BERNARD A. FRIEDMAN, District Judge.
This matter is presently before the Court on defendants' motion to dismiss [docket entry 9]. Plaintiffs have filed a response in opposition, and defendants have filed a reply. Pursuant to E.D. Mich. LR 7.1(f)(2), the Court shall decide the motion without a hearing.
This case involves a contract dispute over a business agreement to open coffee shops in Michigan. On August 1, 2016, defendant Roasting Plant, Inc. ("RP"), a corporation with its principal place of business in New York, entered into a "Development Agreement" ("Agreement") with plaintiff The Roasting Plant of Michigan JV, LLC ("RP of Michigan"). Compl. ¶¶ 1, 27; Compl. Ex. A ("Roasting Plant Coffee Development Agreement" or "Agr.") at 1. RP has "a unique and distinctive system" for operating "coffee retail concepts," such as cafes and kiosks, that prepare and sell coffee and non-coffee products. Compl. ¶ 6; Agr. at 1. RP identifies the "distinguishing characteristics of the RP System" as including not just the name "Roasting Plant" but also particular interior and exterior design and layouts, decor, recipes, operating procedures, management programs, trade names, trademarks, service marks, and a "patented in-store coffee storage, roasting, transporting, ordering and fulfilling technology hardware and software called the Roasting Plant Javabot." Agr. at 1. The Agreement gave RP of Michigan the "exclusive right and license" to develop seven "RP Retail Units" and a license to use the "RP System and Marks exclusively in connection with the development, construction and operation of the RP Retail Units" at locations approved by RP. Compl. ¶ 31; Agr. at 2. Under the Agreement, RP retained control over various aspects of the operation of the RP Retail Units. Compl. ¶¶ 32-41.
In the complaint, plaintiffs characterize the Agreement as a franchise agreement
In Count III, plaintiffs allege that, prior to the Agreement taking effect, all defendants intentionally made false representations of material facts, which plaintiffs relied on. Id. ¶¶ 81-87. In Count IV, plaintiffs allege that defendants participated in a "fraudulent scheme" and engaged in a "pattern of racketeering activity" that constituted a "criminal enterprise" in violation of the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1962(A)-(D). Id. ¶¶ 88-107. In Count VI, plaintiffs assert a claim of common law and statutory conversion against defendant RP, id. ¶¶ 120-23, and in Count VII, they assert a claim of civil conspiracy against all defendants. Id. ¶¶ 124-28. For relief, plaintiffs seek rescission of the Agreement, damages in the amount of approximately $12 million, interest, costs, and attorney fees.
Defendants seek dismissal of the complaint on the grounds that the Agreement's arbitration clause requires that plaintiffs' claims be submitted to arbitration. Alternatively, defendants argue that the complaint should be dismissed either (1) under the provision within the arbitration clause that any claims brought by plaintiffs not subject to arbitration shall be filed in a court having jurisdiction in New York County, New York or (2) under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. Having considered the parties' briefs and the applicable law, the Court is persuaded that dismissal is appropriate because plaintiffs' claims fall within the arbitration clause. The Court therefore finds it unnecessary to consider defendants' remaining arguments.
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., "manifests `a liberal federal policy favoring arbitration agreements.'" Masco Corp. v. Zurich Am. Ins. Co., 382 F.3d 624, 626 (6th Cir. 2004) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). Section 2 of the FAA "provides that a written agreement to arbitrate disputes arising out of a transaction in interstate commerce `shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'" Flint v. Bank of Am., N.A., No. 15-13006, 2016 WL 1444505, at *3 (E.D. Mich. Apr. 13, 2016) (quoting 9 U.S.C. § 2; citing Javitch v. First Union Sec., Inc., 315 F.3d 619, 624 (6th Cir. 2003)). "The Supreme Court has recognized that the FAA `places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms.'" Id. (quoting Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67 (2010)). Under the FAA, courts reviewing contracts containing arbitration clauses "are required to resolve any ambiguities in the agreement or doubts as to the parties' intentions in favor of arbitration." Yaroma v. Cashcall, Inc., 130 F.Supp.3d 1055, 1061 (E.D. Ky. 2015) (quoting Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir. 2000); AT & T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 650 (1986)).
