Amicus Curiae Brief — Choice Hotels International, Inc. v. Ticknor

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(3) Supreme Court, U.S.

7 FILED

No. 01-888 JAN 1? 2000

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IN THE nee

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CHOICE HOTELS INTERNATIONAL, INC.,

Petitioner,

v.

JAMES L. TICKNOR; JANET TICKNOR: LARRY TICKNOR;

TICKCO HOLDING L.L.C.; AND TICKNOR

LODGING CORPORATION,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CourRT OF APPEALS FOR THE NINTH CIRCUIT

BRIEF OF AMICUS CURIAE NATIONAL FRANCHISE

COUNCIL IN SUPPORT OF PETITIONER

Davip J. KAUFMANN

Counsel of Record

KAUFMANN, FEINER, YAMIN,

Gi_pin & Rossins, LLP

777 Third Avenue — 24" Floor

New York, New York 10017

(212) 755-3100

Counsel for Amicus Curiae

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COUNSEL PRESS

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(800) 274-3321 + (800) 359-6859

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SiS PRe, OE LE PT ae NET Pos for ee

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TABLE OF CONTENTS

Page

Te aE Ca ANI 5 oo ke oe ive li

Interest of the Amicus Curiae .................. l

I INES hsv eucdeccccensekxives 3

pL re Oe ee eo bye eee sees 8

I. AFranchise Network’s Franchise Agreements

Are Per Force Uniform — But, Given The

Universe Of Franchise Alternatives Available

To A Prospective Franchisee, They May Not

Be Deemed Unenforceable “Contracts Of

PU i eS 008 Voc pou dare ees reba 8

II. The Subject Arbitration Clause Was Neither

Unconscionable Nor Outside The Parties’

Reasonable Expectations — And The Ninth

Circuit Ignored Montana Law In Holding

CI 6 ae PS eh 6S onde Cave ees 14

A. The Subject Arbitration Clause Was

Indisputedly Within The Parties’

IN sh Fee ev be cise eee 15

B. The Subject Arbitration Clause Was Not

Unconscionable

ee baad bene

ti

TABLE OF CITED AUTHORITIES

Page

Cases:

Bradley v. Harris Research, Inc.,

2001 WL 1658728 (9th Cir. 2001) ............ 13

Chor v. Piper, Jaffray & Hopwood, Inc.,

261 Mont. 143, 862 P.2d 26 (993) ............ 11

Iwen v. U.S. West Direct,

293 Mont. 512, 977 P.2d 989 (1999) ... 6, 10, 14, 15, 19

Lagataree v. Luce Forward, Hamilton & Scripps LLP,

74 Cal. App. 4" 1105, 88 Cal. Rptr. 2d 664 (1999)

OOO Pe re PTET ee fo oe OE Ee a Fy FOE 13

Passage v. Prudential-Bache Securities, Inc.,

223 Mont. 60, 727 P.2d 1298 (1986) ......... ‘Sue

Seigneur v. National Fitness Institute, Inc.,

132 Md. App. 271, 752 A.2d 631 (Md. Ct. of ©

SPUN AOE TGs £505 860s oie sss 12

Statutes:

The Lanham Act, 15 U.S.C. §§ 1051 et seg. ...... 1,9

The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

iii

Cited Authorities

Page

Federal Trade Commission Trade Regulation Rule:

Disclosure Requirements and Prohibitions

Concerning Franchising and Business Opportunity

Ventures, 16 CFR 436 .....---+eeerrrrsertt 15,17

California Franchise Investment Law, California

Corporations Code, Div. 5, Parts 1-6, Section

SAGOD 66 BOG io ohn 6 KA5 UHdD CESS ee veo O ss a3

Hawaii Franchise Investment Law, Hawaii Rev. Stat.,

Title 26, Ch. 482E, Section 482-El et seq. ...-- 15

Illinois Franchise Disclosure Act, Illinois Compiled

Statutes, Ch. 815, Section 1705/1 et seq. ..--+-: 15

Indiana Franchise Disclosure Law, Indiana Code,

Title 51, Ch. 51-19, Section 51-19.01 et seq. ... 15

Maryland Franchise Registration and Disclosure Law,

Ann. Code of Maryland, Business Regulation, Title

14, Section 14-201 et seq. ..-----++ereerrrte 15

Michigan Franchise Investment Law, Michigan

Compiled Laws, Ch. 445, Section 445.1501

BEEF Groce seentevarrerersreseereeer ss 15

Minnesota Franchise Act, Minnesota Statutes,

Ch. 80C, Section 80C.01 ef seg. ..-----+-++°> 15

iv

Cited Authorities

New York Franchise Act, New York General Business

Law, Art. 33, Section 680 ef seg. .............

