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Choice Hotels International, Inc. v. Onkar Lodging, Inc.

Court of Appeals of Texas, Sixth District, Texarkana

June 5, 2019


          Date Submitted: May 8, 2019

          On Appeal from the 202nd District Court Bowie County, Texas Trial Court No. 15C0621-202

          Before Morriss, C.J., Burgess and Stevens, JJ.


          Josh R. Morriss, III Chief Justice

         In June 2017, Choice Hotels International, Inc. (Choice), on one side, and Onkar Lodging, Inc., Harbhajan Nahal, and Maljinder Singh (collectively Onkar or Onkar Parties), on the other, arbitrated a franchise agreement dispute before a panel of American Arbitration Association (AAA) arbitrators in Maryland. In August 2017, the AAA panel denied Onkar's claims and awarded Choice costs and fees. Onkar thereafter sought to vacate the arbitration award in a Bowie County lawsuit, while Choice sought to confirm it. In an order dated September 13, 2018, the trial court denied Choice's motion to confirm the arbitration award and ordered that the parties arbitrate within ninety days of the date of its order, with JAMS, a private alternative dispute resolution provider.[1]

         Choice appeals the trial court's order, [2] claiming that the trial court erred (A) in denying confirmation of the arbitration award in the absence of any statutory grounds for vacatur or any contract defenses under state law to void the parties' arbitration contract and (B) in ordering a new arbitration before a new arbitration provider, thereby effectively rewriting the parties' arbitration agreement. We find that the arbitration award should have been confirmed because (1) no grounds for vacatur were proven and (2) the arbitration contract was enforceable. We therefore reverse the judgment and render judgment confirming the award.

         The complex background of this case bears some detailing.

         Onkar has operated a Comfort Suites hotel in Texarkana, Texas, since 2005 pursuant to a twenty-year franchise agreement (the Agreement) that the parties executed on October 18, 2005, in Silver Spring, Maryland. In 2007, Choice executed an additional franchise agreement with a different party in Texarkana, Arkansas, providing for the operation of a Comfort Inn & Suites hotel. The Comfort Inn & Suites hotel was never constructed. Consequently, in 2011, Choice terminated the Comfort Inn & Suites franchise. Choice then issued a new franchise license to replace the Comfort Inn & Suites hotel with a Comfort Suites hotel.[3] This replacement franchise license generated the parties' dispute here.

         In May 2015, Onkar filed a lawsuit against Choice in Bowie County alleging breach of contract and fraud. Among other things, Onkar complained that Comfort Suites was not the "same brand" as Comfort Inn & Suites and, therefore, Choice had no right, under the Agreement, to replace the Comfort Inn & Suites franchise with another Comfort Suites franchise within Onkar's "area of enhanced protection" (Protected Area).

         Choice responded by filing a general denial answer and a motion to enforce the Agreement's arbitration clause.[4] The trial court ordered arbitration, which was conducted for three days before the AAA panel.

         In its decision, the arbitration panel determined that Choice had neither breached the Agreement nor committed "fraud by representation and omission." Those claims were primarily based on certain provisions of the Agreement and the associated Choice Hotels International Incremental Impact Policy (Policy), discussed below.

         The Agreement was subject to the Policy. Paragraph 21(b) of the Agreement provides:

You agree that this Agreement relates only to the Hotel and the Location. Subject to the terms of our Impact Policy in force from time to time: (1) we may own, operate, franchise or license other hotels using the Marks and the System, as well as hotels using any other brand, at any other location, and (2) we, our affiliates and other franchisees may now or in the future engage in transient lodging or related business activities that may compete with the System or with the Hotel.

         The Impact Policy identifies areas of "enhanced protection."[5] Section II of the Policy states, in pertinent part, "Except as set forth below, Choice will not grant a franchise for a same-brand hotel within your hotel's Area of Enhanced Protection." Section V of the Policy explains when Choice can replace a same-brand hotel within the Protected Area:

         V. Choice's Right to Replace Franchises

Notwithstanding the Area of Enhanced Protection granted in Section II or the additional rights of exclusion granted in Sections III and IV, Choice reserves the right to replace any franchise which has departed or which is scheduled to depart from a Choice brand system ("departed/departing franchise") with a same-brand franchise, located anywhere within the Area of Enhanced Protection of the departed/departing franchise. Choice, however, will not grant a replacement franchise if it is to be located within the Area of Enhanced Protection of a same-brand hotel in good standing, unless the departed/departing franchise was/is already located in such same-brand hotel's Area of Enhanced Protection.