Section 4 of the FAA, which "sets forth the procedure to be followed in the district court when presented with a petition to compel arbitration," Flint, 2016 WL 1444505, at *4 (quoting Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 888 (6th Cir. 2002)), provides that upon receiving such a petition,
9 U.S.C. § 4. "In other words, a district court is instructed to order arbitration to proceed once it is satisfied that `the making of the agreement for arbitration or the failure to comply (with the arbitration agreement) is not in issue.'" Glazer v. Lehman Bros., 394 F.3d 444, 452 (6th Cir. 2005) (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403 (1967)). "Only if the making of the agreement to arbitrate or the failure to perform such an agreement is in issue must the court conduct a trial." Cincinnati Gas & Elec. Co. v. Benjamin F. Shaw Co., 706 F.2d 155, 159 (6th Cir. 1983). "Before compelling an unwilling party to arbitrate, the court must engage in a limited review to determine whether the dispute is arbitrable, including, first, whether the parties agreed to arbitrate; and, second, whether the specific dispute falls within the substantive scope of that agreement." Moran v. Svete, 366 F. App'x 624, 629 (6th Cir. 2010) (internal citation omitted).
Section 18(B) of the parties' Agreement is called "Arbitration" and provides in relevant part:
Agr. at 52-53 (emphasis in original) (alterations added).
Defendants argue that plaintiffs' claims should be submitted to arbitration pursuant to this clause because the parties agreed to arbitration and because all of the claims at issue fall within the arbitration clause's scope. Plaintiffs believe the Court should not compel arbitration without a "trial on the validity of the parties' franchise agreement." Pls.' Resp. Br. at 14-15. For the reasons explained below, the Court finds that arbitration of plaintiffs' claims — not a trial on the validity of the Agreement — is appropriate.
Plaintiffs argue that their request to rescind the Agreement makes the Agreement void ab initio, and therefore the validity of the Agreement is in issue. Id. at 13-15. They assert that the Agreement being void ab initio "render[s] the arbitration provision unenforceable." Id. at 11 (alteration added). Plaintiffs contend that even if the Agreement is not void ab initio, because their request for rescission would terminate the Agreement, their "rescission claim" is not subject to arbitration under § 18(B)(1) of the Agreement. Id. at 15-16. Plaintiffs make clear that they "do not seek to invalidate the arbitration clause itself" and that "instead, Plaintiffs seek to rescind the parties' franchise agreement, inclusive of the arbitration provision, as a matter of law." Id. at 14.
"[C]ourts need not first determine the validity of the underlying contract in order to enforce . . . an arbitration clause." Yaroma, 130 F. Supp. 3d at 1060 (citing Shell v. R.W. Sturge, Ltd., 55 F.3d 1227, 1232 (6th Cir. 1995)). The issue of a contract's validity is "secondary" to determining the validity of the arbitration provision. Id. "[U]nless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance." Id. (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445-46 (2006)). As a result, "[a] federal court need not address whether the entire contract is void or voidable before upholding an arbitration provision under the FAA." Id. (alteration added). A party opposing arbitration "bears the burden of `showing a genuine issue of material fact as to the validity of the agreement to arbitrate'" and must demonstrate "that the arbitration agreement itself, rather than the contract in which it is found, is unenforceable." Id. at 1061 (quoting Great Earth Cos., 288 F.3d at 889; citing Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 91 (2000)).
Thus, "[a] party may not avoid arbitration by attacking the overall contract between the parties." CSA-Credit Sols. of Am., Inc. v. Schafer, 408 F.Supp.2d 503, 508 (W.D. Mich. 2006) (citing Prima Paint Corp., 388 U.S. at 402) (alteration added). The Supreme Court has held that "[w]hen a contract contains an arbitration agreement, `the arbitration provision is severable from the remainder of the contract.'" Yaroma, 130 F. Supp. 3d at 1060 (quoting Buckeye Check Cashing, Inc., 546 U.S. at 445). "Because arbitration agreements are separable from the underlying contract, `attacks on the validity of an entire contract [are] distinct from attacks aimed at the arbitration clause.'" Flint, 2016 WL 1444505, at *4 (citing Preston v. Ferrer, 552 U.S. 346, 353 (2008); Prima Paint Corp., 388 U.S. at 402) (alteration in original). "[A] challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator." Buckeye Check Cashing, Inc., 546 U.S. at 449 (alteration added). Meanwhile, "claims against the validity of the arbitration clause will be reserved for the court." Flint, 2016 WL 1444505, at *4 (citing Prima Paint Corp., 388 U.S. at 402-04).
