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Bishop v. We Care Hair Development Corp.

September 29, 2000

LELA BISHOP, BARBARA WINGO, RINDA YEAGER, PAMELA DUTTON, RAYMOND GREEN, BARBARA GREEN, KAREN STILLWELL, MICHELLE SCHROER, GEORGE HORNBOSTEL,
PLAINTIFFS-APPELLANTS AND CROSS-APPELLEES,
AND
MICHAEL CASTLEMAN,
PLAINTIFF AND CROSS-APPELLEE,
V.
WE CARE HAIR DEVELOPMENT CORPORATION, DOCTOR'S ASSOCIATES, INC., FREDERICK DELUCA, PETER BUCK, FRANCHISE WORLD HEADQUARTERS, INC., JOHN F. AMICO & COMPANY, JOHN AMICO, SR., FREDERICK FLORIO, J'AMI INTERNATIONAL, INC., AND FRANCHISE REAL ESTATE LEASING CORPORATION,
DEFENDANTS-APPELLEES AND CROSS-APPELLANTS.



Appeal from the Circuit Court of Cook County No. 99-L-00223 The Honorable Richard A. Siebel, Judge Presiding

The opinion of the court was delivered by: Justice Greiman

A number of individuals, hereinafter franchisees, filed a complaint against franchisor We Care Hair Development Corporation (We Care Hair). We Care Hair and its affiliates filed motions to compel the franchisees to arbitrate their claims and to stay the proceedings pending arbitration. The trial court granted the motions as to all franchisees except Michael Castleman. The remaining franchisees appealed, arguing that (1) We Care Hair waived its right to compel them to arbitrate; and (2) the arbitration clauses are unconscionable, illusory, and violate public policy. Defendants also appealed, arguing that they did not waive their right to arbitrate with Castleman.

FACTS

On February 4, 1997, a group of We Care Hair franchisees filed a class action lawsuit in Madison County, Illinois circuit court against We Care Hair, Doctor's Associates, Inc. (DAI), Frederick DeLuca, Peter Buck, John Amico, and several others. *fn1 The lawsuit alleged that defendants breached their fiduciary duty in the management of the franchise advertising fund; that defendants committed fraud in the franchising and promotion of the franchises; that defendants violated the Illinois Franchise Disclosure Act of 1987 (815 ILCS 705/1 et seq. (West 1996)) and Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 1996)) in the promotion and marketing of the franchises; and that defendants violated the Illinois anti-trust statute (740 ILCS 10/2, 3 (West 1996)) by engaging in illegal price fixing. Each franchise agreement contained an arbitration clause, which the defendants asserted as an affirmative defense.

The plaintiffs filed a motion for partial summary judgment on the issue of the enforceability of the arbitration clause. On May 15, 1997, the trial court granted the motion after a hearing and entered a judgment under Supreme Court Rule 304(a) (134 Ill. 2d R. 304(a)), finding the arbitration clauses to be illusory, unconscionable, void against public policy, and, therefore, unenforceable. The trial court also found that the defendants waived their right to compel arbitration under both the Federal Arbitration Act (FAA) (9 U.S.C.A. §1 et seq. (West 1996)) and the Illinois Uniform Arbitration Act (the Act) (710 ILCS 5/1 et seq. (West 1996)). The trial court subsequently granted the plaintiffs' motion to amend the complaint to add numerous franchisees as plaintiffs, including Michael Castleman, an Illinois franchisee. On August 29, 1997, the trial court extended its previous arbitration ruling to the new state plaintiffs, certified that ruling for immediate appeal under Rule 304(a), and consolidated the appeal with the May 15, 1997, order. On July 16, 1997, the trial court denied the defendants' motion to transfer the case to Cook County under the doctrine of forum non conveniens. The defendants appealed both rulings.

In the meantime, in April 1997, We Care Hair, an Illinois corporation, filed petitions in the federal District Court for the Northen District of Illinois under section 4 of the FAA (9 U.S.C.A. §4 (West 1996)) to compel arbitration with the 53 non-Illinois franchisees and to enjoin the state court proceeding pending the completion of arbitration. *fn2 The petitions were consolidated into one case. The remaining 11 Illinois franchisees were not included in the federal action.