Finally, the Policy provides, VI. Scope and Term of This Policy

This Policy shall apply to all Choice hotels that are part of the Clarion, Comfort, Quality, Sleep, Econo Lodge, Rodeway, or MainStay brands (including all hotels that are part of any sub-segment of those brands, such as Comfort Suites, for example) and that are located in the United States of America (including all not-yet-operating hotels that are subject to a Choice Franchise Agreement) and its provisions shall be in effect until such time this Policy is withdrawn, amended or modified. Any withdrawal, amendment or modification of this Policy shall be within Choice's sole discretion.
In concluding that Choice did not breach the Agreement, the arbitration panel reasoned:
The contract at issue is the Franchise Agreement as supplemented by the Policy. The latter sets forth the respective rights and duties of the parties in the event that Choice desires to award a Choice franchise near a current franchisee and the current franchisee objects. It provides certain protections to current franchisees. However, these protections are not extended when Choice is replacing a current franchise.
On June 28, 2011, Choice gave notice to Claimants that it had received an application for a Comfort Suites franchise within Claimants' area of protection. Choice asserted that the new hotel was a "replacement" hotel for a Comfort Inn & Suites that was approved but never built. . . . Claimants objected in writing to the new franchise on July 25, 2011. However, they did not follow the procedure set forth in the Policy required to request an incremental impact study which would have measured the potential impact on Claimants' revenue of the new hotel. . . . The Policy allows Choice to replace a departed hotel with one of the same brand. Claimants take the position that "Comfort Suites" and "Comfort Inn and Suites" are two different brands while Choice maintains that "Comfort Suites," "Comfort Inn and Suites," and "Comfort Inn" are the same brand. Claimants produced some evidence that Comfort Suites is a separate brand, e.g., Choice's website lists Comfort Suites separately from the other Comfort hotels and Comfort Suites has a color scheme and logo different from Comfort Inn. Choice points to its management of all Comfort properties within one unit and the uniform design, except for the logo and color, of the exterior of new buildings. The Policy itself is the most persuasive proof on this subject. Section VI, "Scope and Term of this Policy," provides:
This Policy shall apply to all Choice hotels that are part of the Clarion, Comfort, Quality, Sleep, Econo Lodge, Rodeway, or MainStay brands (including all hotels that are part of any subsegment of those brands, such as Comfort Suites, for example) and that are located in the [U.S.A.] (including all not-yet operating hotels that are subject to a Choice Franchise Agreement) . . . .
. . . Section V defines a "departed/departing franchise" as "any open hotel, executed franchise agreement or approved franchise application." Thus, the Comfort Inn & Suites that was granted a franchise but never built meets the definition of a departed franchise, and Choice was entitled to replace it with a new Comfort Suites, a subsegment within the Comfort brand.

         The panel concluded that, because Comfort Suites is a subsegment of the Comfort brand, Choice did not breach the Agreement by granting a new franchise for a Comfort Suites within Onkar's Protected Area, effectively replacing the Comfort Inn & Suites franchise with a Comfort Suites franchise. The panel further opined that, even if there had been a breach of contract, Onkar failed to prove that Onkar's revenue losses were due "solely and directly to the claimed breach of contract." Finally, the panel concluded that the parties' dispute regarding the franchise replacement did not support a fraud claim. The panel stated, "Rather, we find that this is simply a contract dispute; the Claimants were not misled, and the fraud/misrepresentation claim is denied."

