Subway Equipment Leasing Corp. v. Forte

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 97-31236
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SUBWAY EQUIPMENT LEASING CORPORATION;
SUBWAY RESTAURANTS, INC.,

Plaintiffs-Appellants,

versus

BONNIE FORTE, wife of/and; CHARLES N.
FORTE; SELENA RANKINS, wife of/and;
FRANK R. RANKINS; DOROTHY SIMS, wife of/
and; EARL SIMS, JR.,

Defendants-Counter Claimants-Appellees.

versus

DOCTOR’S ASSOCIATES, INC., doing
business as Subway; FREDERICK A. DELUCA,

Counter Defendants-Appellants.

------------------------------------------

EARL SIMS; SUBWAY DEVELOPMENT OF
LOUISIANA, INC.; SUBWAY MANAGEMENT
GROUP OF LOUISIANA,

Plaintiffs-Appellees,

versus

DOCTOR’S ASSOCIATES, INC.; FREDERICK
DELUCA; SUBWAY RESTAURANTS, INC.,

Defendants-Appellants.
_________________________________________________________________

Appeals from the United States District Court for the
Eastern District of Louisiana
_________________________________________________________________
March 24, 1999
Before JOLLY, DUHÉ, and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Doctor’s Associates, Inc. (“DAI”) and companies associated

with DAI appeal a district court ruling denying their motion for a

stay pending arbitration. The district court held that DAI and its

associates had invoked the judicial process thereby creating a

significant delay that prejudiced the opposing parties and that DAI

had therefore waived its right to arbitration. Because DAI has not

invoked the judicial process with respect to the claim it wishes to

arbitrate and because there is no evidence that the opposing

parties have been prejudiced by any delay, we reverse.

I

This case involves a franchisor-franchisee relationship gone

sour. Subway, the chain sandwich shop, sells franchises through

DAI. Earl and Dorothy Sims and various other partners (“the

franchisees”), ran four Subway franchises in the 1980's. Earl Sims

was also a Subway Development Agent (“D.A.”) for the Baton Rouge

area and, on a temporary basis, for the New Orleans area. The

franchisees’ agreements with DAI, contained broad arbitration

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clauses. Earl Sims’s D.A. contract with DAI contained a similar

arbitration clause.

The franchisees subletted real estate and leased equipment

from DAI’s affiliated companies, Subway Restaurants, Inc. (“SRI”)

and Subway Sandwich Shops (“SSS”), both of which leased real

estate, and Subway Equipment Leasing (“SEL”), which leased store

equipment. The franchisees’ real estate subleases and the

equipment leases did not contain arbitration clauses.

In March 1988, Earl Sims, much to his displeasure, was

replaced by another D.A. in the New Orleans area. In May of 1988,

he filed an arbitration demand with the American Arbitration

Association (“AAA”), claiming that DAI had breached the D.A.

agreement. Subsequently, the franchisees defaulted on their real

estate and equipment leases. Shortly thereafter, the litigation

began in earnest.

In November 1988, SEL and SRI sued the franchisees in United

States District Court for the Eastern District of Louisiana to

recover amounts due under the equipment and real estate contracts

for one of the franchises (“the 1988 federal case”). The claims

made by SEL and SRI were under their respective contracts with the

franchisees, for which there were no arbitration clauses. The

franchisees responded by filing what they styled as a counterclaim

against DAI and Frederick DeLuca, one of DAI’s principals.

Although neither DAI nor DeLuca were parties to the lawsuit, the

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franchisees claimed that they should be joined as SEL and SRI were

merely extensions of DAI. The district court apparently permitted

this joinder.1 The counterclaim alleged similar claims to those

made by Sims in his arbitration demand.

