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June 2013

Gordon & Rees Los Angeles Team Wins Petition to Enforce International Arbitration Agreement

On May 23, Gordon & Rees Los Angeles partner Calvin E. Davis and senior counsel Gary A. Collis won a petition to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Gordon & Rees’s client, an Italian corporation that exports coffee to 60 countries and operates coffee shops throughout Europe, is accused in a lawsuit filed in San Diego County Superior Court of selling a franchised coffee outlet without complying with California’s Franchise Investment Law (CFIL). As a result of this order, the plaintiffs, who are residents of San Diego County, must present their CFIL claims to a panel of arbitrators in Switzerland rather than to a San Diego jury.

Gordon & Rees’s client allegedly sold a coffee shop franchise that operated in San Diego without first registering a franchise disclosure document with the California Department of Corporations. The San Diego plaintiffs also allege the client made unregistered financial performance representations and failed to provide the franchise disclosure document within the time required by the CFIL.

Gordon & Rees removed the lawsuit to federal court where it petitioned the U.S. District Court for the Southern District of California to enforce an arbitration provision in the parties’ contract requiring arbitration of any dispute in Switzerland. Although the lawsuit was pending in Superior Court, the District Court had federal question jurisdiction over the original petition because the United States is a signatory to the New York Convention. Pursuant to a provision of the California Arbitration Act, the Superior Court granted Gordon & Rees’s motion to stay the lawsuit until the District Court adjudicated the petition.

In opposition to the petition, the plaintiffs argued that the parties’ canceled the contract in which the arbitration provision was imbedded one day after they signed it. Thus, the plaintiffs argued that no written “agreement to arbitrate” existed as required by the New York Convention. The client disputed that the parties had canceled the contract and noted that the parties performed under the agreement for more than one year. The parties filed a substantial amount of documentary evidence regarding the creation of the contract, including drafts and correspondence, and evidence regarding the contract’s alleged cancellation.

The District Court, after taking the matter under submission for almost a year, ruled that all four elements necessary to compel international arbitration under the New York Convention had been satisfied. The District Court agreed with Gordon & Rees’s argument that the evidence established that the contract existed for at least a very short period of time and, thus, that a written arbitration agreement existed for purposes of triggering the New York Convention. The District Court ruled that the Swiss arbitrators must decide whether and when the parties canceled the contract.

This petition to compel arbitration was legally challenging for two primary reasons. First, the parties disputed the existence of the arbitration agreement, as opposed to its applicability to the CFIL claim or its enforceability under equitable principles such as waiver, estoppel, or unconscionability. This required the District Court to consider contract principles that are usually undisputed when a party invokes an arbitration clause. Second, Gordon & Rees asked the District Court to require California residents to arbitrate claims in a foreign country, although those claims arose under the CFIL, a California law designed to protect local franchisees that is similar in many respects to a consumer protection statute.

Gordon & Rees’s client was delighted with this result, which probably will result in the end of the dispute as it is unlikely the San Diego plaintiffs will pursue this matter in Switzerland.

 

Calvin E. Davis



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