A recent case decided by the Ohio Court of Appeals reminds new franchisors to tread carefully when converting existing licensees to future franchisees. In the case of Okolish v. Town Money Saver, Inc., , the trial court found an arbitration provision in the franchise agreement of a coupon clipper magazine franchise, Town Money Saver, Inc. and TMS Franchising, Inc. (“TMS”) procedurally and substantively unconscionable. As a result, the lower court denied the new franchisor’s motion to compel arbitration. The Ohio Court of Appeals reversed, deciding the arbitration provision was not procedurally unconscionable and remanded the case to require the trial court to further consider whether the provision was substantively unconscionable.
In this case, the franchisee (“Okolish “) started her own business mailing clipper coupons in 1996. A year later she partnered with William Zirzwow to operate under the “Town Money Saver” brand. In 2005, Zirzwow decided to franchise the ‘Town Money Saver’ concept and Okolish alleged that the franchisee was required to enter into a form of franchise agreement if Okolish wanted to continue operating under the name. A dispute arose regarding an encroaching franchisee and Okolish filed suit against TMS for damages. TMS filed a motion to compel arbitration under the required dispute resolutions in the form of franchise agreement. The trial court denied the motion concluding that the arbitration provision in the franchise agreement was procedurally and substantively unconscionable.
On appeal, the court found that Okolish was never required to enter into a franchise agreement to continue operating her territory, only if she desired to expand her region or acquire other markets. Okolish testified to the fact that she wanted to grow her business. The choice she actually lacked was the ability to grow her business by opening in new markets. At least three other similarly situated Town Money saver operators decided not to sign the franchise agreements and continuing operating their businesses, maintaining the status quo. Further, the court found she was neither rushed to sign a franchise agreement or prohibited from starting her own business not under the Town Money Saver name which she was successful doing in the past. Reviewing this record, the court concluded that the trial court incorrectly determined the arbitration was procedurally unconscionable.
This case is helpful reading for current licensed or distributorship relationships that are seeking to convert their existing systems to franchise models. By providing a legitimate choice to prospective converting licensees or distributors, a new franchise system may be successful defending claims that the dispute resolution provisions are procedurally unconscionable.