FRITSCHLER v. Mark Deso et al., Defendants–Respondents. (2022)

Order, Supreme Court, New York County (Marcy S. Friedman, J.), entered December 8, 2020, which granted defendants’ motions for a stay of the action pending arbitration, and denied plaintiffs’ cross motions for expedited discovery and a jury trial, unanimously affirmed, without costs.

Where the parties “explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator” (Contec Corp. v. Remote Solution, Co., Ltd., 398 F.3d 205, 208 [2d Cir. 2005];  see also Schindler v. Cellco Partnership, 200 A.D.3d 505, 505–506, 155 N.Y.S.3d 85 [1st Dept. 2021]).  Here, plaintiff Fritschler and defendant Doctor's Associates, LLC (DAL) evidenced their intent to delegate the issue of arbitrability to the arbitrator by incorporating the AAA (and/or the substantively identical ADRC) rules into the Franchise Agreements’ broad arbitration clauses (id.;  Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd's, 66 A.D.3d 495, 888 N.Y.S.2d 458 [1st Dept. 2009]).

Plaintiffs’ arguments that there was no binding agreement to arbitrate because the Franchise Agreements were procured by fraud, lack of mutuality, were not supported by consideration, and/or were unconscionable are not persuasive.  Because these issues implicate whether the parties formed a valid contract to arbitrate, they were properly decided by the court in the first instance (see e.g. Doctor's Assocs., Inc. v. Alemayehu, 934 F.3d 245, 251–252 [2d Cir. 2019]).  Any argument that plaintiff Fritschler did not form a binding agreement is contradicted by the allegations of the complaint.  Furthermore, plaintiffs do not allege that there were any specific misrepresentations regarding the arbitration clauses themselves (Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 70–72, 130 S.Ct. 2772, 177 L.Ed.2d 403 [2010]).  Fritschler's supposed subjective misunderstanding of the plain terms of the agreements does not amount to fraud (Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, 980–981 [2d Cir. 1996]).

Plaintiffs’ argument that the exclusive jurisdiction provision found in the Management Agreement trumps the Franchise Agreements’ arbitration provisions also fails.  The Management Agreement was entered into by plaintiff EB5 Overseer LLC and defendant Draper Management, LLC in February 2014, shortly before the Franchise Agreements were signed by Fritschler and DAL. However, nothing in the Management Agreement purported to modify or limit the scope of the later agreements that nonparties to the Management Agreement (i.e., Fritschler and DAL) might enter into, nor does it render the clear arbitration and delegation provisions found in the Franchise Agreements ambiguous.  While plaintiffs may very well argue that the terms of the Management Agreement make claims asserted by or against certain parties nonarbitrable, that is a question of arbitrability for the arbitrator, not the court (Matter of WN Partner, LLC v. Baltimore Orioles L.P., 179 A.D.3d 14, 17, 112 N.Y.S.3d 68 [1st Dept. 2019]).

Plaintiffs also contend that the Franchise Agreements did not clearly delegate disputes about arbitrability to the arbitrator because certain plaintiffs and the majority of the defendants were not signatories to the Franchise Agreements.  These arguments also fail.  These non-signatories were agents of DAL and in the Franchise Agreements themselves, Fritschler promised that he would not bring any claims against DAL's agents or affiliates outside of arbitration.  The non-signatory plaintiffs also fall within the scope of the arbitration clauses under the direct benefits theory of estoppel (Matter of Belzberg v. Verus Invs. Holdings Inc., 21 N.Y.3d 626, 631, 977 N.Y.S.2d 685, 999 N.E.2d 1130 [2013]).

We have considered plaintiffs’ remaining contentions and find them unavailing.