Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_15-cv-00337/USCOURTS-azd-2_15-cv-00337-0/pdf.json

Nature of Suit Code: 196
Nature of Suit: Franchise
Cause of Action: 28:1332 Diversity-Breach of Contract

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA

Texas Nrgize #1 Incorporated,

Plaintiff, 

v. 

Kahala Franchise Corporation, et al., 

Defendants.

No. CV15-0337-PHX-DGC

ORDER 

 Plaintiff has filed a motion to compel arbitration and stay judicial proceedings. 

Doc. 39. The motion is fully briefed and no party has requested oral argument. Docs. 43, 

46. The Court will deny the motion. 

I. Background. 

 Plaintiff Texas Nrgize #1, Inc. is a Texas corporation with its principal place of 

business in Tarrant County, Texas. Doc. 1-5, ¶ 1. Plaintiff entered into a Franchise 

Agreement with Defendant Kahala Franchise Corporation to operate a Nrgize juice and 

snack bar inside an L.A. Fitness gym. Doc. 39 at 1-2; Doc. 1-5, ¶ 3. The Franchise 

Agreement includes a Single Unit Facility License Agreement (the “Sublicense”) 

between Plaintiff and Kahala Holdings, L.L.C., which allows Plaintiff to enter the L.A. 

Fitness location to operate its franchise. Doc. 39 at 2. The Sublicense contains an 

arbitration clause requiring that “any controversy, dispute or claim between the parties 

arising out of, in connection with or in relation to this Agreement . . . shall, on the written 

request of either party served on the other, be submitted to arbitration for resolution.” 

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Doc. 39 at 2. 

 Plaintiff filed a complaint against Defendants in state court in Tarrant County, 

Texas on June 14, 2014, alleging breach of contract and violations of the Texas Business 

Opportunities Act. Doc. 1-5. Kahala Franchise Corp. subsequently assigned its interest 

in the franchise in question to Kahala Franchising, L.L.C., an Arizona limited liability 

company. Doc. 1 at 2. Defendants removed the case to the United States District Court 

for the Northern District of Texas and then obtained transfer to this Court pursuant to the 

forum selection clause in the Franchise Agreement. Doc. 7 at 1. 

 On April 16, 2015, more than ten months after it initiated this lawsuit, Plaintiff 

moved to compel arbitration. Doc. 39. Plaintiff argues that Defendants are bound by the 

arbitration clause contained within the Sublicense and that the claims in this case stem 

from both the Franchise Agreement and the Sublicense. Id. at 7; Doc. 46 at 2-3. 

Defendants argue that “neither Plaintiff’s nor Kahala’s claims fall within the Sublicense’s 

arbitration clause” and that “Plaintiff’s initiation of the Complaint and extended 

participation in litigation have waived an alleged right to demand arbitration.” Doc. 43. 

II. Legal Standard. 

 The Federal Arbitration Act creates a national policy favoring arbitration. Preston 

v. Ferrer, 552 U.S. 346, 349 (2008). A written arbitration agreement “shall be valid, 

irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the 

revocation of any contract.” 9 U.S.C. § 2. But the “right to arbitration, like any other 

contract right, can be waived.” United States v. Park Place Assocs., Ltd., 563 F.3d 907, 

921 (9th Cir. 2009). “[T]he filing of a complaint, an answer, a counterclaim or a third 

party complaint does not waive the right to pursue arbitration.” Creative Telecomms., 

Inc. v. Breeden, 120 F. Supp. 2d 1225, 1232 (D. Haw. 1999). “‘Waiver of a contractual 

right to arbitration is not favored,’ and, therefore, ‘any party arguing waiver of arbitration 

bears a heavy burden of proof.’” Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1074 

(9th Cir. 2013) (quoting Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 

1986)). “Specifically, ‘[a] party seeking to prove waiver of a right to arbitration must 

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demonstrate: (1) knowledge of an existing right to compel arbitration; (2) acts 

inconsistent with that existing right; and (3) prejudice to the party opposing arbitration 

resulting from such inconsistent acts.’” Id. (quoting Fisher, 791 F.2d at 694). 

III. Choice of Law. 

 Unless the arbitration agreement specifies that state law controls the rules for 

arbitration, the issue of waiver is decided under federal law. Sovak v. Chugai Pharm. 

Co., 280 F.3d 1266, 1269-70 (9th Cir. 2002). “[T]he strong default presumption is that 

the FAA, not state law, supplies the rules for arbitration.” Id. at 1269. General choiceof-law clauses do not override this presumption. Id. at 1269-1270. 

Plaintiff argues that Texas law should control because § 14(b) of the Sublicense 

provides that the law of the state where the Identified Facility is located will govern the 

Sublicense and any dispute arising under the Sublicense. Doc. 39 at 7; Doc. 10 at 12. As 

the Ninth Circuit held in Sovak, however, such a general choice of law provision does not 

override the strong presumption that federal law controls. 280 F.3d at 1269-70. The 

Court will apply federal law. 