A day before the franchisees filed their counterclaim in the

1988 federal case, SEL filed an involuntary bankruptcy petition

against the franchisees. By 1990, SEL, SRI and SSS had all filed

separate, amended involuntary petitions against the franchisees in

bankruptcy court. None of the bankruptcy petitions involved

arbitrable claims. In December of 1990, the bankruptcy court

entered orders for relief, granting the involuntary petition in

each proceeding. The district court reversed the bankruptcy court,

holding that SEL, SRI, and SSS were not separate entities for

purposes of 11 U.S.C. § 303(b)(1). On appeal, we reversed the

holding that SEL, SRI, and SSS were separate entities. Matter of

Sims, 994 F.2d 210 (5th Cir. 1993). The franchisees then appealed

to the Supreme Court, which denied certiorari in 1994. Sims v.

Subway Equipment Leasing Corporation, 510 U.S. 1049 (1994). The

bankruptcy proceedings were finally resolved in 1996.

1
This point is not entirely clear. Normally, such a joinder
would raise an issue regarding whether DAI and DeLuca were properly
joined under Fed. R. Civ. P. 14(a). Because the 1988 case was
subsequently consolidated with the 1990 case, in which DAI and
DeLuca were named defendants, and because this issue was not argued
on appeal, we assume that DAI and DeLuca are proper parties in this
appeal.

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 In the interim, the franchisees had filed two lawsuits of

their own. In July 1989, they filed a suit in the District Court

for East Baton Rouge Parish for damages against DAI, DeLuca, and

SSS. That case was stayed while the bankruptcy case was pending

and, after discharge, the state granted DAI’s motion to stay the

matter pending arbitration. In February of 1990, Sims sued DAI and

DeLuca in the Orleans Parish District Court. DAI removed the suit

to federal court, where it was consolidated with the 1988 federal

case.

The consolidated case was stayed pursuant to the bankruptcy

proceedings. At approximately the same time, pursuant to a letter

sent by counsel for DAI, the AAA decided to hold Earl Sims’s

arbitration in abeyance until the bankruptcy proceedings were

resolved. Sims apparently did not object to the arbitration

proceeding being held in abeyance. When the bankruptcy proceedings

concluded in 1996, the franchisees moved to restore their actions

in the consolidated case to the active docket. After the district

court reopened the franchisees’ actions, DAI filed a demand for

arbitration with the AAA and moved to stay the litigation pending

arbitration. The district court denied the motion, reasoning that

DAI waived its right to compel arbitration. DAI has filed a timely

appeal.

On appeal, DAI makes two arguments. First, DAI contends that

the district court erred when it held that DAI had waived its right

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to arbitrate claims related to the D.A. agreement. Second, DAI

argues that, provided it is correct that the district court should

stay the franchisees’ claims against DAI pending arbitration, then

the district court should also stay the claims against SEL, SRI,

and SSS as well. We address each argument in turn.

II

We review the issue of whether a party’s conduct amounts to a

waiver of arbitration de novo. Walker v. J.C. Bradford & Co., 938

F.2d 575, 577 (5th Cir. 1991). The factual findings underlying a

district court’s waiver determination are reviewed for clear error.

See id. at 576. "Waiver will be found when the party seeking

arbitration substantially invokes the judicial process to the

detriment or prejudice of the other party." Miller Brewing Co. v.

Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986).

There is a strong presumption against waiver of arbitration.

See, e.g., Lawrence v. Comprehensive Business Services Co., 833

F.2d 1159, 1164 (5th Cir. 1987) (“Waiver of arbitration is not a

favored finding and there is a presumption against it.”); Moses H.

Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983)

(“[A]s a matter of law, any doubts concerning the scope of

arbitrable issues should be resolved in favor of arbitration.”).

Accordingly, a party alleging waiver of arbitration must carry a

heavy burden. Associated Builders v. Ratcliff Constr. Co., 823

F.2d 904, 905 (5th Cir. 1987).

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 Walker provides an example of this court’s “hesitat[ion] to

find that a party has waived its contractual right to arbitration.”