North Dakota Franchise Investment Law, North

Dakota Century Code Ann., Title 51, Ch. 51-19,

Beste FIO OM sik i ee.

Rhode Island Franchise and Distributorship Investment

Regulations Act, General Laws of Rhode Island, Title

Page

15

15

19, Ch. 28.1, Section 19-28.1-1 et seg. ........ 15, 16

South Dakota Franchises for Brand-Name Goods and

Services Law, South Dakota Codified Laws, Title

37, Ch. 37-5A, Section 37-5A-1 et seg. .......

Virginia Retail Franchising Act, Virginia Code, Title

13.1, Ch. 8, Section 13.1-557 et seg. .........

Washington Franchise Protection Act, Revised Code

of Washington, Title 19, Ch. 19.100, Section

RP eee eee rere Ea Tie

Wisconsin Franchise Investment Law, Wisconsin

Stats., Ch. 553, Section 553.01 et seg. ........

16

16

16

16

Vv

Cited Authorities

Other Authorities:

“Guidelines for Preparation of the Uniform Franchise

Offering Circular and Related Documents”, Item

17 Instructions, Sections “u” and “v”, CCH

Business Franchise Guide, 95760 ......------

GAO-01-776, Federal Trade Commission Enforcement

of the Franchise Rule, July, 2001 ..........---

Page

l

INTEREST OF THE AMICUS CURIAE'

The future of franchising — which today accounts for

upwards of fifty percent (50%) of all retail sales transacted

in the United States and which per force relies on uniform

contracts to achieve uniform franchise unit appearance and

operations — will be placed in grave peril if the decision of

the Ninth Circuit sought to be reviewed herein is not,

following such review, reversed as a matter of law. So, too,

will the Lanham Act (15 U.S.C. §§ 1051 et seq.) and Federal

Arbitration Act (9 U.S.C. §§ 1 et seq.) be stripped of their

intent.

Thus, the National Franchise Council (a Washington,

D.C. not-for-profit corporation) respectfully submits this

amicus curiae brief in support of Petitioner Choice Hotels

International, Inc.’s petition for a writ of certiorari to the

United States Court of Appeals for the Ninth Circuit.

The National Franchise Council is a not-for-profit

corporation whose membership is restricted to our nation’s

largest and most reputable franchisors, as identified below.

The National Franchise Council is dedicated to fostering a

legal and regulatory environment favorable to franchising’s

continued growth and success. This goal is achieved in part

through the National Franchise Council’s alternative law

enforcement program, which has been adopted on a trial basis

1. Pursuant to United States Supreme Court Rule 37.3(a),

counsel of record has filed letters with the Clerk of Court consenting

to the filing of this brief. Pursuant to Rule 37.6, counsel for amicus

states that no counsel for a party authored this brief in whole or in

part and no person, other than amicus, its members, or its counsel

made a monetary contribution to the preparation or submission of

this brief.

2

by the Federal Trade Commission (which regulates

franchising for the federal government) and by certain states

administering franchise-specific statutes.

The National Franchise Council’s members? own and

administer the following franchise networks:

AmeriHost Inns Inter-Continental Hotels

AmeriSpec Home Jackson Hewitt Tax Service

Inspection KFC

Arby’s Restaurants MainStay Suites

Avis Car Rental Merry Maids

Baskin-Robbins Ice Cream Pizza Hut

CENTURY 21 Real Estate Popeyes Chicken & Biscuit

Churchs Chicken Quality Inns

Cinnabon Ramada Hotels

Clarion Hotels Rodeway Inns

Coldwell Banker Real Seattle Coffee Company

Estate ServiceMasterClean

Comfort Inns Sheraton Hotels

Crowne Plaza Hotels Sleep Inns

Days Inns St. Regis Hotels

Doubletree Hotels Super 8 Motels

Dunkin’ Donuts T.J. Cinnamons

Econo Lodge Hotels Taco Bell

Embassy Suites Hotels ~ Terminix

2. AFC Enterprises, Inc.; Allied Domecq QSR, Inc; Cendant

Corporation; Choice Hotels International, Inc.; Hilton Hotels

Corporation; Marriott International, Inc.; Medicine Shoppe

International, Inc. Meineke Discount Muffler Shops, Inc.; Midas

International, Inc.; Pearle Vision, Inc.; The ServiceMaster Company;

7-Eleven, Inc.; Six Continents Hotels, Inc.; Starwood Hotels &

Resorts Worldwide, Inc.; Triarc Restaurant Group; and, Tricon

Global Restaurants, Inc.