         The following month, Onkar filed an amended petition against Choice, claiming, among other things, that Choice fraudulently induced Onkar to participate in a "sham," and thus invalid, arbitration. Onkar claimed the arbitration proceeding was void because the arbitrators failed to apply the substantive laws of the State of Maryland and Onkar was "fraudulently induced into the arbitration provision ab initio." Onkar claimed that the arbitration was not fair and impartial because the AAA and Choice "were engaged in a mutually beneficial relationship to the detriment of Choice's franchisees, whereby Choice would keep the AAA and its arbitrators busy . . . with repeat business so long as the rulings were resolved in Choice's favor."[6] Onkar claimed that, because "[t]he fix was in," there was "no chance at prevailing no matter [the] evidence, grievance, or damages." The fraud claim appears to be based on their statement that,

[h]ad Choice disclosed this sham and the certainty that Choice could violate any provision of its Franchise Agreement and any associated terms and conditions therewith with complete impunity, Onkar would have never consented to arbitration as its exclusive method of dispute resolution or entered into the Franchise Agreement to begin with.

         Choice unsuccessfully moved to strike the amended petition and to dismiss the lawsuit.[7] Onkar thereafter filed a motion for partial summary judgment on the claim for breach of contract. Choice filed a motion to confirm the arbitration award, claiming that Onkar's allegations that the arbitrators failed to apply the substantive laws of the State of Maryland and that Onkar was fraudulently induced into the arbitration provision[8] did not meet the standard for vacatur under the Maryland Arbitration Act. Choice also filed a motion for summary judgment and supplemental motion to confirm the arbitration award.

         Following a hearing in August 2018, the trial court denied Onkar's motion for partial summary judgment, Choice's motion for summary judgment, and Choice's motion to confirm the arbitration award. Instead, and without expressly vacating the arbitration award, the trial court ordered the parties to arbitration with JAMS in Dallas. This appeal followed.[9]

         (1) No Grounds for Vacatur Were Proven

         Written arbitration agreements entered under the laws of Maryland generally are governed by the Maryland Uniform Arbitration Act (the Act). Md. Code Ann. Cts. & Jud. Proc. §§ 3-201-3-234 (West, Westlaw through May 13, 2019); see Coleman v. Columbia Credit Co., 42 Md.App. 198, 200-01 (1979) (agreement to submit dispute to arbitration sufficient to trigger application of the Act). An agreement providing for arbitration confers jurisdiction on the court to enforce the agreement and enter judgment on the arbitration award. Md. Code Ann. Cts. & Jud. Proc. § 3-202.[10]

         The "decision to grant or deny a petition to vacate or confirm an arbitration award is a conclusion of law, which we review without deference." WSC/2005 LLC v. Trio Ventures Assocs., 190 A.3d 255, 260 (Md. 2018). "[A]rbitration is favored and encouraged in Maryland because it provides an informal, expeditious, and inexpensive alternative to conventional litigation." Amalgamated Transit Union v. Lovelace, 109 A.3d 96, 106 (Md. 2015) (citations omitted). Consequently, "judicial review of an arbitration award is very narrowly limited[.]" Downey v. Sharp, 51 A.3d 573, 585 (Md. 2012). "[C]ourts generally defer to [an] arbitrator's findings of fact and applications of law. Mere errors of law and fact do not ordinarily furnish grounds for a court to vacate . . . an arbitration award." Id. at 583.

         The Act provides that a court may not vacate an award, or refuse to confirm an award, "on the ground that a court of law or equity could not or would not grant the same relief." Md. Code Ann. Cts. & Jud. Proc. § 3-224(c). Rather, the Act sets forth five grounds on which a "court shall vacate" an arbitration award:

(1) if the "award was procured by corruption, fraud, or other undue means";
(2) if there "was evident partiality by an arbitrator appointed as a neutral, corruption in any arbitrator, or misconduct prejudicing the rights of any party";
(3) if the "arbitrators exceeded their powers";
(4) if the "arbitrators refused to postpone the hearing on sufficient cause being shown for the postponement, refused to hear evidence material to the controversy, or otherwise so conducted the hearing, contrary to the provisions of § 3-213 of this subtitle, as to prejudice substantially the rights of a party"; or
(5) if there "was no arbitration agreement as described in § 3-206 of this subtitle, the issue was not adversely determined in proceedings under § 3-208 of this subtitle, and the party did not participate in the arbitration hearing without raising the objection."

Md. Code Ann. Cts. & Jud. Proc. § 3-224(b).

