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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 such conduct. 

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, including franchisees.

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.

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