ERA Real Estate Togo’s

Four Points Hotels Torrefazione Italia

Furniture Medic Restaurants

Hampton Inns Travelodge Hotels

Hilton Hotels TruGreen-ChemLawn

Holiday Inns Westin Hotels

Homewood Suites

Howard Johnson Hotels :

SUMMARY OF ARGUMENT

Amicus curiae National Franchise Council (an

organization whose membership is restricted to the nation’s

largest and most reputable franchisors) respectfully submits

that the Ninth Circuit Court of Appeals grievously erred when

it held that the arbitration clause contained in Respondent

Ticknor’s Choice Hotels franchise agreement was a “contract

of adhesion,” unenforceable due to its purported

“unconscionability.”

The Choice Hotels franchise agreement which

Respondent Ticknor executed was deliberately pursued by

Respondent Ticknor, and thereafter executed by him, to the

exclusion of thirty-one (31) alternative franchise relationships

which he chose to spurn. Unlike the factual setting in Iwen

(cited and quoted below) — the Montana Supreme Court

decision almost exclusively relied on by the Ninth Circuit in

rendering its decision sub judice — there was no marketplace

or any other compulsion attending Ticknor’s entry into his

franchise agreement, only Ticknor’s desire to execute same.

He could have remained an “independent,” unaffiliated hotel

owner, but instead pursued a franchise relationship.

Respondent Ticknor could have selected another of the thirty

one alternative hotel franchises available to him, but he

pursued Choice Hotels. Now, Respondent Ticknor complains

4

that the very contract be pursued, wanted and obtained —

the contract he executed absent any compulsory circumstance

— is adhesive and unconscionable. Such a conclusion has

no support at law, and the Ninth Circuit erred when it held

otherwise.

True it is that Ticknor’s franchise agreement was largely

non-negotiable. But that does not ipso facto render it a

“contract of adhesion.” Franchising — which in the past fifty

years has grown so exponentially that today it accounts for

nearly 50% of all retail sales consummated in the United

States — has as its bedrock the need to respond to the public’s

desire, indeed demand, for complete franchise unit

uniformity. To meet this consumer demand, each unit in

virtually every franchise network must operate under the

same name and commercial symbol; sell the same products

or services; and, have the same appearance and trade dress.

It is this very operational uniformity that the Lanham Act

not only anticipates but demands, uniformity which maintains

the value of a franchisor’s trademark and service mark while

promoting consumer welfare by meeting consumer

expectations.

Only through identical franchise agreements can a

franchisor achieve such franchise unit uniformity. But the

fact that any given network’s franchise agreements are

uniform and frequently non-negotiable does not render them

“contracts of adhesion” because franchisees, like Respondent

Ticknor, have a universe of franchise alternatives to select

from (Ticknor had thirty one) and thus confront no

compulsory contractual setting. As a matter of law, when one

contract is selected to the exclusion of many others available,

and when no contract at all is necessary to begin with (Ticknor

5

could have operated as an “independent,” like so many

others), no “contract of adhesion” may result — even when

the contract selected is non-negotiable.

Further, it is impossible to contend that the subject

arbitration clause was “unconscionable” because it was not

within Respondent Ticknor’s “reasonable expectation” —

which may explain why the Ninth Circuit utterly ignored this

second prong of Montana’s two prong “unconscionability”

test when rendering its decision. Pursuant to federal and state

law (as cited and discussed below), Ticknor received full

and complete advance disclosure in narrative form regarding

each and every aspect of the subject Choice Hotels franchise

agreement — including the arbitration clause at issue herein.

Also by operation of law, Ticknor was required to delay

executing his Choice Hotels franchise agreement until five

business days elapsed from the time he received it, to give

him an opportunity to fully discern each and every provision

thereof. It was only after such full disclosure was effected

and the five business day “waiting period” had elapsed that

Respondent Ticknor deliberately elected to execute his

Choice Hotels franchise agreement.

Finally, the Ninth Circuit further erred in declaring the

subject franchise agreement arbitration clause

“unconscionable” purportedly because it was not reciprocal.

In fact, as this Court will note, the subject arbitration clause

was completely reciprocal save for three claims which could

exclusivity vest in Choice Hotels — indemnification claims

against Ticknor (under the franchise agreement, Ticknor

could have no indemnification claim against Choice Hotels);

enforcement of Choice Hotels’ intellectual property rights

(Ticknor conferred no corollary rights to Choice Hotels under

the subject franchise agreement); and, collection of monies

6

owed under the franchise agreement (Ticknor could have no

such claim against Choice Hotels, as Choice Hotels had no

financial obligation whatsoever to him under the franchise

agreement). Each and every other claim which petitioner

Choice Hotels had against Respondent Ticknor had to be

pursued through arbitration, reciprocal to Ticknor’s

obligation to pursue claims he had against Choice Hotels

through arbitration. (Even were this not so, the subject

arbitration clause would still not be defective — Montana

law actually holds that an arbitration clause vesting discrepant

rights in the parties thereto is not, for that reason alone,

“unconscionable.”)