On September 25, 1997, the federal district court found the arbitration clauses to be enforceable and entered an order compelling the 53 defendant franchisees to arbitrate their claims against We Care Hair, enjoining them from proceeding in the Madison County lawsuit, and ordering them to withdraw from the appeals that were pending before the Illinois Appellate Court. The district court's decision was affirmed on June 11, 1999. See We Care Hair Development, Inc. v. Engen, 180 F.3d 838 (7th Cir. 1999). The Seventh Circuit determined that the Madison County judgments would not be given preclusive effect under Illinois law since the order holding the arbitration clauses void and unenforceable was not a final order; that the arbitration clauses were valid and enforceable under Illinois law; and that the district court did not abuse its discretion in enjoining the franchisees from proceeding in the state court lawsuit. Engen, 180 F.3d at 842-44.

We Care Hair's consolidated appeals of the Madison County circuit court's rulings proceeded only as to the 11 Illinois franchisees. On March 9, 1998, the Fifth District Appellate Court ruled that the trial court abused its discretion when it denied defendants' motion to transfer under the doctrine of forum non conveniens and ordered the trial court to transfer the cause to Cook County. On May 1, 1998, the Fifth District Appellate Court dismissed the appeals concerning the arbitration issue after finding that the partial summary judgment rulings were not final and appealable despite the Rule 304(a) language. The appellate court found that while the trial court order struck one of the affirmative defenses, it did not dispose of any cause of action in the franchisees' complaint.

On July 21, 1999, defendants filed a motion in Cook County to stay the action pending the arbitrations. On September 14, 1999, We Care Hair filed an application to compel arbitration. No evidentiary hearing was held. On February 4, 2000, the trial court ordered all of the Illinois franchisees except Castleman to arbitrate. The trial court found that defendants waived their right to arbitrate with Castleman because of a prior eviction action filed against him by We Care Hair Realty, the leasing company of We Care Hair. The trial court also found that defendants did not waive their right to arbitrate with the other Illinois franchises by prosecuting the forum non conveniens appeal. The trial court rejected the franchisees' mutuality, public policy, and unconscionability defenses. Accordingly, the trial court stayed all proceedings.

All the plaintiffs except Castleman appealed the trial court's rulings. Defendants appealed the ruling that they waived their right to arbitrate with Castleman. We note that while defendants' notice of appeal is entitled a "cross-appeal," this is technically incorrect since Castleman did not file an appeal.

DAI is a Florida corporation owned by DeLuca and Buck. DAI is the franchisor of Subway sandwich shops. DAI and Amico own We Care Hair, the national franchisor of the We Care Hair salons. The franchise agreements are apparently not identical, as the franchisees signed agreements with We Care Hair over the course of many years. However, they all contain an arbitration clause. Some of the agreements contain the following arbitration clause:

"Any dispute or claim arising out of or relating to this Agreement not settled by the parties according to the mediation procedures set out in [the agreement], shall be settled in accordance with the Commercial Arbitration Rules of the American Arbitration Association at a hearing to be held in Chicago, Illinois. *** The commencement of mediation and then arbitration proceedings by an aggrieved party to settle any such dispute is a condition precedent to the commencement of legal action by either party, except as specifically provided in this Agreement."

The rest of the agreements contain a slightly different arbitration clause:

"Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with Illinois law and the procedure set forth in the Commercial Arbitration Rules of the American Arbitration Association at a hearing to be held at the office of the American Arbitration Association in Chicago, Illinois or whichever city in which the Company is then headquartered ***. The commencement of arbitration proceedings by an aggrieved party to settle disputes arising out of or relating to this Agreement is a condition precedent to the commencement of legal action by either party."

The franchise agreements all provide that they "shall be governed by and construed in accordance with the laws of the State of Illinois."

All of the franchisees were required to sign a sublease agreement with We Care Hair Realty. Although the subleases do not contain an arbitration clause, they do contain the following "cross-default" provision:

"The Sublessee shall use the premises only to operate a We Care Hair hair salon under the terms of his Franchise Agreement with We Care Hair Development Inc. *** If at any time during the term of this Sublease, Sublessee shall default in the performance of any of the terms of this Sublease or the Master Lease or the Franchise Agreement, the Sublessor, at its option, may terminate this sublease on ten (10) days written notice to ...


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