Doctor's Associates, Inc. v. Susan Searl et al. (2015)

MEMORANDUM OF DECISION

The plaintiff brings this action seeking to confirm a favorable arbitration award.   The plaintiff owns the Subway trademarks.   The defendants, a husband and wife, own and operate three Subway restaurants under separate franchise agreements that all provide for arbitration of disputes.   As provided in the agreements, the defendants are independent franchise operators and licensed users of the Subway trademarks.   The defendants filed an objection to the plaintiff's application to confirm the arbitration award,¹ and an answer and special defense, but did not file a motion specifically seeking to vacate the award.   The defendants' special defense essentially alleges that they were not provided with notice of the arbitration hearing and, as a result, they did not have an opportunity to appear at the hearing to defend the action on the merits.   Therefore, the award should be vacated.

The plaintiff has filed a motion to dismiss for a lack of subject matter jurisdiction.   The plaintiff contends that the defendants received notice of the arbitration award, but failed to timely file under Connecticut law a motion to vacate the award.   The defendants, in an attempt to avoid the adverse effects of the application of Connecticut law, counter that federal or New York arbitration laws are controlling, and their answer and special defense is timely and validly filed under either law.

The following facts are relevant to the determination of the motion.   The plaintiff is a foreign corporation headquartered in Milford, Connecticut, and is the franchisor of Subway restaurants.   The defendants reside in upstate New York, where they operate their stores.

The present proceedings arise from a “Franchise Agreement” executed by the parties on July 5, 2007, which governs the defendants' Franklinville, New York restaurant designated by franchise number 34648.   In October 2013, the defendants were notified by the plaintiff that they were noncompliant with certain contractual requirements concerning the operation of that particular restaurant, and that the plaintiff was terminating the franchise agreement.   The letter was received by the defendants despite being incorrectly addressed.   Consequently, in February 2014, the defendants signed a probationary agreement that provided if they were compliant in their Franklinville store operations for three months, they would be reinstated as franchisees of the store.

The plaintiff initiated the subject arbitration on April 3, 2014 by filing a demand for arbitration with the American Dispute Resolution Center (ADRC) claiming that the defendants breached the franchise and probationary agreements.   The defendants have continuously maintained that they did not breach the agreements.

The sole arbitrator found for the plaintiff, and issued his award on June 20, 2014.²  The defendant, Susan Searl, states in her affidavit that she received notice of the arbitration award on June 26, 2014,³ along with, for the first time, notice regarding the selection of the arbitrator and the deadline for the submission of evidence.   As a result, Searl called the ADRC inquiring about the documents that she received on June 26th.   Searl avers that a representative of ADRC informed her that she did not receive any communications from ADRC between receiving notice of the demand for arbitration in April and notice of the award in the latter part of June because “the plaintiff provided the ADRC with the wrong address.”   Searl further avers that she called the plaintiff's legal department and spoke to a representative who informed her “that there was nothing that [she] could do other than sell or close store # 34648.”   The defendants characterize that information as false or misleading.

On September 4, 2014, the defendants, representing themselves, filed with this court a pleading entitled “Objection to Confirmation Award.”   On October 3, 2014, the defendants, through present counsel, filed an “Answer and Affirmative Defenses.”   Therein, the defendants claim that they “had meritorious defenses to the plaintiff's demand for arbitration but they were not given notice or an opportunity to be heard.”   The defendants allege in their affirmative defense that the arbitrator exceeded his authority and imperfectly executed his authority by issuing his award despite the fact that the defendants never received notice of the proceedings and an opportunity to be heard.   The defendants further allege that the lack of notice and an opportunity to be heard at the arbitration violates public policy, and, to the extent that the arbitration center knew about the lack of notice, is evidence of the center's partiality.⁴

The plaintiff filed the present motion to dismiss on October 9, 2014.   The plaintiff alleges that the court lacks subject matter jurisdiction to consider the defendant's answer and special defenses, because it was not filed “within the strict statutory timeframe” required under Connecticut law for an application to vacate.   The defendants respond that their answer and affirmative defense should be resolved on the merits based on their claim that either the Federal Arbitration Act or New York arbitration law should govern the present arbitration proceedings, and not Connecticut law.   In this regard, the defendants assert that the answer and special defense is timely filed and valid under either federal or New York law.

