Franchisee Arbitration

Big businesses don't just use forced arbitration against their consumers. They also use it against smaller, less sophisticated businesses. Franchise agreements are the most common example of this. Starting a franchise appeals to Americans pursuing a dream of starting their own small business by building off of the prominence of an established name. Unfortunately, such arrangements also require franchisees to accept unfair terms –like forced arbitration clauses – that can ruin their financial well being.

In 2004, Deborah Williams and Richard Welshans of Annapolis, Md., invested more than $1 million into starting up a Coffee Beanery franchise coffee shop. Buried deep in their contract with the Michigan corporation was a forced arbitration clause. After the franchise floundered, they attempted to recover operating losses, lost wages and other damages they blamed on material misrepresentations by the company. But instead of being able to bring suit in a Maryland court before a jury of their peers, they were required to travel to Michigan and have their case heard by an arbitrator from the American Arbitration Association (AAA) chosen by the Coffee Beanery. AAA ruled for the Coffee Beanery, required Welshans and Williams to spend over $100,000 in arbitration costs, and ordered them to pay the Coffee Beanery $150,000. The judgment bankrupted the couple.

In 2008, the U.S. Court of Appeals for the Sixth Circuit found that the arbitrator showed "manifest disregard of the law" by ruling that Coffee Beanery did not have to disclose that one of its corporate officers had been convicted of grand larceny and reversed the arbitrator's decision. Williams and Welshans will finally get their day in court.