## Facts

- We Care Hair Development, Inc. was a franchisor of hair-salon franchises; the defendants were franchisees who were also plaintiffs in a related Illinois state-court class action.
- The franchise agreements contained broad arbitration clauses requiring arbitration of disputes “arising out of or relating to” the franchise relationship.
- Franchisees operated on premises subleased through an affiliated entity; the subleases lacked arbitration clauses and allowed eviction for sublease breach.
- The subleases treated a breach of the franchise agreement as a breach of the sublease, which franchisees argued enabled eviction and business termination without first arbitrating disputes tied to the franchise relationship.
- On February 4, 1997, franchisees filed an Illinois class action alleging, among other claims, fraud, breach of fiduciary duty, and statutory violations under Illinois franchise, consumer-fraud, and antitrust laws.
- In April 1997, We Care Hair filed multiple federal petitions under the Federal Arbitration Act seeking orders compelling arbitration and injunctions to halt the pending state proceedings; the petitions were consolidated.
- The state trial court later entered orders declaring the franchise arbitration clauses void and unenforceable, and those orders were appealed in state court.
- The federal district court denied franchisees’ jurisdictional and stay motions, compelled arbitration, and enjoined further prosecution of the overlapping state-court action.

## Issues

1. Whether the district court had diversity jurisdiction, including whether the amount in controversy exceeded the statutory threshold in petitions to compel arbitration.
2. Whether the state trial court’s later rulings declaring the arbitration clauses void and unenforceable precluded the federal court from compelling arbitration.
3. Whether the Anti-Injunction Act barred the federal court from enjoining the parallel state-court proceedings after ordering arbitration.
4. Whether the franchisees’ state-law claims, including challenges tied to the sublease/eviction structure, fell within the scope of the franchise arbitration clauses.

## Decision

- The Seventh Circuit affirmed the district court’s orders compelling arbitration and enjoining the related state litigation.
- The court held the amount-in-controversy requirement was satisfied because the value at stake was measured by the underlying disputes and the right to enforce arbitration, not merely the administrative cost of arbitration.
- The court held the federal action was not barred by the later state-court determinations on enforceability of the arbitration clauses, given the federal action’s prior filing and the nature of the federal relief sought.
- The court held the injunction against the state case fell within an Anti-Injunction Act exception because continuing the state litigation would undermine the federal judgment compelling arbitration.
- The court held the broad “arising out of or relating to” arbitration language encompassed the franchisees’ asserted state-law claims connected to the franchise relationship and associated arrangements.

## Legal Principles

- In a diversity action to compel arbitration, the amount in controversy may be assessed by the value of the underlying controversy and the asserted contractual right to arbitrate, rather than the cost of conducting arbitration.
- A later state-court ruling on enforceability of an arbitration clause does not necessarily bind a federal court that was first properly seized of jurisdiction in an action seeking to enforce arbitration.
- A federal court that has entered a judgment compelling arbitration may enjoin overlapping state proceedings under the Anti-Injunction Act’s relitigation/protect-or-effectuate-judgments exception when the state action would negate or frustrate the federal judgment.
- Broad arbitration clauses covering disputes “arising out of or relating to” a franchise relationship reach related state-law claims that are factually and legally tied to that relationship, including claims attacking closely connected contractual arrangements.

## Conclusion

The Seventh Circuit upheld federal diversity jurisdiction and enforced the franchise arbitration clauses, holding that the franchisees’ claims belonged in arbitration and that the federal court could enjoin parallel state litigation to protect its judgment compelling arbitration.


We Care Hair Dev., Inc. v. Engen, 180 F.3d 838 (7th Cir. 1999)