Choice Hotels International, Inc. v. Chewl's Hospitality, Inc. , 91 F. App'x 810 ( 2003 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CHOICE HOTELS INTERNATIONAL, 
INCORPORATED,
Plaintiff-Appellee,
v.
 No. 02-1855
CHEWL’S HOSPITALITY, INCORPORATED,
A VIRGINIA CORPORATION; SUKHDEV
CHEWL,
Defendants-Appellants.

Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Alexander Williams, Jr., District Judge.
(CA-02-201-AW)
Argued: October 31, 2003
Decided: December 17, 2003
Before LUTTIG and SHEDD, Circuit Judges, and
James H. MICHAEL, Jr., Senior United States District Judge
for the Western District of Virginia, sitting by designation.
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: Onkar Nath Sharma, SHARMA & BHANDARI, Silver
Spring, Maryland, for Appellants. Kerry Shanahan McGeever, Legal
Department, CHOICE HOTELS INTERNATIONAL, Silver Spring,
Maryland, for Appellee.
2 CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Chewl’s Hospitality, Inc. and Sukhdev Chewl (collectively,
"Chewl") appeal from the judgment of the district court confirming
an arbitration award in favor of Choice Hotels International, Inc.
("Choice Hotels"). Chewl argues that the arbitration award should be
set aside because (1) the arbitration clause is unconscionable, (2) the
contractual liquidated damages clause in the underlying contract is an
unenforceable penalty, and (3) Choice Hotels cannot recover both liq-
uidated damages and damages for trademark infringement. We con-
clude that Chewl has failed to establish grounds to vacate the
arbitration award under the Federal Arbitration Act, and we affirm the
judgment of the district court.
I.
Chewl operated a Quality Inn hotel in Roanoke, Virginia pursuant
to a franchise agreement with Choice Hotels. Under that agreement,
Chewl was entitled to operate a hotel using Choice Hotels’ "Quality"
trademarks in exchange for payment of fees and royalties. The agree-
ment took effect in March 1999; although the agreement had a term
of twenty years, either party could terminate the agreement without
cause at any point after five years. The agreement authorized Choice
Hotels to terminate the agreement in the event that Chewl failed to
operate its hotel in accordance with the terms of the agreement.
Under the franchise agreement, Chewl was required to install new
bedding in its hotel rooms; install a deluxe complimentary breakfast;
repair, seal, and stripe the parking areas; and make landscaping
improvements on the property. In the event that Choice Hotels deter-
mined that Chewl had not met these requirements, the agreement pro-
vided that Choice Hotels would give Chewl a 30-day cure period.
Choice Hotels was authorized to terminate the agreement if Chewl
failed to satisfy its improvement obligations within that period.
CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY 3
In July 1999, a Choice Hotels official inspected the hotel and found
that Chewl had not satisfied its repair and improvement obligations.
A Chewl representative accompanied the Choice Hotels official dur-
ing the inspection and certified that its findings were accurate. The
Choice Hotels official returned to the property in September 1999 and
found that Chewl still had not made the required improvements. Pur-
suant to the agreement, Choice Hotels sent Chewl a notice of default
demanding that Chewl make the necessary improvements within 30
days or face possible termination. In November 1999 — after this ini-
tial cure period had expired — Choice Hotels performed a third
inspection of the Chewl property and again found that Chewl was in
default of its capital improvement obligations. Again Choice Hotels
sent Chewl a notice of default, giving Chewl another 30 days to make
the required repairs. Choice Hotels returned to the property after the
expiration of this second cure period. The property still failed inspec-
tion, and the Choice Hotels official recommended terminating the
franchise. In May 2000, Choice Hotels terminated the agreement
based upon Chewl’s uncured defaults. Contrary to the terms of the
agreement, Chewl continued to use the Quality trademark after its
franchise was terminated.
The franchise agreement included the following arbitration provi-
sion:
Except for our claims against you for indemnification,
actions for collection of moneys owed under this Agree-
ment, or actions seeking to enjoin you from using the [trade-
marks] in violation of this Agreement, any controversy or
claim arising out of or relating to this Agreement, or the
breach of this Agreement, including any claim that this
Agreement, or any part of this Agreement is invalid, illegal,
or otherwise voidable or void, will be sent to final and bind-
ing arbitration in accordance with the Commercial Arbitra-
tion Rules of the American Arbitration Association or
J.A.M.S./Endispute . . . . The arbitrator will apply the sub-
stantive laws of Maryland, without reference to its conflict
of laws provision . . . . Any arbitration will be conducted at
our headquarters office in Maryland.
