Consumer Law

In MoJo: how forced arbitration helps franchises commit fraud

By Kia Franklin

We've written time and again about the dangers of pre-dispute binding mandatory arbitration clauses in contracts between people and corporations. And lately this issue has been gaining ground in larger outlets like The Nation and Huffington Post.

The most recent article comes from Stephanie Mencimer at Mother Jones (Mencimer has covered this topic extensively in the past). She details the horrific experience of a Maryland couple that thought they were entering into an exciting new enterprise, but found themselves sucked into an expensive and energy-draining case of franchise fraud. To make matters worse, the couple couldn't take their alleged defrauder, Coffee Beanery, to court. You got it--arbitration horror. From the article:

Hoping to recoup their losses, Welshans and Williams sued in Maryland federal court. But Coffee Beanery struck back in Michigan; a federal judge there ordered the couple?as required in the fine print of their franchise agreement?to instead take their dispute to a private arbitrator selected by the company. (Such binding arbitration clauses are boilerplate in contracts for everything from cell phones to credit cards.) Welshans had to borrow another $100,000 from his brother-in-law just to proceed with the process, which required steep fees up front.

The arbitrator who handled their case had some serious conflicts of interests:

JoAnne Barron, the arbitrator selected for the case, already knew the company and its lawyer, Karl Fink, who served 20 years as a judge on the state court where Barron has been employed as an attorney. She and Coffee Beanery also shared an accounting firm, a potential conflict given that the case partly involved the company's accounting practices. Barron had overseen at least two previous franchise disputes involving Fink, finding in the company's favor both times.

Surprise, surprise--she ruled against them. Coming out of the process, the couple is in the hole to the tune of hundreds of thousands of dollars, including some seriously steep fees. This includes court reporter/transcription fees of over $35,000 and an arbitrator's fee of almost $17,000. But there is a tie for the most ridiculous fees--they had to pay for the lunch and transportation costs of the other side's lawyers, and for the company's defense against a Maryland state investigation, to which the couple was not even a party.

Most recently, the 6th Circuit Court of Appeals struck down the arbitrator's award, finding that the arbitrator had ignored state law. The company is appealing that decision.

Here's a link to the article. Believe me, it's worth the read. In addition to the above snippets, Mencimer provides a full layout of the fees incurred through arbitration, a discussion of the elements of Coffee Beanery's fraudulent activity, and even a description of how Coffee Beanery used its arbitration victory to send a message (of intimidation?) to other franchisees bringing disputes against the company. Mencimer also describes how this experience has reshaped the couple's lives.

Stories like this get me thinking. Imagine if we each refused to enter into any contract that forces us to sign away our right to sue... Would we have jobs? Cell phones? Homes? Cars? Would we even be reading this blog right now?

Pass the AFA now!

Full post as published by TortDeform.com on February 26, 2009 (boomark / email).