1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8
Tempe Hospitality Ventures, LLC, ) No. CV-22-00647-PHX-SPL ) 9 ) 10 Plaintiff, ) ORDER vs. ) ) 11 ) Highgate Hotels, L.P., ) 12 ) 13 Defendant. ) ) 14 )
15 On April 18, 2022, Plaintiff Tempe Hospitality Ventures, LLC, filed this action 16 against Highgate Hotels, L.P. (Doc. 1). Plaintiff’s Complaint asserts claims for (1) breach 17 of contract, (2) breach of the covenant of good faith and fair dealing, (3) breach of fiduciary 18 duties, and (4) a declaratory judgment from this Court as to the enforceability of the 19 Arbitration Provision. (Doc. 1 at 7-10). 20 In February 2020, Plaintiff and Defendant entered into a Hotel Management 21 Agreement (“HMA”). (Doc. 1 at 2). Article 23 of the HMA titled “Dispute Resolution” 22 contains the Arbitration Provision, which states in relevant part in Section 23.2: “Except 23 for (i) those disputes subject to resolution by an Expert, and (ii) those matters set forth in 24 Section 23.3.7 below, the Parties shall resolve all disputes that may arise in connection 25 with this Agreement through final and binding arbitration (without appeal or review) . . . 26 .” (Doc. 9-1 at 9). The HMA goes on to outline various arbitration procedures and 27 incorporates the Commercial Arbitration Rules of the American Arbitration Association 28 (the “AAA rules”) into the Arbitration Provision. (Id.). 1 The Defendant filed its Motion to Dismiss and Compel Arbitration or Stay Pending 2 Arbitration based on Article 23 of the HMA. (Doc. 9). In response, Plaintiff argues: (1) the 3 HMA was the product of an unfair bargaining process; (2) the cost of arbitration would 4 exceed any potential recovery, deterring arbitration altogether; and (3) such a financial 5 burden would be overwhelming due, in part, to Defendant’s own mismanagement of the 6 Property. (Doc. 15 at 4). More specifically, Plaintiff argues that the Arbitration Provision 7 is unconscionable because it holds Plaintiff responsible for the fees and costs of the 8 arbitrators and requires Plaintiff to pay Defendant’s attorneys’ fees and costs throughout 9 the course of arbitration, all regardless of the outcome. (Id. at 2). This claim surrounds 10 Section 23.3.4 of the HMA, which addresses the fees and costs of arbitration (see Doc. 9- 11 1 at 10). 12 I. Legal Standard 13 The Federal Arbitration Act (“FAA”) “leaves no place for the exercise of discretion 14 by a district court, but instead mandates that district courts shall direct the parties to proceed 15 to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter 16 Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (citing 9 U.S.C. §§ 3, 4). “The court’s 17 role under the [FAA] is therefore limited to determining (1) whether a valid agreement to 18 arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” 19 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). Courts 20 must decide these questions “according to the standard used by district courts in resolving 21 summary judgment motions pursuant to [Federal Rule of Civil Procedure (“FRCP”)] 56.” 22 Coup v. Scottsdale Plaza Resort, LLC, 823 F. Supp. 2d 931, 939 (D. Ariz. 2011). If a 23 district court finds that an “arbitration agreement is valid and enforceable, then it should 24 stay or dismiss the action pending arbitration proceedings to allow the arbitrator to decide 25 the remaining claims, including those relating to the contract as a whole.” Nagrampa v. 26 MailCoups, Inc., 469 F.3d 1257, 1276–77 (9th Cir. 2006). 