4 CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY
The agreement also provided that Choice Hotels would be entitled to
liquidated damages in the event of termination occasioned by Chewl’s
default:
If we terminate this Agreement due to your default after the
Opening Date, you will pay us, within 30 days after termina-
tion, as liquidated damages and not as penalty for premature
termination, the product of (i) the average monthly Gross
Room Revenues during the prior 12 full calendar months . . .
multiplied by (ii) the Royalty fee payable in the Remaining
months (as defined below), multiplied by (iii) the number of
months until the next date that you could have terminated
this Agreement without penalty (‘Remaining Months’), not
to exceed 36 months. However, the product of (i) multiplied
by (ii) will not be less than the product of $40.00 multiplied
by the Rentable Rooms.
Chewl filed suit in Virginia state court to compel reinstatement of
the franchise agreement. Choice Hotels removed the case to federal
court and moved to compel arbitration. Chewl did not contest arbitra-
bility, and the case was dismissed. In October 2000, Choice Hotels
filed its arbitration demands with the American Arbitration Associa-
tion ("AAA"). Choice Hotels sought liquidated damages resulting
from termination of the agreement, as well as damages for trademark
infringement, interest, and fees. Chewl filed a response and a counter-
claim in November 2000. Chewl made no objection to the arbitra-
bility of Choice Hotels’ claims at that time.
In September 2001 — after ten months of discovery and only one
month before the arbitration hearing was scheduled to take place —
Chewl filed an objection challenging the arbitrability of the claims at
issue and the jurisdiction of the AAA. After two days of hearings, the
arbitrator issued an award in favor of Choice Hotels for $196,992 in
liquidated damages; $32,042.60 in damages for trademark infringe-
ment; $10,245 in attorneys’ fees; and $1,379.52 in costs.
Choice Hotels moved the district court to confirm the arbitration
award, and Chewl moved to vacate it. The district court held a hearing
and then granted the motion to confirm the award. This appeal fol-
lowed.
CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY 5
II.
Following the Supreme Court’s direction to "apply ordinary, not
special, standards when reviewing district court decisions upholding
arbitration awards," we review the district court’s findings of fact for
clear error and its legal conclusions de novo. First Options of Chi-
cago, Inc. v. Kaplan, 514 U.S. 938, 948 (1995).
A.
At the outset, Chewl challenges the authority of the arbitrator to
decide the claims asserted by Choice Hotels. Assuming that this
objection was properly preserved for review,1 we must decide (1)
whether there existed a valid, enforceable agreement to arbitrate and
(2) whether Choice Hotels’ claims fell within the scope of that agree-
ment. See Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938 (4th Cir.
1999).
1.
The arbitration provision at issue in this case is contained in a con-
tract evidencing a transaction involving commerce, so the Federal
Arbitration Act ("FAA") applies. See 9 U.S.C. § 2. Under the FAA,
a written agreement to arbitrate in a "contract evidencing a transaction
involving commerce . . . shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the revocation
of any contract." Id. Thus, the enforceability of an arbitration provi-
1
Chewl consented to arbitration and litigated this case in arbitration for
nearly ten months before raising any objection to arbitration. Moreover,
Chewl asserted a counterclaim for damages during the arbitration. These
facts suggest that Chewl, by its conduct, consented to arbitration. See
Rock-Tenn Co. v. United Paperworkers Int’l Union, AFL-CIO, 184 F.3d
330, 334 (4th Cir. 1999). Shortly before the arbitration hearing com-
menced, however, Chewl changed its position and objected to the arbitra-
bility of Choice Hotels’ claims. Thus, the issue was presented to the
arbitrator. Because we conclude that the arbitrator properly disposed of
Choice Hotels’ claims, we do not decide here whether an objection to
arbitrability made after months of participation in arbitration proceedings
is timely made.
6 CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY
sion is determined by "ordinary rules of contract interpretation, aug-
mented by a federal policy requiring that all ambiguities be resolved
in favor of arbitration." Choice Hotels Int’l, Inc. v. BSR Tropicana
Resort, Inc., 252 F.3d 707, 710 (4th Cir. 2001).
Chewl attacks the validity of the arbitration agreement on the
ground that the choice-of-law and choice-of-forum clauses of the rele-
vant provision are "unjust" and "unconscionable" as contracts of
adhesion. We apply general principles of contract law to determine
whether the arbitration agreement at issue here was a contract of
adhesion or otherwise unconscionable.