IV. Waiver.

 The three prongs of the waiver test established by the Ninth Circuit are satisfied in 

this case. 

First, Plaintiff had knowledge of its right to compel arbitration. The arbitration 

clause is explicitly set out in § 14(a) of the Sublicense, and the Sublicense was signed by 

Plaintiff’s representatives. Doc. 10 at 13-14; see Hoffman Const. Co. of Or. v. Active 

Erectors and Installers, Inc., 969 F.2d 796, 798 (9th Cir. 1992) (finding that the contract 

itself informs a party of the arbitrability of its claim when the arbitration clause is 

contained within the contract). Moreover, Plaintiff has admitted that it made a conscious 

decision to pursue litigation in state court “instead of initiating arbitration in accordance 

with the Sublicense” in order to minimize expenses. Doc. 46 at 5. 

 Second, Plaintiff acted inconsistently with its right to compel arbitration. Filing a 

lawsuit and seeking legal relief is inconsistent with such a right. See United Computer 

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Sys., Inc. v. AT&T Corp., 298 F.3d 756, 765 (9th Cir. 2002) (holding that filing a lawsuit 

instead of paying an administrative arbitration fee is inconsistent with an arbitration 

clause and that filing a state court complaint seeking monetary damages satisfies the first 

two prongs of the waiver test); see also Riverside Publ’g. Co. v. Mercer Publ’g. L.L.C., 

829 F. Supp. 2d 1017, 1020 (W.D. Wash. 2011) (holding that filing suit and requesting 

monetary relief without mentioning the arbitrability of claims is inconsistent with a right 

to compel arbitration). 

Plaintiff initiated this litigation by filing a complaint in Texas state court and 

seeking legal relief through monetary damages. Doc. 1-5. Plaintiff engaged in motion 

practice by filing its response to Defendants’ motion to transfer, again without 

mentioning the arbitration clause. Doc. 14; Doc. 20. Plaintiff participated in the case 

management conference on April 17, 2015, and served initial disclosures. Doc. 44; 

Doc. 45. All of this is inconsistent with Plaintiff’s right to arbitrate. 

 Third, Defendants have suffered prejudice from Plaintiff’s delay in seeking 

arbitration. The Ninth Circuit has not established a comprehensive test for evaluating this 

factor. Riverside Publ’g. Co., 829 F. Supp. 2d at 1021-1022. “[It] has considered the 

duration and substantive extent of litigation in court as an indicator of prejudice.” Id. at 

1021. “It has also considered delay in proceedings, costs and expenses resulting from 

litigation, and loss of witnesses as a result of delay.” Id. 

 As a result of Plaintiff’s filing of this lawsuit and waiting ten months before 

seeking arbitration, Defendants have incurred the expense of filing answers and 

counterclaims, removing this case to federal court, seeking and obtaining a transfer to 

Arizona, retaining Arizona counsel, participating in a Rule 26(f) conference and 

preparing a Rule 26(f) report, participating in a case management conference, and 

providing initial disclosures. Plaintiff’s delay has imposed substantial costs on 

Defendants – costs which will aid in the completion of this litigation, which would have 

been largely unnecessary if Plaintiff had timely invoked its right to arbitrate, and which 

will have been wasted if arbitration is now granted. These costs and the loss of ten 

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months in resolving this dispute satisfy the prejudice requirement of waiver. See Plows v. 

Rockwell Collins, Inc., 812 F. Supp. 2d 1063, 1068 (C.D. Cal. 2011) (finding that a delay 

in moving for arbitration resulting in 13 months of legal fees and establishing a different 

litigation strategy constituted prejudice sufficient for waiver); Kelly v. Pub. Util. Dist. No. 

2 of Grant Cnty., 552 Fed. Appx. 663, 664 (9th Cir. 2014) (determining that prejudice 

would result if parties were forced to initiate arbitration after 11 months of litigation); see 

also Hoffman, 969 F.2d 796, 799 (finding prejudice in the “staleness of the claim” after a 

delay in moving to compel arbitration). And, of course, Plaintiff’s delay is utterly 

inconsistent with the fundamental goals of speed and efficiency established by the FAA. 

Lyzwa v. Chu, No. C-97-20053, 1998 WL 326768, at *4 (N.D. Cal. Feb. 2, 1998). 

 The Court finds that all three factors of the Ninth Circuit test are satisfied and that 

Plaintiff has waived its right to compel arbitration. 

 IT IS ORDERED that Plaintiff’s Motion to Compel Arbitration and Stay Judicial 

Proceedings (Doc. 39) is denied. 

 Dated this 15th day of June, 2015. 

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