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.
Deborah Williams’ and Richard Welshans’ dreams came true when they opened their own franchise of the Coffee Beanery in suburban Maryland. Unfortunately, it quickly turned into a nightmare. The company had used deceptive business practices to make the franchisees look more profitable than they actually were. They went into arbitration with the company to try and recover some of their losses. When Deborah and Richard found out that the arbitrator shared an accounting firm with the Coffee Beanery, they unsuccessfully tried to get her removed. Before the hearing, a state Securities Commissioner had already ruled that the company had violated Maryland law; however, the arbitrator overruled this finding. The arbitration procedure took place in Ann Arbor, Michigan so Deborah, Richard and their attorney had to fly to Michigan three times over the course of eleven days, costing thousands of dollars. The arbitrator ordered Deborah and Richard to pay the Beanery $150,000. This miscarriage of justice has forced them to mortgage their home and file for bankruptcy.