938 F.2d at 577. In Walker, the plaintiffs sued in state court,

alleging state securities law violations. Instead of immediately

demanding arbitration, the defendant answered the complaint and

participated in discovery. Thirteen months later, after the

plaintiffs moved to transfer the case, the defendant sought to

enforce its contractual right to arbitration. Despite the

defendant’s delay and participation in the lawsuit, this court held

that the defendant had not waived arbitration because the

plaintiffs failed to show that they were “materially prejudiced” by

the delay. Id. at 578.

Before proceeding to the arguments in this case, we should

note that the Second Circuit has addressed the waiver issue in

great detail with respect to litigation involving one of the

parties before this court, DAI. In Doctor’s Associates, Inc. v.

Distajo, the Second Circuit considered and rejected challenges to

the arbitration clause in a Subway franchise agreement. 66 F.3d

438 (2d Cir. 1995) (“Distajo I”), cert. denied, 517 U.S. 1120

(1996). The court held that “[i]f the alleged violations of the

subleases were premised on violations of the franchise agreement

(which DAI was contractually bound to resolve through arbitration)

then DAI did litigate substantial issues going to the merits, and

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the only remaining question will be whether the franchisees

suffered prejudice from the eviction proceedings.” Id. at 457.

In a subsequent appeal of Distajo, the Second Circuit further

delved into the meaning of prejudice for purposes of a waiver of an

arbitration agreement: “prejudice . . . refers to the inherent

unfairness--in terms of delay, expense, or damage to a party’s

legal position--that occurs when the party’s opponent forces it to

litigate an issue and later seeks to arbitrate that same issue.”

Doctor’s Associates v. Distajo, 107 F.3d 126, 134 (2d Cir. 1997),

cert. denied, 118 S.Ct. 365 (1997) (“Distajo II”). However, in

Distajo II, the court held that, even where DAI directed its

affiliates to sue pursuant to cross-default clauses based on

franchise agreement breaches, there was no waiver of DAI’s right to

arbitrate the franchisees’ claims. Id. at 132.

III

In this case, the arbitration clause in the D.A. agreement

covers “[a]ny controversy or claim arising out of or relating to

this contract or the breach thereof.” This language clearly covers

the franchisees’ claims against DAI. Absent waiver, the FAA would

require the district court to stay the litigation pending

arbitration. See In re Complaint of Hornbeck Offshore Corp., 981

F.2d 752, 754 (5th Cir. 1993).

The district court provided the following explanation for

concluding that DAI waived its right to arbitrate:

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 [The] disputes in these actions were not arbitrated
at their inception because of the actions of the Subway
entities. Movants invoked the judicial process, in this
court and in bankruptcy court, creating an eight year
delay which has prejudiced the opposing parties.
Movants, the Subway entities, waived their right to
arbitration.

DAI argues that the district court erred when it concluded that DAI

invoked the judicial process.

DAI argues that it has not engaged in any litigation on the

merits of the claims it is seeking to arbitrate. None of the

actions brought by a DAI affiliate involved claims arising out of

a contract containing an arbitration clause. SEL and SRI brought

the 1988 federal action for breach of their respective contracts,

neither of which contained arbitration clauses. The only other

action initiated by a DAI affiliate is the bankruptcy proceeding,

which again did not involve arbitrable claims. In contrast, the

franchisees have, on three separate occasions, sought to litigate

arbitrable claims related to the D.A. agreement: (1) in their

counterclaim in the 1988 federal case; (2) in their petition filed

in Baton Rouge Parish; and (3) in their petition filed in Orleans

Parish. On its face, at least, it would appear that it is the

franchisees, not DAI, that have invoked the judicial process.

The franchisees make two arguments to support their claim that

DAI has invoked the judicial process to their detriment. First,

they argue that DAI and its affiliates are so related, and the

claims brought by the affiliates so inextricably intertwined, that

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DAI invoked the judicial process when its affiliates brought the

1988 federal action and the bankruptcy action. The franchisees

second argument is that DAI’s affiliates acted as an agents for DAI

in filing the bankruptcy proceeding so that DAI could stay Sims’s

arbitration proceeding.

