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.
Deborah Williams and Richard Welshan, Annapolis, MD
Deborah Williams’ and Richard Welshan’s dreams came true when they opened their own franchise of the Coffee Beanery in suburban Maryland in 2004. However, after investing more than $1 million in opening the location, their dream quickly turned into a nightmare: The company had used deceptive business practices to make the franchises look more profitable than they actually were. After theirs floundered, Deborah and Richard attempted to recover operating cost losses, lost wages, and other damages they blamed on material misrepresentations by the company. Unfortunately, buried deep in their contract with the Michigan corporation was a forced arbitration clause.
Instead of being able to bring suit in a Maryland court before a jury of their peers, Deborah and Richard were required to travel to Michigan to have their case heard by an arbitrator from the American Arbitration Association (AAA) chosen by the Coffee Beanery. The couple and their attorney had to fly from Maryland to Michigan three times over the course of eleven days, costing them thousands of dollars. When Deborah and Richard found out that the arbitrator shared an accounting firm with the Coffee Beanery, they tried to get her removed, but their attempt was unsuccessful. During the proceedings, the arbitrator overruled the finding of a Securities Commissioner that the company had violated Maryland law. At the close of the proceedings, AAA ruled for the Coffee Beanery, required Welshans and Williams to spend over $100,000 in arbitration costs, and ordered them to pay the company damages of $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. Deborah and Richard finally got their day in court.