Current and former franchisees of Stratus Franchising, LLC, a commercial cleaning business tried to use the RICO Act (Racketeer Influenced and Corrupt Organization Act) to assert violations but failed as Stratus Group moved to enforce the individual arbitration provisions within the franchise agreements. The franchisees argued the arbitration provision (a broad standard-form arbitration provision) was “unconscionable” which means it was oppressive, harsh, and unfair – basically calling Stratus Group cheaters & liars. The franchisees also said the other companies (Stratus Group) that didn’t even sign the agreements so they couldn’t try and enforce the agreements; the franchisees lost both of those battles.

Under current law, arbitration agreements are tested in the federal courts by applying state-law principles that govern contract formation and enforcement, such as fraud, duress or unconscionability.  The court will focus on the facts related to the formation of the contract, as well as whether the terms of an arbitration agreement are unduly harsh, “that is, whether the contract terms are so one-sided as to oppress or unfairly surprise an innocent party or – reflect an overall imbalance in the rights and obligations imposed by the contract at issue.”

In the instant matter, the franchisees said the requirement for each franchisee to invoke arbitration would costs too much money and was therefore unfair/oppressive/harsh (“prohibitively high costs”). They wanted the court to allow them to arbitrate as a large group and share the costs. However, the franchisees didn’t give the court specific costs for individual arbitrations and failed to show such costs were prohibitively expensive; thus, failing to carry their burden.

For the franchisees’ second argument, the court found that the arbitration provision was broadly written to cover “all controversies, disputes or claims between us and our affiliates, and their respective members, officers, managers, agents, and/or employees, ….” So the arbitration provision was intended to benefit and bind certain third party non-signatories and as such the non-signatory parties (Stratus Group and connected companies) were covered by the arbitration agreement. Accordingly as third-party beneficiaries to the agreement, the third parties could invoke and enforce the arbitration provision.

Bottom line, arbitration can be a great way to control litigation costs by redirecting expensive class claims to a more manageable individual claim processing format, and moreover, unless drafted contrary to state law contract principles, they are enforceable.

JOSE TORRES, ET AL. vs. SIMPATICO (STRATUS FRANCHISING, LLC) 9 USC §§ 944; AT&T Mobility, LLC v. Conception, 131 S.Ct. 1740, 1748 (2011).

If you have any questions or would like additional information on this topic, please contact Joe Guffey or Joe Orlet.