Indeed, we trust that this Court will note the irony that

the case sub judice had its genesis in Choice Hotels’

commencing just such an arbitration proceeding against

Respondent Ticknor.

Simply stated, the Ninth Circuit’s determination that the

subject franchise agreement’s arbitration provision was an

unconscionable and unenforceable “contract of adhesion” is

antithetical the law of Montana (upon which the Ninth Circuit

purportedly relies) and the law of Maryland. What we have

here is not the “take it or leave it” parking garage contract-

receipt which is wholly one-sided, never read and hardly

subject to negotiation. Nor do we confront a setting analogous

to that in Jwen (the Montana Supreme Court decision relied

upon by the Ninth Circuit, as cited and discussed below), in

which a consumer had to choose between a “take it or leave

it” Yellow Pages listing contract or forego advertising

altogether in the only Yellow Pages serving his market area.

No, the setting here is radically different. Respondent

Ticknor could have remained independent, but freely chose

\

7

to pursue a franchise relationship. Respondent Ticknor had

thirty one alternative franchise relationships to select from

— he deliberately spurned same in favor of pursuing a

franchise relationship with Choice Hotels. As required by

law, Respondent Ticknor received full and complete pre-sale

disclosure regarding every aspect of the franchise agreement

he would have to enter into to become a Choice Hotels

franchisee — including the subject arbitration clause at issue

herein. As part of that pre-sale disclosure, Respondent

Ticknor received a specimen copy of the franchise agreement

(containing the subject arbitration clause) for his and his

advisors’ review. By law, Choice Hotels had to forbid

Respondent Ticknor from executing the subject franchise

agreement until five business days had elapsed following his

receipt of same, further to enable Respondent Ticknor to

make a calculated and deliberate contracting decision.”

It was only after Respondent Ticknor selected Choice

Hotels as the franchise opportunity he wanted to pursue

(to the exclusion of thirty one others); after all of

the aforementioned disclosure had been effected; after the

aforementioned statutorily-imposed “review” period had

elapsed; and, after Respondent Ticknor thus had

the opportunity to fully comprehend each and every provision

of the subject franchise agreement — including its arbitration

clause, which was entirely reciprocal save for claims

which could vest solely in petitioner Choice Hotels —

that Respondent Ticknor put pen to paper and executed the

Choice Hotels franchise agreement whose terms he now

complains of.

Under such circumstances, the law defeats any

suggestion that Respondent Ticknor’s franchise agreement

3. FTC Franchise Rule, infra at fn.7, § 436.1(g).

was a “contract of adhesion” whose arbitration clause is

unenforceable due to purported “unconscionability.”

Respectfully, the Ninth Circuit erred when it decided

otherwise. And unless that decision is reviewed and thereafter

reversed by this Court, then the very bedrock upon which

franchising rests — franchise network uniformity achieved

through franchise agreement uniformity — will be placed in

grave peril. So, too, will the Federal Arbitration Act and the

Lanham Act.

ARGUMENT

I. A FRANCHISE NETWORK’S FRANCHISE

AGREEMENTS ARE PER FORCE UNIFORM-—

BUT, GIVEN THE UNIVERSE OF FRANCHISE

ALTERNATIVES AVAILABLE TO A PRO-

SPECTIVE FRANCHISEE, THEY MAY NOT BE

DEEMED UNENFORCEABLE “CONTRACTS OF

ADHESION”

The lynchpin upon which the Ninth Circuit’s decision

sub judice rests is fundamentally flawed — the holding that

the subject Choice Hotels franchise agreement is a “contract

of adhesion” since, like virtually all franchise agreements of

any given franchise network extant in the United States, it is

a uniform contract subject to little (if any) negotiation.

True it is that a franchise network’s franchise agreements

are virtually always uniform — they have to be. Franchising’s

bedrock is the public’s demand for uniformity. It is that

demand which had led to an explosion of franchise activity

over the past fifty years, to the point where the U.S. General

Accounting Office estimates that today upwards of fifty

9

percent (50%) of all retail sales in this country — $1 trillion

worth — are transacted in franchised outlets.‘

Franchisors respond to the public’s demand for

uniformity with uniformity. Indeed, without uniform

franchise unit appearance and operations attendant to a

network operating under the same name and commercial

symbol, the intent and expectation of the Lanham Act, supra.,

would be contravened. So it is that the Big Mac is prepared

identically in the State of Washington as it is in Washington,

D.C. Each 7-Eleven store carries virtually the same

merchandise as every other. Midas Muffler shops are largely

indistinguishable one from another. Each franchised hotel

in the Embassy Suites chain operates under the same name,

utilizes the same reservation service; and, features

guestrooms tailored to the uniform specifications of the

franchisor applicable to the size and location of the hotel

involved.

