Appellate Court Reverses Lower Court and DAI’s Practice, Ruling Franchisees Have 90 Days to Seek to Vacate Franchise Termination Awards and that Lack of Notice or Opportunity to be Heard Justify Vacatur of Arbitration Award.
In a significant victory for Subway franchisees, the Connecticut Appellate Court reversed the trial court’s decision applying a thirty day deadline for a franchisee to move to vacate an arbitration award terminating a Subway Restaurant franchise agreement. See Doctor’s Associates, Inc. v Susan Searl, et. al. AC 38482 (AC 2018).
Doctor’s Associates Inc. (“DAI”) is the franchisor of Subway restaurants in the United States. It is reported that there are approximately 26,000 Subway restaurants in the United States (by comparison McDonald’s operates less than 15,000 restaurants in the United States). The Subway franchise agreements that have been filed with the courts consistently require all disputes between DAI and the franchisees to be arbitrated in Connecticut.
The Defendants were franchisees of multiple Subway branded restaurants for many years. In October of 2013, DAI alleged that one of the Defendants’ franchises was in violation of one or more terms of the franchise agreement. On April 3, 2014, DAI filed a demand for arbitration with the American Dispute Resolution Center (“ADRC”).
Throughout the arbitration an incorrect address for the Defendants was used by DAI and the ADRC (the ADRC blamed the incorrect address on DAI). The Defendants received notice of the arbitration demand even though the mailing address was incorrect. On May 1, 2014, the Defendants called DAI and spoke with, a DAI case manager. The DAI case manager told the Defendants that they ‘‘would be receiving further information regarding the arbitration process, the selection of an arbitrator, and the scheduling of a hearing date,’’ and that they should ‘‘expect to receive further documentation in June or July.’’ The case manager further advised the Defendants that they ‘‘did not need to make any further decisions or take any further actions until [they] received the information regarding the process for selecting an arbitrator.’’
On June 20, 2014, the arbitrator issued an award in favor of DAI. At some time between June 26 and July 1, 2014 the Defendants received notice of the arbitration award along with their first notice regarding the selection of an arbitrator and the deadline for the submission of evidence in the arbitration proceeding. A representative of DAI told the Defendants that, in light of the arbitrator’s award, there was nothing the Defendants could do ‘‘other than sell or close [the store].’’
On August 8, 2014, DAI filed an application to confirm the arbitration award in the Superior Court. On September 4, 2014, (65-70 days after notice of the arbitration award) the Defendants filed a pleading entitled ‘‘Objection to Confirmation Award’’ without the aid of counsel. In their objection the Defendants explained that they never received notice of the arbitration hearing date. In their objection of September 4, as in all subsequent pleadings, the Defendants maintained that they had meritorious defenses. The Defendants claimed that their franchise was terminated without notice and an opportunity to be heard.
On October 3, 2014 the Defendants retained counsel (Alderman & Alderman, LLC) and on that date counsel filed an appearance, an Objection to Confirmation of Award and the Answer and Affirmative Defenses.
On October 9, 2014, DAI filed a motion to dismiss the Objection to Confirmation Award and the Answer and Affirmative Defenses arguing that the court lacked subject matter jurisdiction because the filings had not been made within the thirty day deadline established under Connecticut Statute §52-420(b) for motions to vacate arbitration awards. In response, the Defendants argued that under the terms of the franchise agreement, drafted by DAI’s counsel, the Federal Arbitration Act (9 U.S.C. § 1 et seq. the “FAA”), with its 90 day time period for motions to vacate, controlled.
On September 15, 2015 (76-81 days after the Defendants first received notice of the arbitration award), the trial court issued its decision in which it refused to vacate the arbitration award on the ground that it was untimely and confirmed the arbitration award. In its decision the trial court adopted the interpretation advanced by DAI and held that under the general choice of law provision in DAI’s franchise agreement, that Connecticut law controlled and, therefore, a motion to vacate filed more than thirty days after notice of the arbitration award was untimely. The Defendants appealed.
On appeal the Defendants claimed that the trial court erred because the parties expressly agreed that the FAA ‘‘preempts any state law restrictions . . . on the enforcement of the arbitration clause in [the franchise agreement],’’ and that the trial court should have applied the FAA when determining whether they had timely moved to vacate the arbitration award.
The Appellate Court agreed with the Defendants and concluded that the trial court should have applied the Federal Arbitration Act and that the franchisee was entitled to 90 days to move to vacate the award terminating the franchise.
The Appellate Court further noted that “parties in arbitration proceeding are entitled to notice and an opportunity to be heard. . . .vacatur of the award [is] justified [where] the lack of notice or denial of an opportunity to be heard involve[s] the merits of the controversy.’’
The Appellate Court reversed the trial court’s judgment and remanded for further proceedings.
[Editorial Note: Alderman & Alderman, LLC was retained to represent the Defendants after the award terminating the franchise was entered and represented them before the trial court and before the Connecticut Appellate Court. The Defendants were also represented on the appeal by Scott T. Garosshen with Karen L. Dowd and Myles H. Alderman, Jr. on the brief. Doctor’s Associates Inc. was represented by Attorney Frank Mottola.]