Franchise Owners Join Fight Against Mandatory Arbitration

This is a post by guest blogger Janet Sparks.

The American Arbitration Association (AAA) is considering potential changes to its Commercial Arbitration Rules and has put out a notice asking for suggestions by e-mail by September 1, 2009. AAA, a private enterprise, was founded in 1926 following the enactment of the Federal Arbitration Act, with the specific goal of helping to implement arbitration as an out-of-court solution to resolving disputes. But this formal notice is curious, coming on the heels of a bill, H.R. 3010, introduced as the Arbitration Fairness Act of 2007, in an effort to ban pre-dispute mandatory binding arbitration, between businesses and consumers and employers and employees in their respective transactions and relationship issues. Recently, there has been a concerted lobbying effort by these groups to expose what they consider to be the unfairness of the current law. This decision to arbitrate future disputes is contained in an “arbitration clause” in their agreements, requiring that if a dispute arises the parties cannot go to court; they must arbitrate their complaint.

One business sector that will be participating in these endeavors will be the franchise community, although with mixed stances on the issues. For the past fifteen years, arbitration has become the preferred means for resolving disputes by franchising firms and their attorneys, in settling disputes with franchise owners. Many conflicts have surfaced in the public domain out of these arbitration processes, often giving franchising a black eye. Mainly these conflicts are in regard to the agreements governing the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system established by the franchisor. Much of the turmoil stems from the wide use of arbitration clauses in franchise agreements, requiring mandatory arbitration for disputes brought by franchisees.

But the newly introduced Bill 3010 points out some of the problems with the current Federal Arbitration Act, one being that arbitration companies, which are private and revenue driven, could be pressured to devise systems that are favorable to companies in order to get repeat business. Another is that mandatory arbitration undermines public law because there is no meaningful judicial review of an arbitrator’s decision. The new bill states, “… arbitrators enjoy near complete freedom to ignore the law and even their own rules.” And, it states, because mandatory arbitration is not transparent, it does not protect the civil rights of consumers, employees and franchisees.

One such arbitration that stands out is a case between the very popular Ann Arbor, Michigan franchise The Coffee Beanery and two of its franchisees in Annapolis, Maryland. Owner JoAnn Shaw has not only been extremely visible in franchise circles, but also in businesswomen communities. In 2000, Shaw was named as the International Franchise Association’s (IFA) first woman chairperson since its formation in 1960. (There’s more on the IFA below.) But the six-year legal wrangling between her company and franchisees Deborah Williams and Richard Welshans is far from over, and it seems to be creating more damage than most in the community think it’s worth. Not only has it called attention to franchising in a negative way in media and the press, it has also played an important role in getting franchisor and franchisee disputes included in the proposed Franchise Fairness Act of 2007. In their quest to get justice after losing everything they owned including their home, Williams and Welshans have become advocates for franchisees who are forced into mandatory arbitration. Williams has testified before Congress and has lobbied on Capitol Hill with other consumer and employment groups in support of the proposed bill.

The franchisees first filed their lawsuit when they allegedly discovered material omissions and misrepresentations given to them orally and in writing after they signed their franchise agreement in 2003. They also claim they were never given the proper legal franchise disclosure documents when they bought their franchise. After they were forced into arbitration by the franchise agreement arbitration clause, an American Arbitration Association arbitrator made its ruling in favor of The Coffee Beanery.

But when the Arbitration Fairness Act reached out to franchise owners, the IFA, a lobbying and trade association largely representing franchisors, jumped into the arena to fight against the proposed bill. IFA adamantly proclaims that it is the only association that represents both franchisors and franchisees. At this year’s annual legal symposium, IFA vice president of government relations David French declared, “As many of you know, there is a comprehensive assault underway in Congress against arbitration.” He explained to some 450 attendees that the centerpiece of these efforts to revise the current act is to establish that agreements to arbitrate disputes will not be enforceable if they are entered before the actual dispute arises. He then announced that the IFA franchisee forum has also taken a position opposing the Arbitration Fairness Act, noting that it would “be an infringement on the right of freedom of contract for Congress to rewrite the terms of these existing contractual agreements between private parties.”

The Supreme Court has now been petitioned by Coffee Beanery attorneys. They are challenging the decision by the Sixth Circuit Court reversing the ruling of a district court and vacating the award in favor of Coffee Beanery, solely on the ground that the arbitrator manifestly disregarded the law by holding that the franchisor was not required to disclose a felony conviction of one of its officers, the son of JoAnn Shaw. The IFA filed a “friend of the court” brief in support of The Coffee Beanery on the issue of manifest disregard of the law in arbitration rulings. It stated that it filed the brief to protect the tenets of arbitration as an efficient and cost-effective method of resolving disputes.

Janet Sparks is a reporter and blogger for Blue MauMau, a daily business news site for franchise buyers and owner-operators, and a columnist/reporter for Franchise Times magazine. Previously, she was the owner/publisher of the Continental Franchise Review, an industry trade journal first published in 1967.

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