Arbitration Provisions Continue to Make Waves

AT&T Mobility and Stolt-Nielsen also make it clear that the question of whether or not a matter can be subject to compelled arbitration is a matter for the court, not the arbitrator, Rubenstein said, “unless, and this is really the key concept in all of these arbitration decisions, the parties say otherwise.”

Kevin Adler is associate editor of this newsletter.

Franchisors are well aware of the U.S. Supreme Court's opinion earlier this year in AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Apr. 27, 2011), addressing whether class-arbitration waivers in standard form contracts are enforceable in actions brought by consumers. The Court held that class-arbitration waivers are enforceable based on federal law that protects agreements to arbitrate and cannot be found unconscionable under state law (California's in this case). The decision has been recognized as strengthening the hand of any business that designates arbitration for dispute resolution. (See FBLA, June 2011, for further discussion.)

In a recent presentation, Nixon Peabody LLP attorneys Gregg Rubenstein and Diana Vilmenay discussed arbitration-related litigation in light of AT&T Mobility LLC v. Concepcion and Stolt-Nielsen S.A. v. AnimalFeeds International Corp., decided by the Supreme Court in April 2010. “The Court in AT&T Mobility said it would enforce an arbitration agreement according to its terms. It said that's the purpose of the FAA,” said Rubenstein, explaining how it could come into effect in a franchise context. “If a franchisor enters into an agreement to arbitrate with a franchisee, and if that provision says that they agree to arbitrate any and all claims and agree that these must be done on an individualized basis, then federal courts will enforce it.”

District Court Cases

Two cases decided in the last few months at the district court level indicate that arbitration provisions written by franchisors in their contracts will be upheld. Braverman Properties v. Boston Pizza Restaurants, 2011 U.S. Dist. LEXIS 68536 (W.D. Mich. Jun. 27, 2011) and Faulkenberg v. CB Tax Franchise Systems , 637 F. 3d 801 (7th Cir. 2011) both represented scenarios in which a franchisee filed a lawsuit to avoid going to arbitration in the venue that was designated in the franchise agreement.

The dispute in Braverman Properties arose when the franchisor chose not to repurchase assets from a franchisee in Michigan. The franchise agreement said that “any and all disputes” would be resolved through arbitration in Dallas under Federal Arbitration Act (“FAA”) rules, a provision that Vilmenay noted “is very common to franchise agreements.” The franchisee sued, seeking court intervention against mandatory arbitration.

The court dismissed the franchisee's claims and agreed with the franchisor that all of the franchisee's claims were arbitrable under the FAA. “The court cited the freedom of contract in the FAA,” said Vilmenay. “It said that, generally, the FAA supersedes any state laws which require primary jurisdiction in any other form when there is an agreement to arbitrate.”

In Faulkenberg, a franchisee that had agreed to purchase units in Missouri sued the franchisor in Illinois court about six months after signing franchise agreements. This franchise agreement also had an arbitration clause and a forum-selection clause that made all claims subject to arbitration in Texas. “What's interesting from a factual perspective in Faulkenberg is that the franchisee strategically sued in Illinois,” said Vilmenay. “It was able to do so because, though all the franchise units were supposed to be in Missouri, one was actually in Illinois. This was to its [the franchisee's] advantage because Illinois has a franchise disclosure act that voids all forms of forum-selection clauses.”

The franchisor argued to dismiss the lawsuit on grounds of improper venue, citing its forum-selection clause and arbitration clause. Also, it challenged the relevance of the franchisee having purchased one unit in Illinois, arguing that the agreement only permitted franchises in Missouri. The district court agreed with the franchisor and dismissed the franchisee's lawsuit, citing the forum-selection clause. On appeal, the Seventh Circuit agreed with the dismissal of the lawsuit, but it cited the arbitration clause for its decision. The Seventh Circuit noted that Illinois state law could be applied, and Illinois franchise law explicitly allows for out-of-state arbitration.