It is elementary, but nevertheless true, that a franchise

network’s uniformity can only be achieved through its use

of uniform franchise agreements. These agreements require

all franchisees of any given network to conduct business

under the same name; build their units in the same way; and,

in all aspects of operations, adhere to an identical business

format geared to satisfy the public’s demand for uniformity.

Without such uniform (and frequently nonnegotiable)

franchise agreements, the bedrock of franchising would

crumble.

- But contrary to the Ninth Circuit’s flawed analysis, the

uniformity and (in many cases) non-negotiability of a

4. GAO-01-776, Federal Trade Commission Enforcement of the

Franchise Rule, July, 2001 at 5.

10

network’s franchise agreements do not ipso facto render them

“contracts of adhesion”. Because the simple fact is that

Respondent Ticknor was not confronted with the type of

contract or contractual setting present in the Montana

Supreme Court case upon which the Ninth Circuit relies, /wen

v. U.S. West Direct, 293 Mont. 512, 977 P.2d 989 (1999). In

Iwen, as the dissent in the Ninth Circuit’s decision sub judice

observed, the contract at issue was imposed upon a consumer

seeking to place an advertisement in the local Yellow Pages,

which consumer had to either accept the contract as presented

or forego advertising in the only Yellow Pages serving his

market area.

However, Respondent Ticknor confronted no such

compulsory contractual setting. To the contrary, Ticknor need

not have executed a franchise agreement at all; he could have

elected to operate his hotel independently, as so many

thousands of hotels do. Having elected to pursue a franchise

relationship, Respondent Ticknor had a plethora of other hotel

franchise opportunities to select from — yet chose Choice

Hotels deliberately, even after receiving full disclosure, as

required by law (as discussed infra.) regarding the Choice

Hotel franchise agreement and, in particular, the arbitration

clause at issue herein. Indeed, in franchisee Ticknor’s guest

lodging segment, there were at least thirty (31) distinct guest

lodging chains which Respondent Ticknor could have sought

to affiliate with but did not, instead freely electing to enter

into the subject Choice Hotel franchise agreement which he

now contends is adhesive and unconscionable.*

5. These other chains include: AmeriSuites; Holiday Inns;

Holiday Inn Express; Best Inns and Suites; Candlewood Suites;

Country Inns and Suites; Courtyard by Marriott; Days Inns; Econo

Lodges; Embassy Suites; Fairfield Inns by Marriott; Hampton Inns

(Cont’d)

11

In such circumstances, where franchisee Ticknor was in

no fashion compelled to enter into a contract at all, and was

in no fashion compelled to enter into a contract with Choice

Hotels, but instead freely elected to do so while excluding

thirty one other franchise opportunities, a franchise network’s

uniform contract may not be deemed a contract of adhesion

simply because of its uniformity. To the contrary, the courts

of Maryland and Montana have held that contractual choice

actually obviates any finding of adhesion.

For example, the Montana Supreme Court itself has held

that when a party having a choice among vendors nevertheless

voluntarily elects to enter into an otherwise adhesive contract

with one such vendor, no principles of adhesion apply.

In Chor v. Piper, Jaffray & Hopwood, Inc. 261 Mont. 143,

862 P.2d 26 (1993), a securities brokerage customer

commenced a judicial action for alleged brokerage

misconduct and, in turn, the brokerage house moved to

compel arbitration pursuant to the customer’s contract.

Rejecting the customer’s claim that her brokerage house

agreement was a “contract of adhesion” whose arbitration

provisions were thus enforceable, the Montana Supreme

Court held:

This claim is not convincing in light of (plaintiff’s)

deposition testimony. (She) testified that since

1983 she had investment accounts with five other

(Cont'd)

and Suites; Hawthorne Suites; Hilton Hotels; Homewood Suites;

Howard Johnson; Knights Inn; Microtel Inns and Suites; Motel 6;

Hampton Inn Suites; Radisson Hotels; Ramada; Red Roof; Residents

Inns by Marriott; Rodeway Inns; Super 8 Motels; Townplace Suites

by Marriott; Travelodge Hotels; Villager Lodge; Wellesley Inns &

Suites; and, Wingate Inns. Source: International Franchise

Association, Spring/Summer 2001 Franchise Opportunities Guide,

at 187-193.

