to limited discovery and prohibitive costs), are unconscionable, cannot be enforced by non-signatory CHOC, and should allow collective (class/representative) relief.
- Defendants moved to compel arbitration and stay the federal action; they argued the arbitration clauses are valid, cover the disputes, permit individual arbitration, and CHOC may enforce arbitration because plaintiffs’ claims arise from the Franchise Agreements.
- The court reviewed the agreements (integral to the complaint), applied Maryland contract law and federal arbitration precedent, and denied plaintiffs’ challenges.
- Ruling: The court granted the motion to compel arbitration, held the arbitration clauses enforceable, allowed CHOC to invoke them, required individual (non-class) arbitrations, and stayed the federal proceedings pending arbitration.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the claims subject to and enforceable under the Franchise Agreement arbitration clauses? | Agreements contain arbitration clauses but plaintiffs urge they be invalidated. | Arbitration clauses are valid and cover the asserted claims. | Clauses are valid and apply; arbitration compelled. |
| Does the effective-vindication doctrine bar arbitration due to limited pre-hearing discovery? | Limited pre-hearing discovery will prevent plaintiffs from proving claims because Choice controls key evidence. | Arbitration’s discovery limits are bilateral and do not preclude vindication. | Discovery limits did not prevent effective vindication; arbitration allowed. |
| Does the effective-vindication doctrine bar arbitration due to prohibitive arbitration costs? | Estimated AAA/JAMS fees ($20k–$42k) and pandemic losses make individual arbitration cost-prohibitive. | Cost estimates are speculative; fees can be reduced/shifted; plaintiffs are businesses with revenue. | Plaintiffs failed to prove costs would be prohibitive or they could not pay; doctrine not met. |
| Are the arbitration clauses procedurally or substantively unconscionable? | Clauses were adhesive, non-mutual, limit discovery, impose costs, and pick Maryland law disadvantageous to plaintiffs. | Plaintiffs are sophisticated commercial parties with opportunity to reject/negotiate; clauses are mutual enough and lawful. | Not unconscionable under Maryland law (no procedural showing of no viable alternatives; terms not unreasonably one-sided). |
| Can non-signatory CHOC enforce the arbitration clauses? | CHOC is a non-signatory and thus cannot force arbitration. | Plaintiffs’ claims against CHOC arise from rights/duties in the Franchise Agreements, so equitable estoppel permits CHOC to enforce arbitration. | CHOC may enforce arbitration because plaintiffs’ claims are intertwined with the Agreements. |
| Must arbitration proceed collectively or individually (class/representative arbitration)? | Plaintiffs sought collective relief where class waivers absent or ambiguous. | Most agreements include class waivers; silence does not authorize class arbitration. | Classwide arbitration not compelled; arbitrations must proceed individually. |
Key Cases Cited
- Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019) (FAA enforces arbitration agreements according to their terms and requires clear contractual basis for class arbitration)
- Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (doubts about scope of arbitrable issues resolved in favor of arbitration)
- Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000) (party seeking to avoid arbitration on cost grounds must show prohibitive costs are likely)
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (claims may be arbitrated despite differences in discovery procedures)
- Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985) (arbitration does not generally preclude vindication of statutory rights)
- DIRECTV, Inc. v. Imburgia, 577 U.S. 47 (2015) (contract interpretation governed by state law as of contracting and FAA principles)
- Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987) (burden on opposing party to show Congress precluded waiver of judicial remedies)
- Walther v. Sovereign Bank, 872 A.2d 735 (Md. 2005) (Maryland unconscionability requires both procedural and substantive elements)
- Freedman v. Comcast Corp., 988 A.2d 68 (Md. Ct. Spec. App. 2010) (arbitration provisions subject to unconscionability analysis; limited discovery not per se unconscionable)