I

ANALYSIS OF THE APPLICABLE ARBITRATION LAWAWhether Federal Arbitration Law Preempts State Law

The court must first determine whether federal law or our state law governing arbitration proceedings, General Statutes §§ 52–408 through 52–424, is controlling.  “Arbitration is essentially a creature of contract, a contract in which the parties themselves charter a private tribunal for the resolution of their disputes ․ Arbitration agreements are contracts and their meaning is to be determined ․ under accepted rules of [state] contract law ․

“Judicial construction of an arbitration agreement, however, is not guided solely by the principles of relevant state contract law.   The arbitration act;  9 U.S.C. §§ 1 through 16;  governs written arbitration agreements that pertain to contracts involving interstate commerce.  9 U.S.C. §§ 1 and 2. The arbitration act creates a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the [a]ct ․ As federal substantive law ․ the arbitration act is to be applied by state courts as well as by federal courts ․

“The purpose of the arbitration act is to ensure that private agreements to arbitrate are enforced according to their terms ․ The arbitration act establishes a strong federal policy favoring arbitration ․ [W]hen Congress passed the [a]rbitration [a]ct in 1925 ․ [i]t intended courts to enforce [arbitration] agreements into which parties had entered ․ and to place such agreements upon the same footing as other contracts ․” (Citations omitted;  internal quotation marks omitted.)  Hottle v. BDO Seidman, LLC, 268 Conn. 694, 701–03, 846 A.2d 862 (2004).

“The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration.”  Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).

The case of Hotz Corp. v. Carabetta Builders, Inc., Superior Court, judicial district of New Haven, Docket Nos. CV–91–0318394 and CV–91–0318936 (November 29, 1991, Schaller, J.), is instructive.   Therein, the defendant filed an application to vacate, correct and/or modify an arbitration award rendered for the plaintiff, and the plaintiff moved for confirmation of the award.  Id.

A threshold issue to be decided was “whether General Statutes §§ 52–417 through 52–419 or the Federal Arbitration Act ․ [was] controlling.”   Id. The court characterized the claims of the parties as follows:  “Hotz argues that the arbitration proceeding before this court shall be in accordance with Connecticut law because the parties agreed in the arbitration clause at issue that [t]he arbitration proceeding shall be in accordance with Connecticut law, and because Connecticut law is consistent with the federal policy favoring arbitration ․ Defendant Carabetta contends that the Federal Arbitration Act, 9 U.S.C.A. § 1 et seq. is controlling in this arbitration because interstate commerce is involved and because the Supremacy Clause requires state law to yield to federal law.”  (Internal quotation marks omitted.)  Id.

“In Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 489 U.S. 468, 109 S.Ct. 1248 (1989), the United States Supreme Court held that the FAA did not preempt California law where the parties' arbitration agreement contained a choice of law clause which provided that the contract would be governed by the law of the place where the project is located even though the contract involved interstate commerce.   The primary basis for the court's holding was that [t]he FAA contains no express preemptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration ․

“In finding that the FAA did not preempt state law where the parties have agreed to abide by state arbitration rules, the Volt court found that:  9 U.S.C.A. § 4 of the FAA does not confer an absolute right to compel arbitration, but only a right to obtain an order directing that arbitration proceed in the manner provided for in [the parties'] agreement ․ The court reasoned that the purpose of the FAA is not [to] mandate the arbitration of all claims, ․ but merely to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms ․ The court in Volt further held that:

“Arbitration under the Act is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit.   Just as they may limit by contract the issues which they will arbitrate, ․ so too may they specify by contract the rules under which that arbitration will be conducted.   Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward.   By permitting the courts to rigorously enforce such agreements according to their terms, ․ we give effect to the contractual rights and expectations of the parties, without doing violence to the policies behind the FAA.” (Citations omitted;  emphasis in original;  internal quotation marks omitted.)  Id.

In light of the decision in Volt, the trial court in Hotz Corp. concluded that the Federal Arbitration Act did not preclude application of the Connecticut arbitration statutes.  “Pursuant to the parties' agreement to arbitrate all disputes arising out of the subcontract, the choice-of-law clause provided that [t]he arbitration proceeding shall be in accordance with Connecticut law.   Accordingly, the U.S. Supreme Court decision in Volt dictates that the FAA does not preempt this state's arbitration rules in that the parties have agreed to abide by Connecticut law to the exclusion of federal arbitration law, even though interstate commerce may be involved.”  (Internal quotation marks omitted.)  Id.