12

brokerage houses besides Piper, none of which

required her to consent to arbitrate future disputes.

She clearly had the ability to go elsewhere if

the terms of the agreement with Piper did not

suit her. /d. at 150 (emphasis added).

Accordingly, the Montana Supreme Court held that the

court below “. . . erred in concluding the (subject) arbitration

agreements are void due to unconscionability or because

they are contracts of adhesion.” Jd. See also the Montana

Supreme Court’s 1986 decision in Passage v. Prudential-

Bache Securities, Inc., 223 Mont. 60, 727 P.2d 1298 (1986)

(“We conclude that even if the customer agreement form is

an adhesion contract, there is nothing in the record and no

compelling law to prevent enforcement of the arbitration

clause”).

Should this Court determine to apply Maryland law

to the case sub judice, the same result will pertain.

For Maryland, too, holds that when a party to a contract is

not dealing with a sole source supplier of goods and services,

but rather has options available to procure the subject good

or service from another source, then no “coritract of adhesion”

argument will pertain. For example, in Seigneur v. National

Fitness Institute, Inc., 132 Md. App. 271, 752 A.2d 631 (Md.

Ct. of Special Appeals 2000), a health club member injured

while exercising complained that the subject health

club membership agreement was a contract of adhesion.

The contract was uniform, held the court, but it noted that

this fact alone did not demonstrate that the defendant health

club had grossly disparate bargaining power. The court

observed:

... (T)here were numerous other competitors

providing the same non-essential services as

13

(defendant) NFI ... To possess a decisive

bargaining advantage over a customer, the service

offered must usually be deemed essential in nature

(citation omitted). The Washington metropolitan

area, of which Montgomery County is a part, is

home to many exercise and fitness clubs.

(Plaintiff) . .. was free to choose among the scores

of facilities providing essentially the same

services (citation omitted). She also had the option

of purchasing her own fitness equipment and

exercising at home or of exercising without any

equipment by doing aerobic or isometric

exercises. (Plaintiff’s) bargaining position was not

grossly disproportionate to that of (defendant)

NFI. Jd. at 283, 285-286.

Indeed, the Ninth Circuit itself has observed — in a

franchise-related decision post-dating that under review —

that non-negotiable franchise agreements are not ipso facto

unenforceable “contracts of adhesion“. In reversing the U.S.

District Court and directing a franchisee to arbitrate his

dispute as his franchise agreement directed, the Ninth Court

very recently observed:

(E)ven if “arbitration agreements are adhesive —

i.e.,... they were offered on a take it or leave it

basis with no opportunity for bargaining”, under

California law, they still may be valid and

enforceable, absent evidence that they are so

unconscionable, that is, “so one-sided as to shock

the conscience” (internal quotation marks

omitted).°

6. Bradley v. Harris Research, Inc., 2001 WL 1658728 (9th Cir.

2001) citing and quoting from Lagataree v. Luce Forward, Hamilton &

Scripps LLP, 74 Cal. App. 4th 1105, 88 Cal. Rptr. 2d 664, 678-79 (1999).

14

Il. THE SUBJECT ARBITRATION CLAUSE WAS

NEITHER UNCONSCIONABLE NOR OUTSIDE THE

PARTIES’ REASONABLE EXPECTATIONS — AND

THE NINTH CIRCUIT IGNORED MONTANA LAW IN

HOLDING OTHERWISE

The Ninth Circuit, while purportedly seeking to ascertain

and follow applicable Montana law, actually ignored that law

in the case sub judice.

Montana law is clear — and is even quoted correctly in

the Ninth Circuit decision sub judice:

To determine the enforceability of a specific

contractual provision under Jwen, a Montana court

must first decide whether the contract is one of

adhesion [citation omitted]. If so, then the

provision will not be enforced against the weaker

contracting party if it is (1) not within that party’s

reasonable expectations, or (2) if within

those expectations, it is unduly oppressive,

unconscionable, or against public policy (citing

Iwen v. U.S. West Direct, supra, and Passage v.

Prudential-Bache, Sec., Inc., supra.). 265 F.3d

at 939.

As set forth below — and as forcefully noted in the Ninth

Circuit’s dissent in this case — the subject franchise

agreement’s arbitration clause was indisputedly within

Respondent Ticknor’s reasonable expectations; not at all

unconscionable; and, is utterly distinguishable from that

present in the /wen case.