27 “Arbitration agreements are presumptively enforceable under the FAA ‘save upon 28 such grounds as exist at law or in equity for the revocation of any contract.’” Taleb v. 1 AutoNation USA Corp., No. CV06-02013-PHX-NVW, 2006 WL 3716922, at *2 (D. Ariz. 2 Nov. 13, 2006) (quoting 9 U.S.C. § 2). The FAA’s saving clause, however, “permits 3 agreements to arbitrate to be invalidated by generally applicable contract defenses, such as 4 fraud, duress, or unconscionability.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 5 339 (2011) (internal quotation marks and citation omitted). Thus, “[i]n determining the 6 validity of an agreement to arbitrate, federal courts ‘should apply ordinary state-law 7 principles that govern the formation of contracts.’” Cir. City Stores, Inc. v. Adams, 279 8 F.3d 889, 892 (9th Cir. 2002) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 9 944 (1995)). In determining the validity and enforceability of the agreement here, then, 10 Arizona’s law of contracts controls. See Taleb, 2006 WL 3716922, at *2. 11 II. Scope of the Arbitration Provision (HMA Art. 23) 12 Defendant argues that Plaintiff’s challenge to Section 23.3.4 is not a challenge to 13 the Arbitration Provision itself, but to the fee allocation provision of the HMA. (Doc. 9 at 14 2). Plaintiff, on the other hand, refers to this section as part of the Arbitration Provision. 15 (Doc. 15 at 1). Upon review, the Court finds that Section 23.3.4 is part of the Arbitration 16 Provision. 17 Arbitration clauses often include information about fees and costs. See, e.g., Green 18 Tree Fin. Corp.-Ala. v. Rudolph, 531 U.S. 79 (2000) (holding an arbitration agreement’s 19 silence as to fees and costs does not render it unenforceable); Jones v. Gen. Motors Corp., 20 640 F.Supp.2d 1124 (D. Ariz. 2009) (reviewing a fee allocation provision); Loyola v. Am. 21 Credit Acceptance LLC, No. 2:19-cv-00002-SMJ, 2019 WL 1601362 (E.D. Wash. Apr. 15, 22 2019) (reviewing a fee allocation provision). Under Arizona law, the Court adopts a 23 construction that will “harmonize all parts of the contract,” considering each provision in 24 light of the entire instrument. Brisco v. Meritplan Ins. Co., 132 Ariz. 72, 75 (Ariz. Ct. App. 25 1982) (citation omitted). 26 Here, it would be inconsistent to consider Section 23.3.4 as separate from the 27 Arbitration Provision. Section 23.3.4 falls under Article 23 which is titled “Dispute 28 Resolution.” (Doc. 9-1 at 8-10). Section 23.2 mandates arbitration, but procedures and rules 1 elaborating on the arbitration process appear throughout Sections 23.2 and 23.3. (Doc. 9-1 2 at 9-11). In fact, the exceptions to mandatory arbitration cited in Section 23.2 appear in 3 Section 23.3.7. (Doc. 9-1 at 11). In consideration of the entire instrument, the Court finds 4 23.3.4 to be part of the Arbitration Provision. 5 III. Arbitrability 6 “Although gateway issues of arbitrability presumptively are reserved for the court, 7 the parties may agree to delegate them to the arbitrator.” Momot v. Mastro, 652 F.3d 982, 8 987 (9th Cir. 2011). “Courts should not assume that the parties agreed to arbitrate 9 arbitrability unless there is ‘clear and unmistakable’ evidence that they did so.” First 10 Options, 514 U.S. at 944 (1995) (citation omitted).