Chewl contends that Virginia law should govern its dispute with
Choice Hotels, while Choice Hotels argues that the franchise agree-
ment calls for application of Maryland law. Because this diversity suit
was filed in Maryland, we apply that state’s choice of law rules to
determine the applicable law. See Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487, 496-97 (1941). Under Maryland law, "it is gener-
ally accepted that the parties to a contract may agree as to the law
which will govern their transaction, even as to issues going to the
validity of the contract." General Ins. Co. of Am. v. Interstate Serv.
Co., Inc., 701 A.2d 1213, 1219 (Md. Ct. Spec. App. 1997). A contrac-
tual choice of law provision may be defeated, however, if "the chosen
state has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for the parties’ choice" or "ap-
plication of the law of the chosen state would be contrary to a funda-
mental policy of a state which has a materially greater interest than
the chosen state in the determination of the particular issue and which
. . . would be the state of the applicable law in the absence of an effec-
tive choice of law by the parties." Id. (internal quotations omitted).
The parties expressly provided that Maryland law would govern
the franchise agreement. Maryland has a substantial relationship to
the parties; Choice Hotels is headquartered there, and the parties
agreed to conduct arbitration there. Moreover, application of Mary-
land contract law to this arbitration agreement would not be contrary
to any fundamental policy of Virginia. Although Chewl contends that
Virginia has a strong policy favoring franchisees, that particular inter-
est does not counsel application of Virginia contract law to determine
whether an agreement to arbitrate is valid and enforceable. Accord-
CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY 7
ingly, Maryland contract law should determine the enforceability of
the arbitration agreement.
Chewl contends that the arbitration provision is an unenforceable
contract of adhesion. Under Maryland law, a contract of adhesion is
one that is "drafted unilaterally by the dominant party and then pre-
sented on a take-it-or-leave-it basis to the weaker party who has no
real opportunity to bargain about its terms." Meyer v. State Farm Fire
& Cas. Co., 582 A.2d 275, 278 (Md. Ct. Spec. App. 1990). The dis-
trict court made the following factual findings:
[Chewl] is not an unsophisticated consumer, nor was the
contract a consumer transaction. The contract is a commer-
cial contract and [Chewl] is an experienced hotel franchise
owner, having purchased at least one other franchise in the
past. Moreover, [Chewl] has not demonstrated that it had no
viable alternatives, or that it faced the possibility of being
excluded from the hotel franchise business if it had refused
such an arbitration contract. Rather, the facts of this case
suggest that [Chewl] made a conscious decision to contract
with Choice Hotels and change its affiliation, because it
believed that the Quality Inn mark, as opposed to the Holi-
day Inn mark, would increase profitability. Further, adden-
dums to the Agreement make clear that at least some
negotiations took place before the Agreement was finalized,
and that [Chewl] willingly accepted the burdens of the fran-
chise agreement.
Chewl cannot demonstrate that these findings are clearly erroneous,
and they plainly support the conclusion that the arbitration provision
was not a contract of adhesion or otherwise unconscionable. Thus, the
district court correctly concluded that the arbitration provision con-
tained in the franchise agreement was valid and enforceable against
Chewl. Cf. BSR Tropicana, 252 F.3d at 710-12 (requiring arbitration
of certain claims under a nearly identical arbitration provision).2
2
Chewl’s reliance upon Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d
931 (9th Cir. 2001), is misplaced. The Ninth Circuit held in Ticknor that
an arbitration provision similar to the one at issue here was a contract of
8 CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY
2.
The district court also properly concluded that the claims asserted
by Choice Hotels fell within the scope of the arbitration provision.
"[I]n applying general state-law principles of contract interpretation
to the interpretation of an arbitration agreement within the scope of
the [FAA], due regard must be given to the federal policy favoring
arbitration, and ambiguities as to the scope of the arbitration clause
itself resolved in favor of arbitration." Volt Info. Sci., Inc. v. Board of
Trs. of Leland Stanford, Jr. Univ., 489 U.S. 468, 475-76 (1989).
The arbitration provision covers "any controversy or claim arising
out of or relating to" the franchise agreement, except indemnification
claims, collection actions, and actions to enjoin Chewl from infring-
ing Choice Hotels’ trademarks. In its arbitration demand, Choice
Hotels sought liquidated damages for termination of the franchise,
damages for trademark infringement, interest, and attorneys’ fees.
