On April 24, 2011, the United States Supreme Court issued its opinion in AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Supreme Court struck down a California rule that prohibited and invalidated nearly all class action waivers in consumer contracts. The Supreme Court determined that AT&T’s arbitration provision provided consumers the ability to pursue claims, even small claims, on an individual basis. The Supreme Court’s decision was greatly influenced by the actual terms of the arbitration provision. The long-term effect of Concepcion depends on how courts apply the Supreme Court’s ruling; however, it appears the Supreme Court authorized the use of arbitration to prevent class action lawsuits.
While not applying Concepcion, the Ohio 9th District Court of Appeals overruled the trial court’s failure to require arbitration of class action claims brought by eight tool dealers against a tool manufacturer. (Bachrach v. Cornwell Quality Tool Co. (May 25, 2011), 2011 Ohio 2498.) In Bachrach, plaintiffs alleged they entered into franchising agreements with Cornwell to purchase its tools and sell them to customers. The franchise agreement contained an arbitration provision. Cornwell contended this arbitration provision applied to class action claims, while the plaintiffs argued that it did not. The trial court sided with the plaintiffs, but the appellate court reversed this decision and determined “the plaintiffs’ claims fall within the scope of the parties’ arbitration agreement.” The decision in Bachrach was complicated by the fact the arbitration provision did not specifically state that arbitration was required for class action claims.
Franchisors face the risk that franchisees may bring a class action lawsuit based on claims common to all franchisees. Class actions permit the damages of all franchisees to be decided in one fell swoop. The risk of liability is high and incurring significant costs defending a class action is certain. The Supreme Court’s decision provides franchisors the ability to reduce these risks and better manage costs by including mandatory arbitration provisions in franchise agreements that apply to class action claims.
Arbitration clauses permit the franchisor to select the method by which disputes will be heard and resolved. There are several benefits to having an arbitration clause: It permits resolution of a dispute in a convenient forum; the costs of arbitration are typically less than the costs incurred in litigation in court; arbitrations are resolved more quickly than court cases; arbitrators with knowledge related to franchisor and franchisee relationships may be chosen to preside over the arbitration instead of a judge who may not be familiar with such relationships; and the proceedings in arbitration are private. The privacy of arbitration may not seem like much of a benefit, but when a lawsuit is filed in court, it is a public record available to anyone who wishes to view it. Subsequent court filings are also public records. The filing of a lawsuit by one disgruntled franchisee may give notice to other franchisees that claims may be available to them. The risk of companion lawsuits is very real.
The Supreme Court’s decision did not alter the enforceability of arbitration provisions, which means arbitration provisions still must meet certain criteria. Among these criteria is that arbitration provisions must permit the vindication of statutory rights, provide for neutral arbitrators, provide for adequate discovery, provide for limited costs, and not permit either party the right to litigate claims while restricting the other party’s right (or, in other words, both parties must be required to arbitrate claims). In short, to realize the benefits of arbitration, you must first have an enforceable arbitration clause. Further, as demonstrated by Bachrach, a well-drafted arbitration provision prevents litigation related to what claims are covered. Arbitration provisions are meant to prevent, not generate, litigation. In drafting an arbitration provision, take care to ensure it is enforceable and that it encompasses class action claims.