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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8
Tempe Hospitality Ventures, LLC, ) No. CV-22-00647-PHX-SPL ) 9 ) 10 Plaintiff, ) ORDER vs. ) ) 11 ) Highgate Hotels, L.P., ) 12 ) 13 Defendant. ) ) 14 )
15 On April 18, 2022, Plaintiff Tempe Hospitality Ventures, LLC, filed this action 16 against Highgate Hotels, L.P. (Doc. 1). Plaintiff’s Complaint asserts claims for (1) breach 17 of contract, (2) breach of the covenant of good faith and fair dealing, (3) breach of fiduciary 18 duties, and (4) a declaratory judgment from this Court as to the enforceability of the 19 Arbitration Provision. (Doc. 1 at 7-10). 20 In February 2020, Plaintiff and Defendant entered into a Hotel Management 21 Agreement (“HMA”). (Doc. 1 at 2). Article 23 of the HMA titled “Dispute Resolution” 22 contains the Arbitration Provision, which states in relevant part in Section 23.2: “Except 23 for (i) those disputes subject to resolution by an Expert, and (ii) those matters set forth in 24 Section 23.3.7 below, the Parties shall resolve all disputes that may arise in connection 25 with this Agreement through final and binding arbitration (without appeal or review) . . . 26 .” (Doc. 9-1 at 9). The HMA goes on to outline various arbitration procedures and 27 incorporates the Commercial Arbitration Rules of the American Arbitration Association 28 (the “AAA rules”) into the Arbitration Provision. (Id.). 1 The Defendant filed its Motion to Dismiss and Compel Arbitration or Stay Pending 2 Arbitration based on Article 23 of the HMA. (Doc. 9). In response, Plaintiff argues: (1) the 3 HMA was the product of an unfair bargaining process; (2) the cost of arbitration would 4 exceed any potential recovery, deterring arbitration altogether; and (3) such a financial 5 burden would be overwhelming due, in part, to Defendant’s own mismanagement of the 6 Property. (Doc. 15 at 4). More specifically, Plaintiff argues that the Arbitration Provision 7 is unconscionable because it holds Plaintiff responsible for the fees and costs of the 8 arbitrators and requires Plaintiff to pay Defendant’s attorneys’ fees and costs throughout 9 the course of arbitration, all regardless of the outcome. (Id. at 2). This claim surrounds 10 Section 23.3.4 of the HMA, which addresses the fees and costs of arbitration (see Doc. 9- 11 1 at 10). 12 I. Legal Standard 13 The Federal Arbitration Act (“FAA”) “leaves no place for the exercise of discretion 14 by a district court, but instead mandates that district courts shall direct the parties to proceed 15 to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter 16 Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (citing 9 U.S.C. §§ 3, 4). “The court’s 17 role under the [FAA] is therefore limited to determining (1) whether a valid agreement to 18 arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.” 19 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). Courts 20 must decide these questions “according to the standard used by district courts in resolving 21 summary judgment motions pursuant to [Federal Rule of Civil Procedure (“FRCP”)] 56.” 22 Coup v. Scottsdale Plaza Resort, LLC, 823 F. Supp. 2d 931, 939 (D. Ariz. 2011). If a 23 district court finds that an “arbitration agreement is valid and enforceable, then it should 24 stay or dismiss the action pending arbitration proceedings to allow the arbitrator to decide 25 the remaining claims, including those relating to the contract as a whole.” Nagrampa v. 26 MailCoups, Inc., 469 F.3d 1257, 1276–77 (9th Cir. 2006). 27 “Arbitration agreements are presumptively enforceable under the FAA ‘save upon 28 such grounds as exist at law or in equity for the revocation of any contract.’” Taleb v. 1 AutoNation USA Corp., No. CV06-02013-PHX-NVW, 2006 WL 3716922, at *2 (D. Ariz. 2 Nov. 13, 2006) (quoting 9 U.S.C. § 2). The FAA’s saving clause, however, “permits 3 agreements to arbitrate to be invalidated by generally applicable contract defenses, such as 4 fraud, duress, or unconscionability.