The Franchise Agreement in the present case, which indisputably involves interstate commerce, contains the following relevant provisions:

10. ARBITRATION OF DISPUTES

a.  Any dispute, controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration.

b. The parties agree that Bridgeport, Connecticut shall be the site for all arbitration hearings held under this Paragraph 10, and that such hearings shall be before a single arbitrator, not a panel.

f. Any disputes concerning the enforceability or scope of the arbitration clause shall be resolved pursuant to the Federal Arbitration Act, 9 U.S.C. § et seq.  (“FAA”), and the parties agree that the FAA preempts any state law restrictions (including the site of the arbitration) on the enforcement of the arbitration clause in this Agreement.

13. GOVERNING LAW

This Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without reference to its conflicts of laws, except as may otherwise be provided in this Agreement.

The parties do not dispute the enforceability or scope of the arbitration clause.   As a result, paragraph 10(f) of the Franchise Agreement is inapplicable to the present proceedings.   Moreover, the agreement contains a choice-of-law provision establishing that Connecticut law governs.   Here, the court concludes, as did the court in Hotz Corporation, that “the U.S. Supreme Court decision in Volt dictates that the FAA does not preempt this state's arbitration rules in that the parties have agreed to abide by Connecticut law to the exclusion of federal arbitration law, even though interstate commerce may be involved.”  Hotz Corp. v. Carabetta Builders, Inc., supra, Superior Court, Docket Nos. CV–91–0318934 and CV–91–0318936.   Accordingly, the court finds that the Federal Arbitration Act is not controlling in the present case.

B

Whether New York or Connecticut Arbitration Law Applies

Having concluded that the Federal Arbitration Act does not apply, the court must next consider the defendants' alternative contention that “New York law should control” because “[t]he state with the greatest interest in this dispute is New York.” The defendants set forth in their memorandum, along with supporting legal authority, the proposition that under New York law “special defenses to the confirmation of an arbitration award cannot be waived simply by the passage of time and may be raised at any time.”

Section 187 of the Restatement (Second) of Conflict of Laws (1971), provides in relevant part:  “Law of the State Chosen by the Parties,” provides in relevant part:

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Restatement (Second), Conflict of Laws § 187, p. 561 (1971).

Our Supreme Court applied the same Restatement section in determining whether an antenuptial agreement containing a New York choice of law provision was valid and enforceable in Elgar v. Elgar, 238 Conn. 839, 850–51, 679 A.2d 937 (1996).   Therein, the court held as follows:  “We conclude, in accordance with § 187 of the Restatement, that parties to a contract generally are allowed to select the law that will govern their contract, unless either:  ‘(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.’   Applying this test to the facts of the present case, we conclude that the parties' choice of New York law was valid and, therefore, was properly given effect.”  (Footnote omitted.)  Id.

Here, the defendants allege that under the analysis set forth in Elgar, the law of New York applies because that state “has a materially greater interest than Connecticut in the determination of the issues in the dispute and ․ the application of Connecticut law would be contrary to the fundamental policy of New York.” Particularly, the defendants note that the Franchise Agreement relates to a New York store;  the employees, customers and equipment were located in New York;  the defendants “reviewed and signed all of the operative documents in New York”;  “the plaintiff's interaction with the defendants was almost entirely through its Development Agent ․ with offices in New York”;  and “the only connection to Connecticut is that it is the location of the plaintiff's corporate offices and legal department.' “

Although there were significant contacts with New York, they are not materially greater than the contacts with Connecticut.   The facts that the Subway store at issue and its franchisees are located in New York, as is the store's operations, are not materially greater than the facts that Subway's headquarters are located in Connecticut;  the defendants were in contact with the plaintiff's legal department in Connecticut concerning store operations;  any notice under the Franchise Agreement were required to be addressed to the plaintiff's legal department in Connecticut;  the parties agreed that Bridgeport, Connecticut was the site for the arbitration hearing;  and that the agreement is to be “governed by and construed in accordance with the substantive laws of the State of Connecticut.”

Based on this finding, the court need not consider the relative policy interests, which would only be necessary had the court found New York to have a materially greater interest in the proceedings than Connecticut.  Elgar v. Elgar, supra, 238 Conn. 851.   Accordingly, the court rejects the defendants' contention that New York rules of arbitration are controlling, and concludes that the law of Connecticut applies to these arbitration proceedings.

C

Application of Connecticut Arbitration Law

The court must next consider under Connecticut law whether the arbitration award should be confirmed as sought by the plaintiff in its application, or vacated for the reasons claimed by the defendants in their answer and special defense.   Arbitration proceedings are governed by General Statutes § 52–408 through 52–424.

