The Case for More, Not Less, Franchisee Protection

Current franchise laws and regulations do not go far enough to protect the interests of franchisees against often times overreaching franchisors.  That is the theme of an article published in Franchise Law Journal, Volume 29, Number 3, Winter 2010, where Lagarias & Boulter reply to a franchisor lawyer’s call to arms to rein in regulations because modern franchisees are sophisticated and powerful enough to fend for themselves vis a vis franchisors.

Several key points emphasize the continuing need for franchise regulations.  First, franchise agreements are drafted by a franchisor’s lawyers to benefit the franchisor in every possible way and are usually presented to franchisees on a take-it-or-leave-it basis.  Regrettably, franchisees usually fail to hire an experienced franchise lawyer in advance of the purchase despite the fact that hundreds of thousands of dollars may be at stake.   Second, franchisees have no idea where the “bones are buried” in franchise systems whereas the franchisors have all the critical information and often conceal it.    Third, many franchisors “sell” franchises via commissioned sales representatives or brokers whose livelihoods depend on making sales.  They will often embellish the likelihood of success and downplay the risks.  Fourth, once in a system, the franchisee may often become stuck because of his sunk costs and continuing obligations like leases.  This franchisee may end up working for free just to pay the bills.

Franchise laws help to diffuse some of the risks noted above.  But franchise disclosure statutes exist in only thirteen states and even in those states, the documents are not generally reviewed for truthfulness. The federal FTC rule requires franchise disclosure in all states, but no generally recognized private right of action exists under the rule meaning, in most cases, no lawsuit can be filed under it by a franchisee.  Reliance on overtaxed federal or state agencies to bring actions is not realistic.  Further, franchisors have convinced some courts that fine print in their agreements can serve to insulate them from misrepresentation or other similar claims.  For these reasons, the limited state statutes providing protection for franchisees should be expanded and consideration given to a more effective federal scheme that offers a private right of action.

If you have questions about a possible breach of contract, fraud, or statutory violation regarding your franchise, please do not hesitate to contact Rob Boulter of Lagarias & Boulter at (415) 460-0100 ext 112 or e-mail rsb@lb-attorneys.com. Our lawyers have more than fifty years combined experience helping franchisees recover losses nationwide. If you are considering the purchase of a franchise, please consider calling us to assist in your pre-purchase due diligence and visit our website at www.lb-attorneys.com for useful information. Free Consultation.

Support the Arbitration Fairness Act of 2009 (House Bill 1020)

Federal appellate courts continue to put their full weight behind arbitration and erode the flexibility of judges to set aside or at least limit one-sided arbitration schemes and results.   In Rent-A-Center West, Inc. v. Jackson, ___ U.S. ___, 2010 WL 2471058 (June 21, 2010) the United States Supreme Court held that an arbitrator rather than a federal district court had authority to hear an unconscionability-based challenge to an arbitration agreement where the arbitration agreement expressly and unequivocally delegated to an arbitrator exclusive authority to resolve such disputes.  This case provides a road map to franchisors that will undoubtedly follow it to lock franchisees into one-sided arbitration schemes.

Yesterday, in Medicine Shoppe Intern., Inc. v. Turner Investments, Inc. 2010 WL 2836621, 4 (8th Cir. 2010), federal Court of Appeals confirmed an award of lost almost $500,000 against a franchisee for a franchisor’s lost future profits despite arguments that the such damages were not available and had not been properly proved under applicable law. The court declined to even review “the merits of [the arbitrator’s] conclusions.”

The Arbitration Fairness Act of 2009 is a bill under consideration with our Congress that would take these matters out of arbitration and eliminate the enforceability of pre-dispute arbitration clauses in franchise, employment, and consumer contracts.  This is a law of vital importance to franchisees and franchisees must express support to their Representatives for it to have a chance of passing.  There can be no doubt that franchisors are heavily lobbying and spending millions against this bill because they are afraid of juries and rights of appeal.  Therefore, to combat such efforts, it is essential that franchisees mobilize by getting their co-franchisees, family, friends, and others to express support for this bill.

The serious concerns about arbitration have been well expressed by the sponsoring Congressional Representatives in the proposed findings supporting the act which in pertinent part provide:

The Congress finds the following:

(4) Private arbitration companies are some times under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business.

(5) Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.

(6) Mandatory arbitration is a poor system for protecting civil rights and consumer rights because it is not transparent. While the American civil justice system features publicly accountable decision makers who generally issue written decisions that are widely available to the public, arbitration offers none of these features.

(7) Many corporations add to their arbitration clauses unfair provisions that deliberately tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes. While some courts have been protective of individuals, too many courts have upheld even egregiously unfair mandatory arbitration clauses in deference to a supposed Federal policy favoring arbitration over the constitutional rights of individuals.

Concerned franchisees and citizens should call on their Congressional Representatives to support the Arbitration Fairness Act of 2009 (House Bill 1020) that would amend Section 2(b) of the FAA to render invalid any pre-dispute arbitration agreement that purports to require arbitration of “an employment, consumer, or franchise dispute.”   To make this process simpler we have provided you with a template letter that you are free to cut and paste and e-mail to your representative below.  You may find Congressional e-mail addresses and contact information here. Alternatively, submit your full contact information, name, address, telephone number, e-mail address, and name of franchise (if applicable) to our firm and we will be happy to submit a letter to your Representative on your behalf.   We appreciate your support of this vital bill.

Sample letter to your Representative

Dear Representative:

I write to ask you to support the Arbitration Fairness Act of 2009 (House Bill 1020) under consideration with the Commercial and Administrative Law Committee.  As a franchisee with a franchise located in your district, I worry about the fairness of arbitration for the reasons set forth in the findings noted by the sponsoring Congressional Representatives that:

• Private arbitration companies are some times under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business.
• Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.
• Mandatory arbitration is a poor system for protecting civil rights and consumer rights because it is not transparent. While the American civil justice system features publicly accountable decision makers who generally issue written decisions that are widely available to the public, arbitration offers none of these features.
• Many corporations add to their arbitration clauses unfair provisions that deliberately tilt the systems against individuals, including provisions that strip individuals of substantive statutory rights, ban class actions, and force people to arbitrate their claims hundreds of miles from their homes. While some courts have been protective of individuals, too many courts have upheld even egregiously unfair mandatory arbitration clauses in deference to a supposed Federal policy favoring arbitration over the constitutional rights of individuals.

I also worry that there are no or few rights of appeal from arbitration decisions.   Thank you for your consideration and support for this important bill.

[If appropriate, you can include language from your own arbitration agreement and note your concerns or you can note and detail if you have had a bad experience with arbitration].

If you have questions about a possible breach of contract, fraud, or statutory violation regarding your franchise, please do not hesitate to contact Rob Boulter of Lagarias & Boulter at (415) 460-0100 ext 112 or e-mail rsb@lb-attorneys.com. Our lawyers have more than fifty years combined experience helping franchisees recover losses nationwide. If you are considering the purchase of a franchise, please consider calling us to assist in your pre-purchase due diligence and visit our website at www.lb-attorneys.com for useful information. Free Consultation.

Welcome to Franchisee Law Blog

Welcome to the Franchisee Law Blog published by Lagarias & Boulter L.L.P., a California law firm that represents franchisees.  This firm devotes itself to keeping up-to-date on issues important to the franchising community and to franchisees in particular.  And while we want to help keep you informed, we also appreciate hearing from you on franchising issues you deem important or would like to know more about.   Thank you for visiting our blog.   To learn more about the legal services we provide, click here