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Gill v. World Inspection Network International

July 31, 2006


The opinion of the court was delivered by: Joseph F. Bianco, District Judge


Plaintiff Timothy Gill seeks preliminary injunctive relief, preventing defendant Worldwide Inspection Network International, Inc. ("WIN") from continuing to prosecute an arbitration proceeding against him in Seattle, Washington. Further, Gill seeks a declaration that any such arbitration must occur within the State of New York. WIN opposes the application, arguing that the forum selection clause in the franchise license agreement between the parties is effective to compel Gill to proceed with the arbitration in Washington. WIN also cross-moves to stay the instant proceeding pending the Washington arbitration. For the reasons stated below, Gill's motion for a preliminary injunction is denied, and WIN's cross-motion to stay the instant proceeding is granted.


The following facts are undisputed, unless otherwise indicated. WIN is a franchisor that licenses a home property inspection system under the "World Inspection Network" mark, pursuant to license agreements made with franchisees. (See Declaration of Jonathan P. Deex ("Deex Decl."), ¶ 2.) WIN has approximately 225 franchisees located in 30 states. (See id.) Gill was a WIN franchisee from February 2001 until February 2006. (Id. ¶ 5.)

On January 19, 2001, when Gill was still a prospective franchisee, he received a Uniform Franchise Offering Circular ("UFOC"), which included a copy of the form Franchise Agreement which Gill was required to sign.*fn1 (See id. ¶ 3; Ex. A; Ex. B.) Gill signed an acknowledgment that he received the UFOC, the Franchise Agreement and other related documents. (See Deex Decl. ¶ 3; Ex. A.) The UFOC contains a chart, which summarized certain provisions of the Franchise Agreement. (See Deex Decl., Ex. B.) The sixteenth item in the chart ("u.") is entitled "Dispute Resolution by Arbitration or Mediation," and indicates that pursuant to sections 12.01-12.02 of the Franchise Agreement, "[e]xcept for certain claims, all disputes must be arbitrated before Franchise Arbitration and Mediation, Inc." (Id.) The seventeenth item in the chart ("v.") is entitled "Choice of Forum," and indicates that pursuant to section 12.01 of the franchise agreement, "[a]rbitration/litigation normally takes place in Washington." (Id.)

On February 2, 2001, Gill executed the Franchise Agreement. Section 12.01 of the Franchise Agreement addresses arbitration and forum selection, and specifically provides:

. . . [a]ny controversy or claim arising out of or relating to this Agreement, or any breach thereof, including without limitation, any claim that this Agreement, or any breach thereof, is invalid, is illegal or otherwise voidable or void, shall be submitted to arbitration . . . . Such arbitration shall take place in or about King County, Washington.

Franchise Agreement, § 12.01. Section 13.01(d) includes a covenant not to compete, which specifically provides:

In the event of termination or expiration of this Agreement as described in § 13.01(a) above, Franchisee shall not, for a continuous uninterrupted period of one year after the expiration or termination of this Agreement or when Franchisee actually stops conducting a similar business, whichever is later, regardless of the cause of termination, engage as an owner, partner, director, officer, employee, consultant, sales person, representative, service person or agent or in any other capacituy in any other business which is the same as or similar to the Franchised Business within, or market into, the Designated Area or within twenty-five miles of the border of the Designated Area. Franchisee shall cause each and all of its Operators to be bound by the terms of this provision.

Franchise Agreement, § 13.01(d).

In February 2006, the Franchise Agreement expired, and Gill elected not to renew it. Believing that Gill has violated the non-compete clause in the Franchise Agreement, WIN sought arbitration in King County, Washington, to enforce the provision. On June 16, 2006, Gill filed an Order to Show Cause in Supreme Court of the State of New York, Suffolk County, seeking that the court issue a preliminary and permanent injunction restraining WIN from prosecuting the arbitration proceeding in Washington, and directing that the parties, if they choose to arbitrate, must conduct the proceeding in New York. Gill also brought a claim alleging fraud under New York General Business Law section 687. On June 28, 2006, the case was removed to this Court.


A. Preliminary Injunction Standard

"The preliminary injunction `is one of the most drastic tools in the arsenal of judicial remedies.'" Grand River Enters. Six Nations v. Pryor, No. 02-CV-5068 (JFK), 2006 U.S. Dist. LEXIS 35614, at *16 (S.D.N.Y. June 1, 2006) (quoting Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 60 (2d Cir. 1985)). In order to prevail on a motion for a preliminary injunction, a party must establish: "(1) irreparable harm in the absence of the injunction and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor." MyWebGrocer, LLC v. Hometown Info, Inc., 375 F.3d 190, 192 (2d Cir. 2004) (quoting Merkos L'Inyonei Chinuch, Inc. v. Ostar Sifrei Lubavitch, Inc., 312 F.3d 94, 96 (2d Cir. 2002)); Iron Mountain Information Mgmt., Inc. v. Taddeo, No. 06-CV-2164 (JFB) (AKT), 2006 WL 1867049, at *6 (E.D.N.Y. June 30, 2006). "To establish irreparable harm, plaintiffs must demonstrate an injury that is neither remote nor speculative, but actual and imminent." Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir. 1989) (internal quotations omitted). A preliminary injunction is not appropriate where monetary damages will serve as adequate compensation. Id. "The law in this circuit requires a showing that irreparable damages are likely, not merely possible." Goldblatt v. Englander Communs., LLC, No. 06-CV-3208 (RWS), 2006 U.S. Dist. LEXIS 29443, at *10-11 (S.D.N.Y. May 16, 2006).