These claims plainly relate to the franchise agreement. There is no
indemnification claim (since there is no third party involved), nor did
Choice Hotels seek an injunction. To the extent that Chewl argues for
application of the collection-action exclusion, that argument is fore-
closed by our decision in BSR Tropicana, where we held that a
Choice Hotels arbitration provision similar to the one at issue here did
not exclude a breach of contract claim. 252 F.3d at 711-12. As in BSR
Tropicana, the franchisee’s liability on the breach of contract claim
did not "arise from the formation of the contract itself, but rather from
an alleged breach of contract." Id. at 712. Thus, this contract claim is
not a collection action. The district court correctly determined that
Choice Hotels’ claims fell within the scope of the arbitration agree-
ment.
B.
An arbitration award may be set aside pursuant to the FAA only
where (1) "the award was procured by corruption, fraud or undue
adhesion under Montana law. Id. at 939-41. Of course, Montana law is
not applicable in this case, and Chewl has not demonstrated that the dis-
trict court’s factual findings concerning the parties’ relative bargaining
positions were clearly erroneous. On the facts and on the law, Ticknor
is distinguishable.
CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY 9
influence," (2) "there was evident partiality or corruption in the arbi-
trators," (3) "the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy," or (4) "the
arbitrators exceeded their powers, or so imperfectly executed them
that a mutual, final, and definite award upon the subject matter sub-
mitted was not made." 9 U.S.C. § 10(a). In addition, we have recog-
nized that an arbitration award may be set aside if it reflects a
manifest disregard of applicable law. Gallus Inv., L.P. v. Pudgie’s
Famous Chicken, Ltd., 134 F.3d 231, 233-34 (4th Cir. 1998).
1.
Chewl argues that the arbitrator exhibited "evident partiality" in
favor of Choice Hotels. As the district court noted, "[b]esides the
empty assertion, [Chewl] offers no evidence of bias." To the contrary,
the arbitrator rendered a decision based upon two days of hearings
and direct evidence of Chewl’s infringement of the Choice Hotels
trademark. The arbitrator awarded Choice Hotels less than it sought
in liquidated damages, and he elected not to treble the trademark
infringement damages as the Lanham Act permitted. There is no indi-
cation at all that the arbitrator failed to discharge his duties in a fair
and impartial manner.
2.
Chewl further contends that the arbitrator improperly disregarded
applicable law concerning liquidated damages. Under applicable
Maryland law, a liquidated damages clause is enforceable if it is a
reasonable estimate of just compensation at the time the agreement
was made. Massachusetts Indem. & Life Ins. Co. v. Dresser, 306 A.2d
213, 216 (Md. 1973). Only if the amount agreed upon is "grossly
excessive and out of all proportion to the damages that might reason-
ably have been expected to result from [a] breach of the contract"
should a particular liquidated damages provision be defeated. Balti-
more Bridge Co. v. United Rys. & Elec. Co., 93 A. 420, 422 (Md.
1915). The fact that actual damages turn out to be less than those stip-
ulated in the liquidated damages provision does not "characterize or
stamp the stipulation as a penalty unless it was so exorbitant as to
clearly show that such amount was not arrived at in a bona fide effort
10 CHOICE HOTELS INT’L v. CHEWL’S HOSPITALITY
. . . to estimate the damages that might have been reasonably expected
to result from a breach" of the contract. Id. at 422-23.
Chewl has failed to demonstrate that the liquidated damages provi-
sion in the franchise agreement was a penalty. Precise damages could
not be determined at the time of contracting, there being no measure
of the royalties that would accrue to Choice Hotels by the success of
Chewl’s hotel. Moreover, the liquidated damages clause provided a
reasonable method for calculating just compensation, taking into
account the profits earned in the months prior to termination and the
amount of time remaining before Chewl would be able to terminate
the franchise on its own. Accordingly, the arbitrator properly awarded
Choice Hotels liquidated damages according to the terms of the fran-
chise agreement.
3.
Chewl next contends that the arbitrator improperly awarded Choice
Hotels both liquidated damages and damages for trademark infringe-
ment. This argument is meritless. As the district court noted, the fran-
chise agreement called for liquidated damages to remedy a
termination occasioned by Chewl’s default. Choice Hotels’ trademark
infringement claim arose from Chewl’s conduct after termination of
the agreement: Chewl continued to use the Quality mark even after
its franchise had been extinguished. This was an independent claim
that was separately compensable.
III.
Choice Hotels’ claims were properly decided in arbitration, and
Chewl has failed to demonstrate any grounds sufficient to vacate the
arbitrator’s award under § 10 of the FAA. Accordingly, the judgment
of the district court is
AFFIRMED.