15

A. The Subject Arbitration Clause Was Indisputedly

Within The Parties’ Expectations

Respondent Ticknor cannot credibly assert that the

arbitration provision at issue herein was not within his

“reasonable expectations,” and the Ninth Circuit erred by

ignoring this second prong of the two prong /wen

“unconscionability” test when rendering its decision.

As this Court is well aware, franchising is heavily

regulated in the United States by both the federal and state

governments. The Federal Trade Commission’ and fourteen

(14) states* have laws or regulations on their books requiring

1. Federal Trade Commission Trade Regulation Rule:

Disclosure Requirements and Prohibitions Concerning Franchising

and Business Opportunity Ventures, 16 CFR 436, hereafter the “FT Cc

Franchise Rule.”

8. California: California Franchise Investment Law, California

Corporations Code, Div. 5, Parts 1-6, Section 31000 et. seq.; Hawaii:

Hawaii Franchise Investment Law, Hawaii Rev. Stat., Title 26,

Ch. 482E, Section 482-E1 ef seq.; Illinois: Illinois Franchise

Disclosure Act, Illinois Compiled Statutes, Ch. 815, Section 705/1

et seq.; Indiana: Indiana Franchise Disclosure Law, Indiana Code,

Title 51, Ch. 51-19, Section 51-19.01 ef seq.; Maryland: Maryland

Franchise Registration and Disclosure Law, Ann. Code of Maryland,

Business Regulation, Title 14, Section 14-201 ef seq.; Michigan:

Michigan Franchise Investment Law, Michigan Compiled Laws,

Ch. 445, Section 445.1501 et seg.; Minnesota Franchise Act,

Minnesota: Minnesota Statutes, Ch. 80C, Section 80C.01 et seq.;

New York: New York Franchise Act, New York General Business

Law, Art. 33, Section 680 et seq.; North Dakota: North Dakota

Franchise Investment Law, North Dakota Century Code Ann.,

Title 51, Ch. 51-19, Section 51-19-01 et seg.; Rhode Island: Rhode

Island Franchise and Distributorship Investment Regulations Act,

(Cont’d)

16

franchisors to disseminate comprehensive “franchise

disclosure documents” (prospectus-type circulars) to

prospective franchisees prior to offering or selling any

franchise. Under most of the above-referenced state laws,

franchisors must register their franchise disclosure documents

prior to offering or selling any franchise in the subject

franchise-regulating state — as Choice Hotels did in this case.

Critically, this franchise disclosure document must

highlight any forum selection or arbitration clause which

would limit either litigation or arbitration venue, compel

arbitration, or both.’ Included in each franchise disclosure

document must be specimen copies of all franchise and

(Cont'd)

General Laws of Rhode Island, Title 19, Ch. 28.1, Section 19-28.

1-1 et seg.; South Dakota: South Dakota Franchises for Brand-Name

Goods and Services Law, South Dakota Codified Laws, Title 37,

Ch. 37-5A, Section 37-5A-1 et seq.; Virginia: Virginia Retail

Franchising Act, Virginia Code, Title 13.1, Ch. 8, Section 13.1-557

et seq.; Washington: Washington Franchise Protection Act, Revised

Code of Washington, Title 19, Ch. 19.100, Section 19.100.010

et seq.; Wisconsin: Wisconsin Franchise Investment Law, Wisconsin

Stats., Ch. 553, Section 553.01 et seq.

9. “Guidelines for Preparation of the Uniform Franchise

Offering Circular and Related Documents”, Item 17 Instructions,

Sections “u” and “v”, CCH Business Franchise Guide, 4 5760.

The UFOC Guidelines are promulgated and periodically updated by

the North American Securities Administrators Association

(“NASAA”), whose predecessor created the UFOC disclosure format

to eliminate the “patchwork quilt” of confusion engendered by the

varying (and sometimes conflicting) disclosure requirements imposed

by the fourteen franchise-regulating states. The Federal Trade

Commission and each franchise-regulating state has decreed that a

franchisor’s use of the UFOC document will satisfy that franchisor’s

disclosure obligations.

17

franchise-related agreements that a prospective franchisee

may or will be asked to enter into."°

So it is that Respondent Ticknor was apprised not once,

not twice, but three times of the details of the litigation and

arbitration provisions present in the Choice franchise

agreement: first in Choice’s franchise disclosure document

(the narrative text of which specifically made reference to

same in compliance with the above-referenced “UFOC

Guidelines”); second in the specimen franchise agreement

which, pursuant to those guidelines, was set forth in Choice’s

disclosure document; and, third in the actual Choice franchise

agreement tendered to franchisee Ticknor for execution.

By law, Choice Hotels had to forbid Respondent Ticknor

from executing the subject franchise agreement until five

business days had elapsed following receipt of same, further

to enable Respondent Ticknor to make a calculated and

deliberate contracting decision."

