When and to whom do arbitration clauses in franchise agreements apply? If you follow franchise law, you know that this has been a hot topic in franchise litigation. The contours of this issue have been explored in depth by the Federal District Court in Massachusetts and the United States Court of Appeals for the First Circuit in cases involving Coverall franchisees who have challenged the arbitration clauses in their agreements in various ways.
In 2009, the Court of Appeals issued an opinion in Awuah v. Coverall North America, Inc., 554 F.3d 7 (1st. Cir. 2009) (Awuah I). In that opinion, the Court of Appeals held that, where the franchisee plaintiffs admitted to signing agreements that contain arbitration clauses, the question of whether the agreement to arbitrate was unconscionable should be decided by the arbitrator. However, at the same time, the court held that the threshold question of whether the remedy of arbitration was illusory should be decided by a court.
As a result of Awuah I, a class of plaintiffs was certified by the District Court. These district court plaintiffs, a portion of a much larger group of plaintiffs, are not subject to arbitration clauses. The question of the contours of this group were at issue in Awuah v. Coverall North America, Inc., No. 12-1301, — F.3d — (1st Cir. Dec. 27, 2012) (Awuah II).
Awuah II involves plaintiffs who became Coverall franchisees by signing Consent to Transfer Agreements and/or Guaranties to Coverall Janitorial Franchise Agreements. These transfer agreements and/or guaranties did not themselves contain arbitration clauses. However, the terms of the documents incorporated the obligations of a Franchise Agreement that contained arbitration clauses. While the transferee and guarantor plaintiffs never received copies of the Franchise Agreement, the First Circuit found that there was no suggestion that they ever asked for or were denied copies of the Franchise Agreement. The District Court concluded that the franchisees signing transfer or guaranty agreements did not have adequate notice of the arbitration clauses and allowed them to proceed in the district court and did not send them to arbitration.
The First Circuit disagreed. In fact, the Court concluded that neither the Federal Arbitration Act nor Massachusetts law imposed any special notice requirement for arbitration clauses in commercial contracts. Moreover, the Court specifically held that no "magic language" was required to incorporate the arbitration clause by reference. Respecting the Transfer Agreements, language providing that the transferees succeeded to all of the original franchisee’s rights and obligations was sufficient. Similarly, the Guaranties contained language that guarantied the performance of all responsibilities, duties, and obligations of the franchisee under the Franchise Agreement.
In Awuah II, the First Circuit distinguishes many of the cases cited by the District Court on the basis that those cases all involved some special, heightened standard of notice of the arbitration clause. The heightened standard employed by the District Court, the Circuit Court noted, developed in unique situations involving federal employment statutes and/or certain civil rights laws like the Americans with Disabilities Act, not the Federal Arbitration Act or any state law.
The Awuah II decision is written in very expansive language. Nonetheless, the fact that the Coverall franchise agreements, transfer agreements and guaranties involved commercial contracts seems to have played an important role in the decision. Awuah II, moreover, continues a now prominent trend within the federal courts to strictly apply arbitration agreements unless there is clear evidence that the parties did not agree to arbitrate.
On somewhat of a side note, consistent with Awuah I, the First Circuit did agree with the District Court on the question of whether a court or an arbitrator should decide whether there even was an agreement to arbitrate. Specifically, whether the transferees and guarantors assumed arbitration obligations under the arbitration clauses of the Franchise Agreements was a question the District Court sought properly to decide. The First Circuit simply found that the District Court "got the answer to the question wrong".