The franchisees contend that the district court correctly

concluded that DAI invoked the judicial process through its

affiliates, insisting that the affiliates were DAI’s alter egos or

at least its agents.2 This argument brings up an issue we

addressed in Lawrence, and which the Second Circuit has addressed

in greater detail since--whether a party can invoke the judicial

process if it litigates a non-arbitrable claim against a party with

2
The franchisees concede that, in Matter of Sims, 994 F.2d
210, 217-20 (5th Cir. 1993), we held that the bankruptcy court’s
finding that DAI’s affiliates were not its alter egos was not
clearly erroneous. Even so, the appellees note that several post-
Sims cases have found an alter ego relationship between DAI and its
affiliates. See Janotta v. Subway Sandwich Shops, Inc., 125 F.3d
503, 510 (7th Cir. 1997) (noting that DAI did not appeal the jury
finding that SSS was DAI’s alter ego); Doctor’s Associate’s, Inc.
v. Distajo, 944 F.Supp. 1010, 1014 (D.Conn. 1996) (stating that
“DAI has conceded that the leasing companies were its alter egos”);
Pine Tree Associates v. Doctor’s Associates, Inc., 654 So.2d 735,
739-40 (La. 1995) (finding sufficient evidence to warrant a trial
on the issue of whether DAI’s affiliates were its alter egos).
The franchisees also contend that DAI is responsible for SEL’s
conduct in initiating the involuntary bankruptcy proceeding because
SEL merged into DAI on December 31, 1996. The franchisees claim
that, as a Florida corporation, DAI is “liable and responsible” for
SEL’s pre-merger conduct pursuant to Fla. Stat. Ann.
§ 607.1106(1)(c)).
Because we need not make a determination of the exact
relationship between DAI and its affiliates to resolve the matter
before us, we will not do so.

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whom it has arbitrable claims. Lawrence, 833 F.2d at 1165 (holding

that franchisor who sued franchisees had not invoked the judicial

process for purposes of a subsequent dispute); Distajo II, 107 F.3d

at 132-33 (“only prior litigation of the same legal and factual

issues as those the party now wants to arbitrate results in waiver

of the right to arbitrate); see also Gingiss Int’l, Inc. v. Bormet,

58 F.3d 328, 330(holding that a franchisor “did not waive . . .

[his arbitrable] claims by prosecuting the unlawful detainer action

in California state court because that action involved different

issues”). We hold today that a party only invokes the judicial

process to the extent it litigates a specific claim it subsequently

seeks to arbitrate.

The franchisees argue, however, that the dispute over the D.A.

agreement is so inextricably intertwined with the actions brought

by DAI’s affiliates that they amount to the same action. We cannot

agree. DAI’s affiliates sought to recover for obligations under

their respective contracts. These contracts, all related to

obligations for leasing equipment and real estate, in no instance

involved the D.A. agreement between Sims and DAI. Because the

actions brought by the DAI affiliates involved claims that are

different from the one DAI now seeks to arbitrate, it does not

matter whether DAI’s affiliates were the alter ego, agent, or

precursor to DAI. Even if the affiliates and DAI were one and the

same, DAI still would not have invoked the judicial process.

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 The franchisees further argue that DAI encouraged its

affiliates to file actions against the franchisees so that DAI

could postpone the arbitration proceeding. This argument is a

relatively novel one. The franchisees essentially contend that by

using the bankruptcy proceeding as an excuse to delay the Simses’

arbitration, DAI invoked a judicial process (the bankruptcy

proceeding) to the prejudice of the franchisees (who were subjected

to an eight-year delay). Even if we accepted the reasoning of this

argument, which we do not, the franchisees’ argument would still

fail on the record before us. DAI did request that Sims’s

arbitration be held in abeyance pending the bankruptcy proceeding

and all of the parties now agree that there was no legally binding

reason for the arbitrator to do so. The franchisees, however,

never challenged the arbitrator’s decision. We will not construe

a decision to delay arbitration as prejudicial to the franchisees,

when the franchisees never objected to that delay.