         On appeal, Onkar claims that the arbitrators exceeded their powers by re-drafting the Agreement and failing to apply the substantive law of Maryland, as provided by the arbitration clause, [11] and that the arbitration panel manifestly disregarded the law. These arguments implicate the third statutory ground for judicial review of an arbitration award, claiming that the arbitrators exceeded their powers. The Maryland Court of Appeals has explained that "the issue of whether an arbitrator exceeded the arbitrator's authority is not the same as the issue of whether the arbitration award was rational or legally correct." Prince George's Cty. Police Civilian Employees Ass'n v. Prince George's Cty. ex re. Prince George's Cty. Police Dep't, 135 A.3d 347, 355 (Md. 2016).

         This distinction is illustrated in Downey. In that case, the trial court granted a petition to confirm an arbitration award. That decision was reversed by the intermediate appellate court and was remanded with instructions to vacate several findings within the award because-according to the court-the arbitrator exceeded his authority by issuing a "completely irrational" award that was in "manifest disregard of the law." Downey, 51 A.3d at 581-82. The Maryland Court of Appeals held that the Court of Special Appeals' reliance on the statutory ground that the arbitrator exceeded his authority was misplaced. Id. at 582. It explained,

[A]n issue or matter resolved by an award may be rational and legally correct but the arbitrator, under the arbitration agreement, may have had no power or authority to resolve the particular issue. On the other hand, an issue may have clearly been within the arbitrator's powers, but the arbitrator's resolution of the issue may have been irrational or manifestly erroneous as a matter of law . . . . Vacating an award because it is "completely irrational" or "manifestly in disregard of the law" is clearly different from vacating an award for one of the reasons delineated in § 3-224(b).

         The court further clarified that "an arbitrator exceeds the arbitrator's authority by issuing an award that arises out of a contract that one party lacked the authority to enter." Prince George's Cty. Police Civilian Employees Ass'n, 135 A.3d at 356. This rule is aligned with earlier precedent that an arbitrator exceeds his powers by issuing an award where the underlying contract is invalid. Bd. of Educ. of Charles Cty. v. Educ. Ass'n of Charles Cty., 408 A.2d 89, 93 (1979).

The provisions and time constraints of [CJ §§] 3-227 and . . . 3-224 apply equally, whether the arbitration award is challenged on the ground that the underlying contract is invalid because of fraud or on the ground that the arbitrator exceeded his [or her] powers because the underlying contract was illegal . . . . [CJ §§] 3-224 and 3-227 establish an orderly mechanism whereby a court, not an arbitrator, makes the final determination of the legality of a contract before an arbitration award is enforced.

Prince George's Cty. Police Civilian Employees Ass'n, 135 A.3d at 356 (quoting Bd. of Educ. of Charles Cty., 408 A.2d at 93).

         The Maryland Court of Appeals has interpreted this statutory ground to coincide with the idea of jurisdiction-the power to act. The United States Supreme Court similarly interpreted the federal counterpart to this ground in Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2067 (2013). Writing for the majority of the Court, Justice Kagan explained:

Here, Oxford invokes § 10(a)(4) of the [Federal] Act, which authorizes a federal court to set aside an arbitral award "where the arbitrator[ ] exceeded [his] powers." A party seeking relief under that provision bears a heavy burden. It is not enough to show that the arbitrator committed an error-or even a serious error. Because the parties bargained for the arbitrator's construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court's view of its (de)merits. Only if the arbitrator acts outside the scope of his contractually delegated authority-issuing an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract-may a court overturn his determination. So the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong.

Id. (emphasis added) (citations omitted). In Oxford Health Plans, the Supreme Court discussed an argument addressing the merits of the arbitrator's decision: that the arbitrator had "badly misunderstood" a critical provision of the parties' contract. The Court stated:

We reject this argument because, and only because, it is not properly addressed to a court. Nothing we say in this opinion should be taken to reflect any agreement with the arbitrator's contract interpretation, or any quarrel with Oxford's contrary reading. All we say is that convincing a court of an arbitrator's error-even his grave error-is not enough. So long as the arbitrator was "arguably construing" the contract-which this one was-a court may not correct his mistakes under [9 U.S.C.] ยง 10(a)(4). The potential for those mistakes is the price of agreeing to arbitration. As we have held before, we hold again: "It is the arbitrator's construction [of the contract] which was bargained for; and so far as the arbitrator's decision concerns construction of the contract, the courts have no business overruling him because their ...

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