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Mkja, Inc., et al v. 123 Fit Franchising

January 4, 2011

MKJA, INC., ET AL., PLAINTIFFS AND RESPONDENTS,
v.
123 FIT FRANCHISING, LLC ET AL., DEFENDANTS AND APPELLANTS.



Super. Ct. No. GIN055734 APPEAL from an order of the Superior Court of San Diego County, Michael M. Anello, Robert P. Dahlquist, Judges. Reversed.

The opinion of the court was delivered by: Aaron, J.

CERTIFIED FOR PUBLICATION

I.

INTRODUCTION

Code of Civil Procedure section 1281.4*fn1 requires that a court impose a stay of litigation whenever that court, or another court, has ordered arbitration of a controversy that is an issue in the litigation. The court in which the litigation is pending is required to "stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies." (Ibid.)

In this case, the trial court lifted a stay of litigation that had been imposed pursuant to section 1281.4, on the ground that the plaintiffs could not afford to pay the costs associated with arbitration. We conclude that a party's inability to afford to pay the costs of arbitration is not a ground on which a trial court may lift a stay of litigation that was imposed pursuant to section 1281.4. Accordingly, we reverse the trial court's order lifting the stay.

II.

FACTUAL AND PROCEDURAL BACKGROUND

A. The plaintiffs' complaint

In September 2006, MKJA, Inc., Kris Roberts, Mike Roberts, Julie Dominguez, Inc., Julie Dominguez, John R. Dominguez, Jr., Corefit, Inc., Lezlie Martin, and Krista Crocker (plaintiffs) filed this action against 123 Fit Franchising, LLC (123 Fit), its affiliates, and various officers and/or employees of 123 Fit (defendants). In their complaint, the plaintiffs alleged that the defendants fraudulently induced them to enter into certain health club franchise agreements, and failed to provide them with the operational support that the defendants were to provide pursuant to the terms of the agreements.*fn2 The plaintiffs' complaint included claims for violation of the California Franchise Investment Law (Corp. Code, Ãé§ 3100 et seq.), breach of contract, unfair business practices (Bus. & Prof. Code, Ãé§ 17200 et seq.), and fraudulent inducement.

B. The defendants' motion to stay the litigation and the plaintiffs' motion to declare the arbitration provisions unenforceable

On or about November 7, 2006, the defendants filed a motion to stay this action pursuant to section 1281.4. In their motion, the defendants stated that each of the franchise agreements entered into between 123 Fit and the plaintiffs contained an identical arbitration provision that required that all of the claims that the plaintiffs raised in their lawsuit be arbitrated. The defendants stated that on November 2, 2006, 123 Fit had filed a petition in a Colorado court seeking an order compelling arbitration of the plaintiffs' claims against the defendants. The defendants noted that section 1281.4 required the California trial court to stay the litigation in order to allow the Colorado court to rule on the petition to compel, and to allow any subsequent arbitration to proceed. The defendants lodged a copy of the Colorado petition and the relevant franchise agreements with their motion.

Each of the franchise agreements contains an identical arbitration provision that provides in relevant part:

"17F. ARBITRATION

"We and you agree that, except for controversies, disputes, or claims, related to or based on improper use of the Marks or Confidential Information, all controversies, disputes, or claims between us and our affiliates, and our and their respective shareholders, officers, directors, agents, and/or employees, and you (and/or your owners, guarantors, affiliates, and/or employees) arising out of or related to:

"(1) this Agreement or any other agreement between you and us (or our affiliates);

"(2) our relationship with you;

"(3) the validity of this Agreement or any other agreement between you and us (or our affiliates); or

"(4) any System Standard; "must be submitted for binding arbitration, on demand of either party, to the American Arbitration Association. The arbitration proceedings will be conducted by one arbitrator and, except as this Subsection otherwise provides, according to the then current commercial arbitration rules of the American Arbitration Association. All proceedings will be conducted at a suitable location chosen by the arbitrator in or within fifteen (15) miles of our then existing principal office.[*fn3 ] All matters relating to arbitration will be governed by the Federal Arbitration Act (9 U.S.C. Ãé§Ãé§ 1 et seq.). Judgment upon the arbitrator's award may be entered in any court of competent jurisdiction."

In December 2006, the plaintiffs filed a motion to declare the arbitration provisions unenforceable. The plaintiffs also filed an opposition to the defendants' motion to stay the litigation.

In January 2007, the trial court entered an order granting the defendants' motion to stay the action pursuant to section 1281.4 and denying the plaintiffs' motion to declare the arbitration provisions unenforceable. In its order, the trial court noted that 123 Fit had filed a petition to compel arbitration in Colorado. The court stated that section 1281.4 "requires this Court to stay this action pending Colorado's decision on the Petition to Compel Arbitration." The trial court also ruled that it did not have jurisdiction to make a determination concerning the enforceability of the arbitration provisions, and stated, "If the Plaintiffs desire to argue that the Arbitration Clause is unconscionable or against California's public policy, they may raise such arguments before the Colorado court."

C. The plaintiffs' September 2008 motion to lift the stay and to declare the arbitration provisions unconscionable

In September 2008, the plaintiffs filed a motion to lift the stay of this action and for a declaration that the arbitration provisions in the franchise agreements are unconscionable in the California trial court. In their motion, the plaintiffs noted that the Colorado court had granted the defendants' motion to compel arbitration in October 2007. The plaintiffs claimed that they had attempted to initiate arbitration of their disputes, but had determined that the costs of arbitration would be prohibitive.

The defendants filed an opposition to the motion in which they argued that section 1281.4 required that the case remain stayed until the plaintiffs complied with the Colorado court's order compelling arbitration.

In November 2008, the trial court denied the plaintiffs' motion to lift the stay. The court stated that its order was "without prejudice to the possibility of plaintiffs bringing a motion to lift the stay again in the future . . . ." The court explained:

"This court is concerned that the arbitration has not yet occurred, and that the plaintiffs may be financially unable to proceed with the arbitration. The plaintiffs are obviously entitled to have their dispute heard on the merits in some forum, whether in arbitration or otherwise. However, the Court is not persuaded, on the present record, that it would be appropriate for this Court to lift its stay and proceed with litigation on the merits of plaintiffs' claims when a Colorado court has ordered the matter to arbitration, and the plaintiffs have not returned to the Colorado court for relief and/or have arguably not exhausted all means of attempting to proceed with the ordered arbitration."

D. The plaintiffs' August 2009 motion to lift the stay and for a declaration that the arbitration ...


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