More importantly, the reasoning used by the franchisees is

ultimately specious. As we make clear today, in order to invoke

the judicial process, a party must have litigated the claim that

the party now proposes to arbitrate. Here, the franchisees argue

that, by asserting unrelated litigation--the bankruptcy

proceeding--as a basis for delaying the arbitration proceeding, DAI

has “invoked the judicial process” and therefore waived its right

to arbitrate. This argument, however, confuses our use of the term

12
“invoke” in past cases. We use the term to describe the act of

implementing or enforcing the judicial process, not the act of

calling upon for support or assistance, as say, one would invoke a

spirit or the elements.3 Thus, to invoke the judicial process, the

waiving party must do more than call upon unrelated litigation to

delay an arbitration proceeding. The party must, at the very

least, engage in some overt act in court that evinces a desire to

resolve the arbitrable dispute through litigation rather than

arbitration. There is no evidence that DAI’s actions or, assuming

arguendo that DAI’s associates’ actions can be imputed to DAI, the

actions of SEL, SRI, or SSS amount to this threshold showing of an

attempt to invoke the judicial process.

We therefore find no basis for concluding that DAI should be

denied an opportunity to arbitrate this claim. DAI did not invoke

the judicial process with respect to the arbitrable claim at issue

here. Even if the franchisees could show that DAI intentionally

brought the bankruptcy proceeding to delay arbitration, the

franchisees have not shown that they were prejudiced as a result of

that stay. We therefore hold that the district court erred when it

denied DAI’s motion for a stay pending arbitration.

3
See Webster’s Third International Dictionary 1191 (1993).
Both uses of “invoke” are accepted definitions. In this context,
however, we cannot see a plausible reading of the term “invoke”
that would lead to our treating the “judicial process” as if it
were a specter, ghost, or deity. In this context, we regard the
judicial process as a mechanism: to invoke it is to implement it.

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 IV

Having concluded that DAI is entitled to a stay pending

arbitration, we now must address the scope of the stay order. DAI

argues that, even though SEL, SRI, and SSS have no right to

arbitrate the claims brought against them by the franchisees, the

district court should stay the litigation with respect to them as

well. DAI argues that the FAA requires the district court to stay

litigation where issues presented in the litigation are the subject

of an arbitration agreement. See 9 U.S.C. § 3.

Based on the record before us, we find merit in DAI’s

argument. In Sam Reisfield & Son Import Co. v. S.A. Eteco, we held

that an order to stay covering claims against all defendants was

proper, even though two defendant were not part of the arbitration

agreement. 530 F.2d 679, 681 (5th Cir. 1976). Although the DAI

affiliates themselves have no right to arbitration, the claim

brought by the franchisees is based entirely on the franchisees’

rights under the D.A. contract. We therefore fail to see how

litigation could proceed on the franchisees’ claims without

adversely affecting DAI’s right to arbitration. See, e.g., Kroll

v. Doctor’s Associates, Inc., 3 F.3d 1167, 1171 (7th Cir. 1993)

(stating that a decision about whether to grant a stay should be

motivated by the court’s “concern that litigation against a party

not bound by an arbitration provision may impair an arbitrator's

14
consideration of claims against a party that is compelled to

arbitrate.”).

V

For the foregoing reasons, we hold that DAI, SEL, SRI, and SSS

are entitled to a stay pending arbitration of the franchisees’

claims against DAI. We therefore REVERSE the district court and

REMAND for further proceedings not inconsistent with the opinion.

REVERSED and REMANDED.

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