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Taylor v. Rothschild

United States District Court, W.D. Washington, Tacoma

July 12, 2019

ROBERT SEAN TAYLOR, Trustee for the bankruptcy estate of Robert and Stephanie Taylor, Plaintiff,
v.
MORGAN ROTHSCHILD f/k/a MORGAN HENNING, HAYLEY HENNING, and FRANNET GLOBAL, LLC, Defendants.

          ORDER GRANTING DEFENDANT'S MOTION TO COMPEL ARBITRATION

          BENJAMIN H. SETTLE, UNITED STATES DISTRICT JUDGE

         This matter comes before the Court on Defendant Morgan Rothschild f/k/a Morgan Henning's (“Rothschild”) second motion to compel arbitration. Dkt. 27. The Court has considered the pleadings filed in support of and in opposition to the motion and the remainder of the file and hereby grants the motion for the reasons stated herein.

         I. PROCEDURAL HISTORY

         On September 17, 2018, Robert Sean Taylor (“Sean Taylor”) and Stephanie Taylor (“the Taylors”) filed suit against Rothschild, his ex-spouse Haley Henning (“Henning”), and John Does 1-10 in the Washington Superior Court for Clark County. Dkt. 1-1. On October 25, 2018, Rothschild removed the case to this Court. Dkt. 1. On November 16, 2018, Rothschild moved to dismiss or in the alternative to compel arbitration and stay the case. Dkt. 7. On December 11, 2018, the Court entered a stay pursuant to the parties' stipulation for the parties to pursue settlement discussions and for the Taylors' counsel to seek litigation approval from the Bankruptcy Court. Dkts. 9, 10. On January 7, 2019, the parties agreed to lift the stay and renote the motion. Dkt. 11. On February 24, 2019, the Court granted the Taylors' motion to substitute Chapter 7 Trustee Russell Garrett (“Plaintiff) into the action as Plaintiff in place of the Taylors. Dkt. 19.

         On May 2, 2019, the Court denied Rothschild's motion to dismiss or compel arbitration. Dkt. 25. On May 16, 2019, Rothschild filed a second motion to change venue and compel arbitration. Dkt. 27. On May 30, 2019, Plaintiff filed an amended complaint with leave of the Court adding claims against Defendant FranNet Global, LLC. Dkts. 31, 33. On May 31, 2019, Plaintiff responded to Rothschild's motion. Dkt. 34. On June 7, 2019, Rothschild replied. Dkt. 36.

         II. FACTUAL BACKGROUND

         This case involves a dispute between a franchisor and disenchanted franchisees. Rothschild runs Party Princess International (“Party Princess”). Dkt. 1-1, ¶ 2. Henning, his former spouse, worked with Rothschild on the business and advised on franchises. Id. In October 2015, Party Princess filed paperwork to register in Washington as a franchisor, but the filing was unsuccessful. See Dkt. 8, Declaration of Morgan Rothschild (“Rothschild Decl.”), ¶ 8.

         At some point in 2015, Sean Taylor consulted a franchise broker about investment opportunities who referred him to Rothschild. Dkt. 1-1, ¶ 15. At this time, all parties resided in California. See Dkt. 12 at 2, 3; Dkt. 16 at 6. Sean Taylor and Rothschild spoke by phone, and Rothschild “informed Taylor that a Google advertising campaign alone in Taylor's prospective territory would generate at least $100, 000 per year for Taylor, ” but Rothschild “could not put the projections in writing due to regulatory prohibitions.” Dkt. 1-1, ¶ 17. Rothschild also told Sean Taylor that meeting Party Princess's requirement that each franchise host 40 parties per month would be “easily achievable.” Id. ¶ 18.

         On December 4, 2015, Sean Taylor purchased a Party Princess Franchise, Dkt. 35, ¶ 5, “for the Washington territory.” Dkt. 1-1, ¶ 21.[1]The parties' contract included a Franchise Agreement, a Washington Rider to the Franchise Agreement, a Franchise Disclosure Document, and an “Addendum to the Party Princess USA LLC Disclosure Document for the State of Washington” (the “Washington Addendum”). See Dkt. 8; Dkt. 8-1. The contract's documents contained a number of provisions regarding arbitration. In section 16.3, Dispute Resolution, the Franchise Agreement provided:

a. Except as otherwise provided herein, any dispute, claim or controversy arising out of or relating to this Agreement, the breach hereof, the rights and obligations of the parties hereto or the relationship between the parties, or the entry, making, interpretation, or performance of either party under this Agreement . . . shall be settled by arbitration administered by the American Arbitration Association . . . .
b. Any arbitration shall take place before a sole arbitrator in Denver, Colorado or, if our headquarters is no longer located in Denver, Colorado, then the arbitration shall take place in the city which is our principal place of business at the time arbitration is commenced. You agree that conducting the arbitration where we are located is appropriate due to the multiple locations throughout the United States where our franchises are located.