It is thus readily apparent that franchisee Ticknor cannot

be heard to complain that the subject franchise agreement's

arbitration provisions were not within his “reasonable

expectations.” It is not at all apparent, however, why the Ninth

Circuit chose not to even mention the broad disclosure

regarding arbitration, or the regulatorily prescribed “waiting

period” which preceded Ticknor’s execution of his franchise

agreement, when considering whether same was

“unconscionable.” '

10. Id. at 45774.

11. FTC Franchise Rule, supra at fn.7, §436.1(g).

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B. The Subject Arbitration Clause Was Not

Unconscionable

Critical to the Ninth Circuit’s decision in this case is the

conclusion that the subject franchise agreement’s arbitration

clause was “unconscionable” under Montana law “. .

because it required binding arbitration of the weaker

bargaining party’s claims, but allowed the stronger bargaining

party the opportunity to seek judicial remedies to enforce

contractual obligations.” 265 F.3d at 940. More specifically,

observed the court below, because “(t)he arbitration clause

in this case allowed Choice to bring its claims against Ticknor

into state or federal court, yet forced Ticknor to submit all

claims to binding arbitration as Choice’s headquarters in

Maryland.” Jd. at 940.

In so holding, the Ninth Circuit erred in many critical

respects. To begin with, and as noted in the Ninth Circuit’s

dissent opinion (/d. at 943 and fn.7), the subject arbitration

clause did not permit the franchisor to bring all claims against

its franchisee in court while relegating its franchisee solely

to arbitration. To the contrary, the franchisor’s ability to go

to court was limited to three instances which had no corollary

for the franchisee — to pursue indemnification claims against

the franchisee (the franchisor did not indemnify the

franchisee, who could thus not pursue any such claim); to

- enforce the franchisor’s trademark rights (again, the

franchisee conferred no such rights to the franchisor under

the subject franchise agreement); and, to collect monies owed

under the franchise agreement (the franchisee could have no

such claim against Choice, as Choice owed no monies

whatsoever to the franchisee under the franchise agreement).

Each and every other claim which Petitioner Choice had

against Respondent Ticknor had to be pursued through

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arbitration. Indeed, we trust that it has not escaped this

Court’s attention that this case emanated from Petitioner

Choice’s commencement of an arbitration proceeding against

Respondent Ticknor.

More critically, the Montana Supreme Court in Jwen,

supra. — upon which the Ninth Circuit’s decision rests

almost entirely — actually holds that an arbitration clause

vesting discrepant rights in the parties thereto is not

automatically “unconscionable.” To the contrary, the Montana

Supreme Court in Jwen held:

Certainly, this does not mean arbitration

agreements must contain mutual promises that

give the parties identical rights and obligations,

or that the parties must be bound in the exact same

manner. This simply restates the rule of law that

disparities in the rights of the contracting parties

must not be so one-sided and unreasonably

favorable to the drafter, as they are in this case,

that the agreement becomes unconscionable and

oppressive (citation omitted) 293 Mont. 522-23.

Of course, in Jwen, the subject arbitration clause was

truly “one way” — that is, the purchaser of Yellow Pages

advertising thereunder was compelled to arbitrate all disputes,

while the Yellow Pages publisher was free to litigate. In the

case sub judice, as noted immediately above, there is no such

disparity of arbitral obligations — only a carveout therefrom

conferred upon franchisor Choice to pursue claims that only

it could possess.

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Respectfully, the Ninth Circuit committed reversible

error by holding the subject Choice franchise agreement’s

arbitration provision “unconscionable.” That arbitration

clause was disclosed again and again to Respondent Ticknor

by Petitioner Choice; the obligations contained therein were

completely reciprocal save for claims that could vest solely

in Choice (and never in Respondent Ticknor); and, even after

such repeated disclosure regarding the subject arbitration

provision, Respondent Ticknor of his own volition

determined to pursue a franchise relationship instead of

remaining independent; freely elected to execute his Choice

franchise agreement; and, deliberately rejected the franchise

offerings of fully thirty one (31) other guest lodging

franchises available for him to select from.

CONCLUSION

For all of the reasons set forth herein, it is respectfully

submitted that the petition for a writ of certiorari sought

herein by Petitioner Choice Hotels International, Inc. should

be granted.

Respectfully submitted, .

Davip J. KAUFMANN

Counsel of Record

KAUFMANN, FEINER, Y AMIN,

Gipw & Rossins, LLP

‘ 777 Third Avenue — 24* Floor

New York, New York 10017

(212) 755-3100

~ Counsel for Amicus Curiae