While the two opinions indicate that arbitration provisions will be enforced in a franchise context, Vilmenay nonetheless said that franchisors can take additional steps to strengthen their claims in court. For example, a franchisor faced with a challenge to arbitration clauses should file an arbitration demand in the jurisdiction where it is seeking to compel arbitration. “This shows that the franchisee will have its claims heard in the right forum,” she said. Vilmenay also recommended that a franchisor should consistently fight claims outside of the forum designated for arbitration because a court might construe not doing so as a waiver of the arbitration provision.

Edible Arrangements

Another recent decision, EA Independent Franchisee Association v. Edible Arrangements International, Inc., et al. (2001 U.S. Dist. LEXIS 78008, D. Conn. July 19, 2011) addressed a franchisee association's effort to be granted standing to sue a franchisor. One aspect that came into play was the franchisee association's challenge to the franchisor's ban on class-action arbitrations. For additional discussion, see Court Watch in this issue of FBLA.

Franchisees of Edible Arrangements formed an association early in 2010, and in September 2010 they sued for declaratory judgment that the franchisor had or would breach the franchise agreement with its members and commit unfair trade practices by collecting fees for services previously provided for free and changing other terms of service. The proposed changes included taking a fee (potentially as high as 80%) for referrals to local franchisees for orders placed over the franchisor's website; imposition of mandatory Sunday hours; and required use of approved produce vendors. None of the changes or fees had been put in place, but Edible Arrangements had announced that it intended to enact them.

Edible Arrangements moved to dismiss the lawsuit based on the association's lack of standing, as well as on the arbitration provisions in franchise contracts. The franchisor cited that each franchise agreement contained an arbitration provision and, similar to the provision in AT&T Mobility, “they specifically prohibited class-based arbitration and required individualized arbitration,” said Rubenstein.

In July 2011, the court decided that the association does have standing to sue, ruling that the association met all three prongs of the test for standing, as set out by prior decisions in the Second Circuit: 1) members have standing to sue in their own right; 2) the interests that the association is seeking to protect are germane to the organization's purpose; and 3) participation by individual members is not required to resolve claims or provide relief.

Meanwhile, the arbitration argument took a distant second place in the court's opinion, yet left open uncertainty about how it would be handled if a franchisor made different arguments. “The franchisor argued that the association could not arbitrate because it was not party to any agreement with the franchisor, including arbitration,” said Rubenstein. “The court seized upon that claim to put to the side any argument that the prohibition on class-based arbitration would apply to the association.”

Looking at the Edible Arrangements decision leaves some questions related to whether an association has standing to sue a franchisor. “It depends ' upon the claims that the association is bringing,” said Rubenstein.

Yet, Rubenstein said that the arbitration provisions in a franchise agreement can play a role in these types of disputes, too. “I think it's important whether the arbitration provision in the franchise agreement between the association's members and the franchisor ' addresses class-based arbitration,” he said. “The Edible court was able to sidestep that issue and not deal with AT&T Mobility. Properly positioned, a court would have to deal with that, and I certainly would have to question why a prohibition against collective dispute resolution would not be applicable to claims by an association, which after all, is not bringing claims in its own right, but only bringing claims on behalf of its members.”

Rubenstein predicted “more fallout” from AT&T Mobility as the issue of contracts that ban class-based arbitration is challenged. “I think this issue of associational standing will play a big role going forward,” he said.

Looking Ahead

Looking ahead, Rubenstein assessed other possible impacts of AT&T Mobility. “At bottom, what AT&T Mobility really says is that the parties are free to structure the dispute resolution process any way they want,” he said. “The FAA gives statutory basis for giving effect to that decision. While there are certainly some limits to it, the court has said that, if the parties decide to resolve disputes in their own fashion, we will support it.”

AT&T Mobility and Stolt-Nielsen also make it clear that the question of whether or not a matter can be subject to compelled arbitration is a matter for the court, not the arbitrator, Rubenstein said, “unless, and this is really the key concept in all of these arbitration decisions, the parties say otherwise.”

Kevin Adler is associate editor of this newsletter.