"Under normal circumstances, an arbitration provision within a contract admittedly signed by the contractual parties is sufficient to require the district court to send any controversies to arbitration." Johnson v. Stellar Recovery, Inc., No. 13-13829, 2014 WL 5705027, at *4 (E.D. Mich. Nov. 5, 2014) (internal quotation omitted). This is because such circumstances indicate that "the parties have at least presumptively agreed to arbitrate any disputes, including those disputes about the validity of the contract in general." Id.
In the present case, the arbitration clause and plaintiffs' failure to arbitrate as required by that clause are not in issue. The parties do not dispute that the Agreement, which contains the arbitration clause, was signed. Rather than question the validity of "the arbitration clause itself," plaintiffs challenge the validity of the Agreement as a whole. Although plaintiffs argue that the arbitration clause is unenforceable because the Agreement is void ab initio, "the Supreme Court specifically disavowed the void/voidable distinction in Buckeye, 546 U.S. at 446," where it was also presented with an argument opposing arbitration because a contract was said to be void ab initio. Moran, 366 F. App'x at 631. In that case, the Supreme Court determined that "the arbitration agreement was enforceable and the challenge was subject to arbitration" because the challenge was to the contract as a whole (including the arbitration clause), as opposed to a challenge to the validity of the arbitration agreement itself. Id. Like the agreement to arbitrate in Buckeye, the Agreement's arbitration clause is enforceable and arbitration is appropriate because plaintiffs challenge the entire contract and not the arbitration clause. Plaintiffs have not shown that "the arbitration agreement itself . . . is unenforceable."
The Court next considers, for purposes of determining whether a dispute is arbitrable, whether the parties' dispute falls within the substantive scope of the arbitration clause. Plaintiffs make no argument concerning this inquiry.
The Sixth Circuit has established that
Highlands Wellmont Health Network, Inc. v. John Deere Health Plan, Inc., 350 F.3d 568, 576-77 (6th Cir. 2003) (alteration added).
The instant action falls within the scope of the arbitration clause because it could not be "maintained without reference to the [Agreement] or relationship at issue." In Counts I and II, plaintiffs assert violations of the MFIL and the FTCA, whose requirements allegedly apply because the parties entered into the Agreement. In Count III, plaintiffs allege that defendants made misrepresentations that they relied upon in "entering into the Agreement" and in "continuing to expend funds in furtherance of the Agreement." Compl. ¶ 86. In Count IV, plaintiffs allege that the "fraudulent scheme perpetrated by Defendants includes but is not limited to, providing Plaintiffs with materially false financial forecasts, misrepresenting the legality of the Agreement, misrepresenting the legal form of the franchises, and attempting to avoid compliance with the MFIL and the Federal Trade Commission Act." Id. ¶ 92. In Count V, plaintiffs assert a violation of the MCPA because defendants "caus[ed] confusion and misunderstanding as to the legal rights, obligations, or remedies of [the] parties to the Agreement." Id. ¶ 114 (alterations added). Plaintiffs state that the MCPA applies because they paid more than $500 for the RP Retail Units, id. ¶ 112, an exchange that happened through the Agreement. Count VI, a claim of common law and statutory conversion against RP, also references RP's "fraudulent scheme," which, as described above, involved the Agreement and the parties' relationship. In this count, plaintiffs take issue with RP's "wrongful dominion" over their money, which RP obtained through the Agreement. Id. ¶¶ 121-22. Count VII is a claim of civil conspiracy against all defendants, who allegedly conspired "with the unlawful purpose of defrauding plaintiffs, violating the MFIL, violating the Federal Trade Commission Act, violating RICO, committing statutory conversion, and/or violating the MCPA." Id. ¶ 125. Plaintiffs' MFIL, FTCA, RICO, conversion, and MCPA claims all relate to the Agreement and the parties' relationship. This action is therefore covered by the arbitration clause because it cannot be maintained without reference to the Agreement or the parties' relationship, and because there is no evidence that the parties intended to exclude any of these claims from arbitration.
