Opinion ID: 736206
Heading Depth: 1
Heading Rank: 4

Heading: Fraudulent Inducement of the Arbitration Agreement

Text: 34 The franchisees argue that the district court erred in rejecting, as a matter of law, their defense that DAI fraudulently induced them to accept the arbitration clause. Specifically, they claim that DAI (1) falsely represented in its offering circulars and franchise agreements that arbitration is a condition precedent to litigation, and (2) concealed the material fact that DAI controls its franchisees by instructing its assetless leasing companies to threaten or institute eviction proceedings. The district court found--even after considering the franchisees' last-minute affidavits--that there were no material issues of fact in dispute, and held that the franchisees had not offered evidence from which it could be found that DAI had made any false representations that induced their agreement to arbitrate. 944 F.Supp. at 1017-18. 35 It is clear that a court, not an arbitrator, resolves a claim that an arbitration clause--as opposed to the contract as a whole--was fraudulently induced. Distajo I, 66 F.3d at 457 (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967)). We apply state law concerning the validity, revocability, and enforceability of contracts generally to the issue whether DAI fraudulently induced the arbitration agreement. See Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 2527 n. 9, 96 L.Ed.2d 426 (1987); Stuart, 85 F.3d at 979-80 (applying, without discussion, Connecticut law to franchisees' fraudulent inducement claim); Progressive Casualty Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 45-46 (2d Cir.1993) (state law applies to whether parties agreed to arbitrate). 36 The franchisees maintain that we should apply Illinois law on fraudulent inducement. The district court applied Connecticut law pursuant to the choice-of-law clause in most of the relevant franchise agreements. It noted with respect to certain franchisees, whose contracts designated Florida or Illinois law as controlling, that DAI claimed, without contradiction, that Florida and Illinois law do[ ] not differ from Connecticut law on fraudulent inducement. 944 F.Supp. at 1017 n. 2. Thus, the franchisees waived this issue, and, as in Distajo I, 66 F.3d at 451, and Stuart, 85 F.3d at 979-80, we apply Connecticut law to their fraud claims. 37 It is well-settled under Connecticut law that to prove fraudulent inducement, a party must show (1) that a false representation was made as a statement of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other party to act on it; and (4) that the latter did so act on it to his injury. Stuart, 85 F.3d at 979 (citing Miller v. Appleby, 183 Conn. 51, 438 A.2d 811, 813 (1981)). In Stuart, we held that Subway franchisees making similar allegations utterly failed to allege, much less prove, sufficient facts indicating that they were defrauded into agreeing to arbitrate. Stuart, 85 F.3d at 980. We explained that before purchasing their franchise, each franchisee received copies of DAI's standard franchise agreement and sublease, and that the relevant clauses pertaining to arbitration and eviction were not camouflaged. Id. We thus found that DAI had not made any false representations to the franchisees regarding the possibility of eviction for violation of the franchise agreement. 38 The district court made identical factual findings in this case with respect to the franchisees' access to copies of the franchise agreement and sublease and the contents of those documents. It concluded that [a]t most, [the franchisees] lacked understanding of the ramifications of two documents which they had ample opportunity to read and understand.... They cannot hold DAI as misrepresenting what is plainly stated in the documents nor the legal ramifications thereof. 944 F.Supp. at 1018; see Stuart, 85 F.3d at 980. 39 On this record, we too find that the district court properly held, as a matter of law, that DAI did not fraudulently induce [the franchisees] into signing the agreement to arbitrate. Id. 40