|
|
A Cautionary Tale On Arbitration Clauses For Prospective Franchisees
By Mario Herman, Esq.
The following case demonstrates why individuals considering executing a
franchise agreement in California should be cautious regarding franchise
agreements that contain an arbitration clause. Learn why it’s important to
utilize experienced franchise counsel.
In MJKA, Inc. v. 123 Fit Franchising, LLC, (January 4, 2011, D055867) [2011
DJDAR 194], the California Court of Appeal reversed the trial court’s order
which concluded that plaintiffs were not able to arbitrate their claims with the
American Arbitration Association due to their financial inability to pay the
fees and costs, and therefore lifted the stay it had previously placed on the
litigation.
In 2006, the MJKA Plaintiff franchisees sued in California, alleging they had
been fraudulently induced by the defendants to enter into the franchise
agreements and that during the term of the franchise agreements defendant failed
to provide the operational support that it had promised. The defendant did
not file a motion to compel arbitration in the California court, but did so in a
Colorado court, while moving the California court to stay the lawsuit under
C.C.P. 1281.4. In opposition to the motion, the plaintiffs moved to
declare the arbitration provisions unenforceable. In January 2007, the
California trial court granted the motion to stay and denied plaintiff’s motion
to declare the provisions unenforceable. In October 2007, the Colorado
court ordered the parties to arbitration. In September 2008 plaintiffs
filed a motion in the California court to lift on the basis that nearly a year
had passed and the plaintiffs could not afford to arbitrate the matter in
Colorado. Plaintiff’s motion was denied in November 2008, but the
California court added the caveat that the motion was denied “without prejudice
to the possibility of plaintiffs bringing a motion to lift the stay again in the
future." Nine months later, three year after Plaintiff’s original California
lawsuit had been filed, Plaintiffs filed another motion with the California
court to lift the stay. This time, the court concluded that the plaintiffs
were financially unable to arbitrate their claims with the American Arbitration
Association (which refused to waive the fees associated therewith). The
California court lifted the stay and found that the arbitration provisions were
unconscionable and unenforceable.
Defendant appealed, and the appellate court found that C.C.P. Sec. 1281.4
mandated a stay of litigation pending arbitration and that the trial court had
no discretion to lift the stay based on a party’s financial inability to
arbitrate. The appellate court also held that once a stay is issued the
trial court has only “vestigial jurisdiction,” which does not allow the trial
court to thereafter find that the arbitration provision is unconscionable and
unenforceable.
Prospective franchisees in California should take note of this Court of Appeal
decision, and determine if it is really wise to enter into a franchise agreement
containing an arbitration clause. The Plaintiffs in MJKA informed the
California court that the costs to arbitrate in Colorado would include a $6,000
filing fee, a $2,500 case service fee, the estimated cost of $10,000-$14,000 in
arbitrator's fees, and unknown facility fees. Adding attorney’s fees and
travel and accommodation fees in an estimated amount in excess of $20,000, the
plaintiffs estimated the total cost to arbitrate in Colorado at $38,500-$42,500
per case. Additionally, the plaintiffs filed declarations with the trial
court emphasizing the economic losses that the plaintiffs had suffered as a
result of their failed franchises. One plaintiff declared that she had "incurred
at least $208,000 in personal debt because of 123 Fit, and another stated that
she and her partner had invested over $253,000 in their franchise, and that she
had filed the lawsuit to "try and recoup some of my lost monies." Another
franchisee stated that she and her partner had "incurred approximately
$300,000-$320,000 in personal debt due to [their] involvement in the Defendant
123 Fit Franchise."
Clearly, plaintiff’s made a sympathetic case regarding their financial
condition and inability to proceed with arbitration for financial reasons.
However, the Court of Appeal found that the mandatory provisions of the
California Arbitration Act would not allow for the lifting of the stay based on
a party’s financial inability to proceed with arbitration. Moreover, it
should be noted that under the American Arbitration Association’s rules, an
arbitration may suspend or terminate the arbitration proceedings if the
administrative charges and/or arbitrator’s fees are not paid.
As such, prospective franchisees should consider that if something goes
horribly wrong, and the franchise is not only unprofitable but also depletes the
coffers, the franchisee may be without the financial means to arbitrate and left
without any chance to have his/her “day in court.”
Mr. Herman based in Washington, D.C., represents franchisees domestically and
internationally negotiation, mediation, arbitration, and litigation. Contact:
mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)
|
|