Moreover, Counts I through VII of the complaint do not fall under the "Claims Not Subject to Arbitration" listed in § 18(B)(1) of the Agreement. This is because plaintiffs' claims do not involve the propriety of the termination of the Agreement, RP of Michigan's right to operate an RP Retail Unit, any trade secrets or marks, a transfer, or RP's enforcement of non-competition, confidentiality, or non-solicitation obligations. Plaintiffs' request for rescission does not fall under the non-arbitrable claims in § 18(B)(1) either. A request for rescission is not a claim but a remedy. Even if it were a claim, it does not "involve[e] the propriety of any termination of th[e] Agreement." Agr. at 52 (alterations added). Plaintiffs broadly interpret § 18(B)(1) as providing that "claims involving termination of the Agreement were expressly reserved for court action." Pls.' Resp. Br. at 11. But this interpretation overlooks the fact that the claims excluded from arbitration are not claims regarding termination of the Agreement; rather, the excluded claims are those involving "the propriety of any termination of th[e] Agreement." Plaintiffs have not asserted such a claim. Therefore, if plaintiffs wish to pursue their claims, they must arbitrate — not litigate — them.
Defendants assert that the arbitration clause requires that plaintiffs' claims be arbitrated in New York. Defs.' Br. at 1, 5. Plaintiffs argue that Mich. Comp. Laws § 445.1527(f) "renders the New York forum selection provision in the agreement `void and unenforceable.'" Pls.' Resp. Br. at 2. Mich. Comp. Laws § 445.1527 provides in pertinent part:
"The FAA governs all aspects of arbitration procedure and preempts inconsistent state law." Stout, 228 F.3d at 716 (citing Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 688 (1996); Moses H. Cone Mem'l Hosp., 460 U.S. at 24). This Court has determined that "arbitration agreements are to be enforced `according to their terms' and that the Michigan Franchise Investment Law's prohibition against extra-territorial arbitration agreements, `impose[s] limitations on the method and manner of arbitration,' which cannot be permitted under the Federal Arbitration Act and the Supremacy Clause." Flint Warm Air Supply Co. v. York Int'l Corp., 115 F.Supp.2d 820, 827-28 (E.D. Mich. 2000) (alteration in original). When faced with a similar argument, Judge Edmunds concluded:
Prude v. McBride Research Labs., Inc., No. 07-13472, 2008 WL 360636, at *5 (E.D. Mich. Feb. 8, 2008) (alteration in original). Because the FAA preempts the MFIL, even if the MFIL were found to apply to the Agreement, the Agreement's provision that arbitration will take place in New York is enforceable. As a result, if plaintiffs choose to arbitrate their claims, they must do so in New York.
Having determined that the claims in the complaint are subject to the parties' agreement to arbitrate, the Court could compel arbitration under § 4 of the FAA if defendants had requested this in their motion. But defendants have not asked the Court to compel arbitration; instead, they seek dismissal of the complaint. Where no request is made for arbitration, dismissal without prejudice is the proper remedy. Even if defendants had asked that arbitration be compelled, dismissal without prejudice would still be appropriate. "Federal Courts of Appeal, including the Sixth Circuit . . . have authorized dismissal where all claims in an action are to be submitted to arbitration and where staying the action and retaining jurisdiction would serve no purpose." Prude, 2008 WL 360636, at *7 (citing Hensel v. Cargill, Inc., No. 99-3199, 1999 WL 993775, at *4 (6th Cir. Oct. 19, 1999)). In the present case, plaintiffs have agreed to limit their remedy to arbitration, but defendants do not seek to enforce this agreement to arbitrate by asking that the Court compel arbitration. Accordingly, the Court dismisses plaintiffs' claims without prejudice.
For the reasons stated above,
IT IS ORDERED that defendants' motion to dismiss [docket entry 9] is granted because plaintiffs' claims are subject to the Agreement's arbitration clause.
IT IS FURTHER ORDERED that this action is dismissed without prejudice.