“[I]t is significant that proceedings to confirm, modify or vacate arbitration awards are initiated, not by the filing of a complaint, but by the filing of an application or of a rule to show cause.”  Waterbury v. Waterbury Police Union, 176 Conn. 401, 407, 407 A.2d 1013 (1979).   Proceedings to confirm, modify or vacate arbitration awards are not civil actions, but are created by state statute.  Id., 408.   Applications to confirm or vacate an award are considered by the court in the same manner as are written motions on the regular motion calendar.  General Statutes § 52–420(a).   An application for an order confirming an award must be filed within one year after receiving notice of the award.  General Statutes § 52–417 The court is required to grant an order confirming an award “unless the award is vacated, modified or corrected as prescribed in sections 52–418 and 52–419.” § 52–417.   “Section 52–420(b) requires that a motion to vacate an arbitration award be filed within thirty days of the notice of the award to the moving party.   If the motion is not filed within the thirty day time limit, the trial court does not have subject matter jurisdiction over the motion.  Vail v. American Way Homes, Inc., 181 Conn. 449, 452–53, 435 A.2d 993 (1980).  Middlesex Ins. Co. v. Castellano, 225 Conn. 339, 344, 623 A.2d 55 (1993);  see General Statutes § 52–420(b).”  (Internal quotation marks omitted.)  Wu v. Chang, 264 Conn. 307, 312, 823 A.2d 1197 (2003).  “Subject matter jurisdiction involves the authority of the court to adjudicate the type of controversy presented by the action before it ․ [A] court lacks discretion to consider the merits of a case over which it is without jurisdiction ․ The subject matter jurisdiction requirement may not be waived by any party, and also may be raised by a party, or by the court sua sponte, at any stage of the proceedings, including on appeal.”  (Internal quotation marks omitted.)  Ajadi v. Commissioner of Correction, 280 Conn. 514, 533, 911 A.2d 712 (2006).

The plaintiff filed an application to confirm the arbitration award issued on June 20, 2014 in accordance with the provisions of General Statutes § 52–417.   The defendants admit that they received notice of the award on June 26, 2014.   Notwithstanding, it is clear that the defendants received notice of the award sometime between June 26, 2014 and July 1, 2014.   Despite the defendants' disagreement with the arbitrator's award, and their claimed lack of notice of, and an opportunity to attend, the arbitration hearing, the defendants failed to file a motion to vacate the award within thirty days of their receipt of the award.   In view of those undisputed facts, the court lacks subject matter jurisdiction under Connecticut law to consider the defendants' special defense wherein they seek to vacate the arbitration award.   Additionally, the court is statutorily compelled to grant to the plaintiff an order confirming the award.

II

CONCLUSION

The plaintiff's motion to dismiss (115.00) is denied.   Additionally, the plaintiff application to confirm the arbitration award (100.31) is granted.

TYMA, J.

FOOTNOTES

FN1. Prior to counsel filing an appearance for the defendants on October 3, 2014, the defendants filed on September 4th a pleading captioned “Objection to Confirmation Award.”   Therein, the defendants set forth a lengthy chronology of relevant facts and a letter addressed generally to a judge of this court discussing their personal situation relating to the operation of their restaurants.   In the pleading, the defendants state that “no motion to vacate or modify or correct an award may be made 30 days after notice of award given.   They are saying that date is 7/25/14 & we did protest the award before that date.”   On the same date that counsel appeared in the case on behalf of the defendants, plaintiff's counsel filed an answer and special defense.   In their special defense, the defendants assert that the award should be vacated because they did not receive adequate notice.   The defendants claim, therefore, that the award demonstrates that the arbitrator exceeded his authority, imperfectly executed his powers, engaged in partiality, and that the award violates public policy.   Because the defendants seek to have the award vacated, the court construes the answer and special defense as a motion to vacate in rendering its decision..  FN1. Prior to counsel filing an appearance for the defendants on October 3, 2014, the defendants filed on September 4th a pleading captioned “Objection to Confirmation Award.”   Therein, the defendants set forth a lengthy chronology of relevant facts and a letter addressed generally to a judge of this court discussing their personal situation relating to the operation of their restaurants.   In the pleading, the defendants state that “no motion to vacate or modify or correct an award may be made 30 days after notice of award given.   They are saying that date is 7/25/14 & we did protest the award before that date.”   On the same date that counsel appeared in the case on behalf of the defendants, plaintiff's counsel filed an answer and special defense.   In their special defense, the defendants assert that the award should be vacated because they did not receive adequate notice.   The defendants claim, therefore, that the award demonstrates that the arbitrator exceeded his authority, imperfectly executed his powers, engaged in partiality, and that the award violates public policy.   Because the defendants seek to have the award vacated, the court construes the answer and special defense as a motion to vacate in rendering its decision.