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 5 339 (2011) (internal quotation marks and citation omitted). Thus, “[i]n determining the 6 validity of an agreement to arbitrate, federal courts ‘should apply ordinary state-law 7 principles that govern the formation of contracts.’” Cir. City Stores, Inc. v. Adams, 279 8 F.3d 889, 892 (9th Cir. 2002) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 9 944 (1995)). In determining the validity and enforceability of the agreement here, then, 10 Arizona’s law of contracts controls. See Taleb, 2006 WL 3716922, at *2. 11 II. Scope of the Arbitration Provision (HMA Art. 23) 12 Defendant argues that Plaintiff’s challenge to Section 23.3.4 is not a challenge to 13 the Arbitration Provision itself, but to the fee allocation provision of the HMA. (Doc. 9 at 14 2). Plaintiff, on the other hand, refers to this section as part of the Arbitration Provision. 15 (Doc. 15 at 1). Upon review, the Court finds that Section 23.3.4 is part of the Arbitration 16 Provision. 17 Arbitration clauses often include information about fees and costs. See, e.g., Green 18 Tree Fin. Corp.-Ala. v. Rudolph, 531 U.S. 79 (2000) (holding an arbitration agreement’s 19 silence as to fees and costs does not render it unenforceable); Jones v. Gen. Motors Corp., 20 640 F.Supp.2d 1124 (D. Ariz. 2009) (reviewing a fee allocation provision); Loyola v. Am. 21 Credit Acceptance LLC, No. 2:19-cv-00002-SMJ, 2019 WL 1601362 (E.D. Wash. Apr. 15, 22 2019) (reviewing a fee allocation provision). Under Arizona law, the Court adopts a 23 construction that will “harmonize all parts of the contract,” considering each provision in 24 light of the entire instrument. Brisco v. Meritplan Ins. Co., 132 Ariz. 72, 75 (Ariz. Ct. App. 25 1982) (citation omitted). 26 Here, it would be inconsistent to consider Section 23.3.4 as separate from the 27 Arbitration Provision. Section 23.3.4 falls under Article 23 which is titled “Dispute 28 Resolution.” (Doc. 9-1 at 8-10). Section 23.2 mandates arbitration, but procedures and rules 1 elaborating on the arbitration process appear throughout Sections 23.2 and 23.3. (Doc. 9-1 2 at 9-11). In fact, the exceptions to mandatory arbitration cited in Section 23.2 appear in 3 Section 23.3.7. (Doc. 9-1 at 11). In consideration of the entire instrument, the Court finds 4 23.3.4 to be part of the Arbitration Provision. 5 III. Arbitrability 6 “Although gateway issues of arbitrability presumptively are reserved for the court, 7 the parties may agree to delegate them to the arbitrator.” Momot v. Mastro, 652 F.3d 982, 8 987 (9th Cir. 2011). “Courts should not assume that the parties agreed to arbitrate 9 arbitrability unless there is ‘clear and unmistakable’ evidence that they did so.” First 10 Options, 514 U.S. at 944 (1995) (citation omitted). “Clear and unmistakable ‘evidence’ of 11 agreement to arbitrate arbitrability might include . . . a course of conduct demonstrating 12 assent . . . or . . . an express agreement to do so.” Rent-A-Center, W., Inc. v. Jackson, 561 13 U.S. 63, 79-80 (2010) (Stevens, J., dissenting). Even if a delegation of arbitrability is clear 14 and unmistakable, it may be found unenforceable if the delegation itself is unconscionable. 15 Id. at 71-74. 16 First, the Court considers whether there was clear and unmistakable evidence that 17 the parties agreed to arbitrate arbitrability. Defendant argues that Plaintiff’s claims are 18 encompassed by the language of the Arbitration Provision which includes “all disputes that 19 may arise in connection with [the HMA].” (Doc. 9 at 7 (citing section 23.2)). Defendant 20 also argues that the AAA rules, which are incorporated in the Arbitration Provision, give 21 the arbitrator “the power to rule on his or her own jurisdiction, including any objections 22 with respect to the existence, scope, or validity of the arbitration agreement.” (Doc. 9 at 8 23 (citing AAA Rule 7) (emphasis added)). On the other hand, Plaintiff asserts that section 24 23.3.7 creates an avenue for judicial involvement through an exception which states that 25 “the Parties shall have the right to commence litigation or other legal proceedings with 26 respect to any Claims solely relating to . . . enforcement of the dispute resolution provisions 27 of this Agreement.” (Doc. 15 at 12-13; Doc 15-2 at 33; Doc. 9-1 at 11). In response, 28 Defendant argues that this section only allows the parties to commence litigation to enforce 1 the dispute resolution proceedings, not to challenge, contest, or question the enforceability. 