B. Likelihood of Success on the Merits

As a threshold matter, the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., governs the interpretation of the arbitration clause of the Franchise Agreement because the contract, in fact, contemplates arbitration and involves interstate commerce, specifically a relationship between a Washington franchisor and a New York franchisee.*fn2 See Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265, 281, 115 S.Ct. 834 (1995). The Supreme Court has recognized that the purpose of the FAA is to "place an arbitration agreement `upon the same footing as other contracts where it belongs,' and to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219, 105 S.Ct. 1238 (1985) (citation omitted). The FAA establishes a clear and unequivocal "presumption in favor of arbitration" and requires that courts "rigorously enforce agreements to arbitrate." Sphere Drake Ins. Ltd. v. Clarendon Nat. Ins. Co., 263 F.3d 26, 30 (2d Cir. 2001); Dean Witter Reynolds, 470 U.S. at 221. However, despite the fact that the FAA expresses a strong federal policy in favor of arbitration, Congress enacted the FAA to "make arbitration agreements as enforceable as other contracts, but not more so." Cap Gemmini Ernst & Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 364 (2d Cir. 2003) (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967)). Accordingly, under Section 2 of the FAA, an agreement to arbitrate is presumptively valid and irrevocable, except where grounds exist at law or in equity for revocation of the contract, including the pledge to arbitrate. 9 U.S.C. § 2 ("A written provision in . . . a contract . . . to settle by arbitration a controversy thereafter arising out of such contract . . . or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract . . . shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."); Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652 (1996) (noting that "[g]enerally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2 [of the FAA].") As the Supreme Court has noted, "[c]ourts may not, however, invalidate arbitration agreements under state laws applicable only to arbitration provisions . . . [b]y enacting § 2, we have several times said, Congress precluded States from singling out arbitration provisions for suspect status requiring instead that such provisions be placed upon the same footing as other contracts." Id. (internal quotations and citations omitted).

In the instant case, Gill does not contest the fact that he has to arbitrate all disputes with WIN arising from the Franchise Agreement, but rather asserts that the arbitral forum selection clause, dictating that the arbitration should occur in King County, Washington, should not be enforced. As a general matter, courts consistently enforce arbitral forum selection clauses under the FAA's presumptive requirement that arbitration clauses are fully enforceable. See e.g., Doctor's Associates, Inc. v. Hamilton, 150 F.3d 157, 163-64 (2d Cir. 1998), cert denied, 525 U.S. 1103, 119 S.Ct. 867 (1999) (enforcing arbitral forum selection clause after concluding that unconscionability defense did not overcome presumptive enforceability under the FAA); see also Management Recruiters Int'l v. Bloor, 129 F.3d 851, 856 (6th Cir. 1997) ("[I]f . . . [Washington law] . . . imposed an absolute requirement of in-state arbitration notwithstanding the parties' agreement to arbitrate [elsewhere], its validity would be in serious doubt as a result of the preemptive effect of the FAA"); see also Snyder v. Smith, 736 F.2d 409, 418 (7th Cir. 1984), overruled on other grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998) ("[U]nder the [FAA], the court must order the parties to arbitrate `in accordance with the terms of the agreement'; one such term of the agreement is the parties' forum selection clause."); N. Pac. Intern., Inc. v. Am. Lines/Am. Lines, Inc., 888 F. Supp. 31, 32 (S.D.N.Y. 1995) (finding that presumptive validity of forum selection clause in arbitration provision defeated inconvenient forum claim in opposition to motion to compel arbitration).

Gill argues that the arbitral forum selection clause should not be enforced in this case because it is unconscionable. Gill notes that the sentence dictating that arbitration will occur in Washington is found at the end of a "long and convoluted" paragraph of the Franchise Agreement. (See Pl.'s Mem. at 2.) Gill also asserts that retaining local counsel and making appearances in Seattle would impose a substantial financial hardship upon him, considering that he does not conduct business in that region, whereas WIN is a large corporation with significant resources and already conducts business in Suffolk County, New York with a number of other franchisees. (See id. at 3-4.) In addition, Gill argues that it would be more appropriate to conduct an arbitration in New York, since the witnesses who would be required to testify about his alleged violation of the covenant not to compete are located in New York. (See id. at 4.) Gill also argues that the arbitral forum selection clause should not be enforced because it is inequitable, citing a New Jersey Superior Court order which refused to enforce the identical clause against another WIN franchisee. (See id. at 5-6) (quoting Allen v. World Inspection Network Int'l, No. C-161-05 (N.J. Super. Ct., Ch. Div. 2005). Finally, Gill asserts that the Court should not enforce the clause because it contravenes New York public policy, as expressed by Article 33 of the New York General Business Law. (See id. at 6-7.)

In order to determine whether Gill is likely to succeed on the merits of his claim for injunctive relief to stay the Washington arbitration, the Court must first consider the issue of whether the enforceability of the arbitral forum selection clause is a question for this Court or the arbitrator in the first instance. The Court proceeds to examine that issue first, and then ...

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