US Supreme Court Decision Could Impact Franchisee Rights
By Mario Herman
A recent decision by the U.S. Supreme Court pertaining to a case
involving AT&T could have an impact of class action claims brought by
franchisees. Click here to learn more.
In a 5-4 ruling on April 27, 2011, the U.S. Supreme Court held in Concepcion
v. AT&T that corporations may in the fine print of their consumer contracts
prohibit class action/group action arbitrations, and that defrauded
consumers cannot challenge such clauses on the grounds of unconscionability.
The Court abrogated the California Supreme Court’s ruling in Discovery Bank
which held that class waivers in consumer arbitration agreements are
unconscionable if the agreement is an adhesion contract, disputes between
the parties are likely to involve small amounts of damages, and the party
with inferior bargaining power alleges a deliberate scheme to defraud.
The Supreme Court’s ruling in Concepcion, as such, holds that states are
barred by the Federal Arbitration Act from protecting their residents from
It is unfortunate in some respects that this specific AT&T contract was
at issue, because although it prohibited class actions, it had some
seemingly favorable clauses for the consumer (if one were to only glance and
not think about how most consumers would not even pursue the claim on their
own for such a small dollar amount). For example, the AT&T arbitration
clause did provide that for claims of $10,000 or less, the consumer could
choose whether the arbitration would proceed in person, by telephone, or on
submissions, and that either party could bring a claim in small claims court
in lieu of arbitration. It also provided that the arbitration could
award any form of relief including injunctions and presumably punitive
damages. It also denied AT&T the right to seek reimbursement of
attorney’s fees. Finally, the High Court stated that if a customer
received an arbitration award in excess of AT&T’s last settlement offer, ATT
was required to pay a minimum recovery of $7500, and twice the amount of the
consumer’s attorney’s fees.
Perhaps, the U.S. Supreme Court was blinded by the seemingly favorable
provisions for consumers in the arbitration clause at issue. More
likely, it is just a sign of the political times we live in where large
corporations who pay little or no taxes are favored over small businesses
and consumers. Either way, this ruling could have a devastating impact,
not only on consumer rights, but on the rights of small business persons,
Historically, courts have been far more willing to protect the rights of
consumers than those of small entrepreneurs. An ongoing debate is whether
a franchise agreement is a contract of adhesion (a take it or leave it form
contract not subject to negotiation), or merely an arm’s length contract.
With a U.S. Supreme Court ruling which gives corporations carte blanc to
basically write their own rules even when dealing with consumers through
adhesive contract, there is little likelihood that any franchisee could
successfully challenge on the ground of unconscionability, an arbitration
clause which contained a provision against group or class arbitration.
It is therefore more important than ever for prospective franchisees to
be proactive prior to signing a franchise agreement. The author of
this article has been a practicing franchise law attorney for twenty two
years, seeking to protect and enforce the rights of franchisees.
During that time as a franchise lawyer, I have never seen an arbitration
clause in a franchise agreement in which the franchisor waives its rights to
collect attorney’s fees if it is the prevailing party, or agrees to pay a
minimum sum far in excess of the alleged claim, or agrees to pay twice the
amount of the franchisee’s attorney’s fees should the franchisee be the
prevailing party and recover in excess of the franchisor’s last written
offer. These provisions that were contained in the Concepcion case are
non-existent in franchise agreements. However, waivers of group and
class arbitrations are common, as are waivers of compensatory and punitive
damages, juries, franchisee venues, favorable laws to franchisees, and other
such substantive provisions. As an experienced franchise law attorney,
I recommend that you protect yourself proactively! Practice
safe-contracting! Have an experienced franchise lawyer review the
franchise agreement before you sign it, and have the franchise law attorney
attempt to negotiate out any objectionable clauses such as the one at issue
in the Concepcion case. It is important that you do not retain
someone who does not have many years’ experience in franchise law.
Mr. Herman based in Washington, D.C., represents franchisees domestically
and internationally in negotiation, mediation, arbitration, and litigation.