2 (Doc. 16 at 3). 3 “[I]n a contract between sophisticated parties, ‘incorporation of the AAA rules 4 constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate 5 arbitrability.’” Shivkov v. Artex Risk Solutions, Inc., 974 F.3d 1051, 1068 (9th Cir. 2020) 6 (quoting Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015)). Here, the AAA 7 rules were explicitly incorporated into the Arbitration Provision in Section 23.2.2. The 8 Court considers Mr. Singh, the owner of Tempe Hospitality Ventures who signed the 9 HMA, to be a sophisticated party. Mr. Singh is a business owner who opened the first 10 Indian restaurant in the Phoenix area in 1986 and acquired this Sheraton franchise in 2012. 11 (Doc. 15 at 5). Since then, he has contracted with four different professional hotel 12 management companies, including Highgate. (Id.). Because both parties are sophisticated, 13 the incorporation of the AAA rules demonstrates the agreement to arbitrate arbitrability. 14 Moreover, the exception in section 23.3.7 cited by Plaintiff does not cast doubt on 15 this issue. Section 23.3.7 states that parties have the right to use the courts for claims “solely 16 relating to . . . enforcement of the dispute resolution provisions.” (Doc. 9-1 at 11 (emphasis 17 added)). Simply, enforcement means to compel compliance with an agreement. 18 Enforcement, Black’s Law Dictionary (11th ed. 2019). Given the plain meaning of 19 enforcement, section 23.3.7 does not allow Plaintiff to bring a claim challenging or 20 questioning the provision before the Court. The delegation of arbitrability to the arbitrator 21 is clear and unmistakable. 22 When a Court finds a delegation of arbitrability to be clear and unmistakable, it may 23 only consider generally applicable contract defenses like unconscionability if the Plaintiff 24 has specifically challenged the delegation provision within the arbitration agreement. Rent- 25 A-Center, 561 U.S. at 70-71. Here, Plaintiff’s substantive unconscionability challenges are 26 not specific to the delegation of arbitration. Instead, Plaintiff argues the Arbitration 27 Provision is substantively unconscionable because the cost of arbitration would exceed any 28 potential recovery, deterring arbitration altogether, and Plaintiff is unable to meet this 1 | financial burden due, in part, to Defendant’s own mismanagement of the Property. (Doc. 15 at 4). This challenge surrounds the fees and costs of arbitration, not the delegation of 3| arbitrability. For that reason, the arbitrator, not this Court, must decide Plaintiff's 4) unconscionability challenge, as well as the claims for breach of contract, breach of the 5| covenant of good faith and fair dealing, and breach of fiduciary duty. See Rent-A-Center, 6| 561 U.S. at 70-74 (stating “we need not consider that claim because none of [the 7 | defendant’s] substantive unconscionability challenges was specific to the delegation 8 | provision,” and that “[i]jt may be held that had [the defendant] challenged the delegation provision by arguing that these common procedures as applied to the delegation provision 10 | rendered that provision unconscionable, the challenge should have been considered by the court.’). Because the relief sought in this case is left to the arbitration tribunal, the Court 12 | will not stay the action but will instead compel arbitration and terminate this action. 13 IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss and Compel Arbitration (Doc. 9) is granted. 15 IT IS FURTHER ORDERED directing the Clerk to enter judgment in favor of 16 | Defendant and terminate this action accordingly. 17 Dated this 2nd day of August, 2022. 18
20 United States District Judge 21 22 23 24 25 26 27 28