FN2. During the month of August 2013, the defendants moved to a new personal residence.   As required by the agreement, the defendants gave notice to the plaintiff of their change of address..  FN2. During the month of August 2013, the defendants moved to a new personal residence.   As required by the agreement, the defendants gave notice to the plaintiff of their change of address.

FN3. Notwithstanding the defendants' admission, the plaintiff claims, and the defendants do not dispute, that the defendants received notice of the award as early as June 26, 2014 and no later than July 1, 2014.   Because that jurisdictional fact is determinative of this motion, an evidentiary hearing is not required.  “Finally, where a jurisdictional determination is dependent on the resolution of a critical factual dispute, it cannot be decided on a motion to dismiss in the absence of an evidentiary hearing to establish jurisdictional facts.  Gordon v. H.N.S. Management Co., 272 Conn. 81, 92, 861 A.2d 1160 (2004) ( [w]hen issues of fact are necessary to the determination of a court's jurisdiction ․ due process requires that a trial-like hearing be held, in which an opportunity is provided to present evidence and to cross-examine adverse witnesses ․ );  Schaghticoke Tribal Nation v. Harrison, 264 Conn. 829, 833, 826 A.2d 1102 (2003) (same).   Likewise, if the question of jurisdiction is intertwined with the merits of the case, a court cannot resolve the jurisdictional question without a hearing to evaluate those merits.  Lampasona v. Jacobs, 209 Conn. 724, 728, 553 A.2d 175 (1989) ( [i]n some cases ․ it is necessary to examine the facts of the case to determine whether it is within a general class that the court has power to hear), cert. denied, 492 U.S. 919, 109 S.Ct. 3244, 106 L.Ed.2d 590 (1989).”  (Citations omitted;  emphasis added;  internal quotation marks omitted.)  Dorry v. Garden, supra, 313 Conn. 522–24.”  Cuozzo v. Town of Orange, 315 Conn. 606, 616–17, 109 A.3d 903 (2015)..  FN3. Notwithstanding the defendants' admission, the plaintiff claims, and the defendants do not dispute, that the defendants received notice of the award as early as June 26, 2014 and no later than July 1, 2014.   Because that jurisdictional fact is determinative of this motion, an evidentiary hearing is not required.  “Finally, where a jurisdictional determination is dependent on the resolution of a critical factual dispute, it cannot be decided on a motion to dismiss in the absence of an evidentiary hearing to establish jurisdictional facts.  Gordon v. H.N.S. Management Co., 272 Conn. 81, 92, 861 A.2d 1160 (2004) ( [w]hen issues of fact are necessary to the determination of a court's jurisdiction ․ due process requires that a trial-like hearing be held, in which an opportunity is provided to present evidence and to cross-examine adverse witnesses ․ );  Schaghticoke Tribal Nation v. Harrison, 264 Conn. 829, 833, 826 A.2d 1102 (2003) (same).   Likewise, if the question of jurisdiction is intertwined with the merits of the case, a court cannot resolve the jurisdictional question without a hearing to evaluate those merits.  Lampasona v. Jacobs, 209 Conn. 724, 728, 553 A.2d 175 (1989) ( [i]n some cases ․ it is necessary to examine the facts of the case to determine whether it is within a general class that the court has power to hear), cert. denied, 492 U.S. 919, 109 S.Ct. 3244, 106 L.Ed.2d 590 (1989).”  (Citations omitted;  emphasis added;  internal quotation marks omitted.)  Dorry v. Garden, supra, 313 Conn. 522–24.”  Cuozzo v. Town of Orange, 315 Conn. 606, 616–17, 109 A.3d 903 (2015).

FN4. The defendants' claims in their objection to the plaintiff's motion to dismiss are based on their answer and special defense that was filed on October 3, 2014, and not the objection previously filed by the defendants in their individual capacity.   Accordingly, the court will not address the objection..  FN4. The defendants' claims in their objection to the plaintiff's motion to dismiss are based on their answer and special defense that was filed on October 3, 2014, and not the objection previously filed by the defendants in their individual capacity.   Accordingly, the court will not address the objection.

Tyma, Theodore R., J.