         Dkt. 8-1 at 47.[2], [3] The Washington Rider to the Franchise Agreement stated in part:

Arbitration shall take place at a site to be determined, at the time of arbitration, by the arbitrator appointed by the Denver, Colorado office of the American Arbitration Association, as applicable, but only if there is a valid and legal restriction under [FIPA] to prohibit Franchisee and Franchisee from agreeing on the site for arbitration in Denver, Colorado. However, Franchisee and Franchisee do not agree that this is a valid and legal restriction under the Act, and, unless this restriction is found to be valid and legal, the parties agree that arbitration shall take place in Denver, Colorado in accordance with the Franchise Agreement. Franchisee and Franchisee [sic] believe that each of the provisions of the Franchise Agreement, including all venue provisions, are fully enforceable.

         Dkt. 8-1 at 75. The Franchise Disclosure Document listed as the first “Risk Factor” of buying a franchise that:

THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH U.S. BY MEDIATION AND ARBITRATION ONLY IN COLORADO. OUT-OF-STATE MEDIATION AND ARBITRATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO MEDIATE OR ARBITRATE WITH U.S. IN COLORADO THAN IN YOUR OWN STATE.

         Rothschild Decl. ¶ 3; Dkt. 8-1 at 84. It listed effective dates of the Franchise Disclosure Document for some states, but the effective date for Washington was blank. Dkt. 8-1 at 85. The Washington Addendum to the Franchise Disclosure Document featured an arbitration clause which was functionally identical to the Washington Rider to the Franchise Agreement. Dkt. 8-1 at 137. As part of the purchase, “[Rothschild] caused Party Princess to send written documents to Taylor stating that the worst-case-scenario revenue data for Taylor would be $90, 000 in gross revenues based solely on spending $2, 190 per month on the Google advertising campaign, ” Dkt. 1-1, ¶ 21.

         On December 18, 2015, the Washington Department of Financial Institutions (“DFI”) responded to Party Princess's counsel notifying him of additional steps Party Princess would need to take to secure registration as a franchisor in Washington, including revisions to the Washington Addendum to the Franchise Disclosure Document regarding arbitration and to the Washington Addendum to the Franchise Agreement regarding arbitration. Dkt. 35-2 at 3. In January 2016, according to Rothschild, Party Princess provided supplemental or amended information to the DFI and successfully registered as a franchisor. Rothschild Decl. ¶ 8. In February 2016, Rothschild “notified Mr. Taylor that Party Princess's franchisor registration had not been effective in Washington at the time the Taylors originally signed the Franchise Agreement.” Id. On February 27, 2016, Rothschild declares that he sent Sean Taylor a new franchise agreement by email to sign. Id.[4] Sean Taylor testified in his deposition that he had no recollection of receiving the email and no recollection of responding to it. Dkt. 34 at 3 (citing Dkt. 35, ¶ 10; Dkt. 35-5).

         Rothschild declares that the Taylors moved to the Pacific Northwest “sometime during 2016.” Rothschild Decl. ¶ 2. The Taylors alleged that despite Sean Taylor's continued efforts to operate the franchise, “including fully funding the marketing campaign, [he] never achieved the results promised by [Rothschild].” Dkt. 1-1, ¶ 24.

         In October 2017, the Taylors filed a complaint about Party Princess with the DFI's Securities Division. Id. ¶ 25. Party Princess then filed an arbitration claim “seeking to terminate Taylor's franchise, ” and the parties began arbitration in Colorado. Id. The Taylors filed for bankruptcy on September 27, 2018. Dkt. 15 at 3; Dkt. 8-1 at 249-304. According to Rothschild's counsel, the arbitration proceedings have been suspended since September 27, 2018 after the Taylors filed for bankruptcy and “[t]here has been no arbitration hearing to date, nor is a hearing date scheduled.” Dkt. 37, Third Declaration of Curt Roy Hineline, ¶ 7. As noted, the Taylors filed this lawsuit on September 17, 2018. Dkt. 1-1. The Taylors claim that they have lost “well over $200, 000” in investments in the franchise. Id. ¶ 28.

         The Taylors assert four causes of action against Rothschild-intentional misrepresentation, negligent misrepresentation, violation of Washington's Franchise Investment Protection Act (“FIPA”), RCW Chapter 19.100, and Washington's Consumer Protection Act ...


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