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Remember the song “Buttons and Bows”?: “East is east, and west is west, and the wrong one I have chose … ” Well, that is how franchisors seeking to enforce arbitration provisions contained in their franchise agreements must be feeling. Because over the past six months, two California courts have utterly disemboweled such arbitration clauses and New York-based franchisors have good reason to fear that their arbitration provisions will suffer a similar fate in California. THE ‘BOLTER’ CASE First came the California Court of Appeal decision in Bolter v. Harris Research, Inc., [FOOTNOTE 1] which held that a Chem-Dry franchise agreement’s arbitration provision was so “unconscionable” that it entitled the court to completely rewrite it such that the very terms agreed to by the parties regarding forum selection, consolidation and punitive damages were stricken. “Conduct all arbitration proceedings in Utah,” stated the Chem-Dry franchise agreement. No, directed the California Court of Appeal, conduct those proceedings in California instead. “Exemplary and punitive damages will not be available to an arbitrating franchisee in any proceeding,” stated the Chem-Dry franchise agreement. No again, said the court, they will be available. “No class action or consolidated arbitration proceedings are to be countenanced,” directed the Chem-Dry franchise agreement. Sorry, said the court, “class action” or consolidated arbitration proceedings may be commenced regardless of what the franchise agreement says. This arrogant disregard of arbitration terms agreed to by the parties in their franchise agreement was driven by the unfortunate, all too common and, it turns out, utterly false assumption that the plaintiffs in this case were small mom-and-pop franchisees. The Bolter plaintiffs were Chem-Dry franchisees who, in contravention of the binding arbitration provisions contained in their franchise agreements, commenced a judicial proceeding against their franchisor, defendant Harris Research Inc., asserting multiple breaches of contract and violations of the implied covenant of good faith and fair dealing. In response, Harris Research sought removal of the lawsuit to federal court and, concurrently, commenced separate arbitration proceedings against each plaintiff-franchisee. After the arbitral forum (AAA) declared, following a hearing which the franchisee’s counsel refused to attend (fearing it would bind his clients to arbitration), that the franchise agreement’s arbitration provisions should be enforced, the franchisees sought a temporary restraining order from the trial court seeking to stay arbitration proceedings, while Harris Research concurrently filed a motion to stay the judicial action altogether pending resolution of the arbitration. Ultimately, the trial court decided to confirm the AAA’s arbitration rulings, grant Harris Research’s motion to compel arbitration and stayed the judicial action. Following an interlocutory appeal and remand, the trial court again issued an order granting Harris Research’s motion to compel arbitration and Utah and dismissing the franchisee’s judicial action. What followed was the franchisee’s writ petition to the California Court of Appeal, which resulted in the decision under review. The court’s first step, mistaken in the authors’ opinion, was to declare the subject franchise agreement a “contract of adhesion,” based in significant part on the court’s finding that Harris Research was a “large wealthy international franchisor” while the franchisees ” … have limited financial means, owning small ‘one man operated’ Dry-Chem franchises.” The court further justified its “ contract of adhesion” conclusion by noting that the subject franchisees whose franchise agreements expired and were offered renewal contracts were ostensibly ” … told they must agree to the new franchise terms in order to continue running their franchises,” with Harris Research purportedly displaying a “ take it or leave it” attitude. “Harris was certainly aware that an established franchise owner simply could not afford to dispute, much less attempt to negotiate, the place and manner arbitration was to occur”. Which gives rise to the first apparent defect in the court’s logic. For nowhere does the decision state, suggest or even imply that the franchisees in this case ever sought to negotiate the arbitration provisions extant in their franchise agreements. And didn’t the U.S. Supreme Court negate the California Court of Appeals’ philosophy way back in 1991 when, in Carnival Cruise Lines, Inc. v. Shute, [FOOTNOTE 2] it declared enforceable a forum-selection clause that appeared on the last pages of a cruise line ticket that was sent to an “unsophisticated cruise line passenger, notwithstanding the disparity in the parties’ bargaining power and the fact that the contract had not been subject to negotiation”? ( see Haynsworth v. The Corporation). [FOOTNOTE 3] ‘BOLTER’ HOLDING The Bolter court, considering the franchisees’ assertion that arbitration in the contractually designated forum of Salt Lake City, Utah, would be “inconvenient,” then proceeded to characterize the subject franchisees as poor, defenseless little creatures in terms more characteristic of soap opera than judicial objectiveness: Harris is a large international corporation and petitioners are small “Mom and Pop” franchises located in California. … (I)t is simply not a reasonable or affordable option for franchisees to abandon their offices for any length of time to litigate a dispute several thousand miles away … (franchisee) Sandra Valdez explained, “I labor hard and daily to make a living for my franchise. … It is necessary for me to be home daily in order to receive calls from potential customers, schedule cleanings, and do all that must ordinarily be done in connection with such a family-run business.” Likewise, (franchisee) Stephen Knight, who owns three Chem-Dry franchises, stated he is ‘basically a one man operation’. … Florence Bolter declared she is 66 years old and solely responsible for running her franchises. She also cares for her husband who is ‘severely ill’ and ‘could not get by in (her) absence.’ Moreover, (the franchisees) declared they are all suffering from severe financial hardships and could not afford to maintain their claims if forced to litigate the matter out of state. While denying the franchisees’ motion to strike altogether the franchise agreement’s arbitration provisions (“it is not necessary to throw the baby out with the bath water”), the court did declare that: “Those unconscionable clauses, regarding forum selection, consolidation restrictions and damages limitations, are clearly severable from the remainder of the arbitration agreement,” and remanded the case to the Superior Court, directing that court to vacate its judgment and enter a new and different order striking the unconscionable clauses delineated above and permitting the franchisees to address their claims in a California arbitration. Strikingly, it became all too apparent after the decision in Bolter that the franchisees’ self-styled, small mom-and-pop status was, to say the least, exaggerated. For as is made clear in a copy of Harris Research’s draft petition to the Supreme Court of California obtained by the author, the franchisees in Bolter were hardly small “Mom and Pop” operations. Instead, observes the draft petition, plaintiff Bolter operates four franchises in Southern California plus another in Hawaii, while a fellow plaintiff-franchisee operates three Chem-Dry franchises in Southern California. ‘CHOICE HOTELS’ Then, just last month, the 9th U.S. Circuit Court of Appeals in Ticknor v. Choice Hotels International Inc., [FOOTNOTE 4] similarly held that the Choice Hotels franchise agreement’s arbitration provision was ” … an unconscionable arbitration clause in an adhesion contract,” which was unenforceable under Montana law (the court invoking Montana law as opposed to contractually designated Maryland law holding that because the complaint to block arbitration was filed in Montana, that state’s choice of law rules applied). Observing that the arbitration clause in this case allowed Choice Hotels to bring its claims against the franchisee in either state or federal court, but compelled the franchisee to submit all claims to binding arbitration at Choice Hotels’ headquarters in Maryland, the court concluded that ” … the district court correctly determined that the Montana Supreme Court would likely hold that the arbitration provision of the Franchise Agreement was unenforceable as unconscionable under Montana law.” The court then turned its attention to whether Montana’s construction of the unconscionability of arbitration clauses would be preempted by the Federal Arbitration Act. While noting that state legislation specifically aimed at arbitration agreements is preempted by the Federal Arbitration Act, in all situations where arbitration provisions are “placed upon the same footing as other contracts,” state law applies, held the court. Accordingly, the court concluded that Montana law concerning arbitration clauses in adhesion contracts does not run afoul of either the Federal Arbitration Act or a Supreme Court decision construing the same. Accordingly, the court concluded that the district court did not err in denying Choice Hotels’ motion to dismiss and its motion to compel arbitration. “The arbitration clause in the Franchise Agreement was unenforceable as unconscionable under Montana law, which was not preempted by the Federal Arbitration Act,” concluded the court. ON THE EAST COAST Thankfully, those of us practicing back East do not (yet) run into such radical judicial reformation of franchise agreement dispute resolution provisions that are fully disclosed in franchisors’ Uniform Franchise Offering Circulars and freely entered into by franchisors and franchisees. For example, see the Sept. 27, 2001 decision in Hur v. Carvel Corporation, [FOOTNOTE 5] in which a Carvel franchisee who had instituted an action in the Supreme Court, Nassau County, New York, seeking damages over an alleged wrongful termination of his franchise agreement was held to have no right to proceed in said court when the subject franchise agreement’s dispute resolution provision called for litigation in the U.S. District Court for the District of Connecticut. Held the court: In order to set aside such a (forum designation) clause, a party must show either that enforcement would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching such that a trial in the forum set in the contract would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court (citations omitted). The forum-selection clauses at issue here are clear in their scope and import. To construe the relevant language otherwise would read the choice of forum provision out of the parties’ agreements. Concluded the court: “Plaintiff’s submissions failed to raise or establish that the forum-selection clause was unjust, unreasonable or that trial in the State of Connecticut would be so gravely difficult and inconvenient as to deprive the Plaintiff of its day in court (citations omitted).” Accordingly, the court granted Carvel’s motion to dismiss but on condition that Carvel consent to the jurisdiction of the court stipulated to in the subject franchise agreement, and that it waive any jurisdiction and statute of limitations defenses. CONCLUSION So, it is that most courts in New York and elsewhere on the East Coast will, like the court in Carvel, supra., enforce franchise agreement arbitration, governing law and venue provisions in accordance with their terms absent extraordinary circumstances, in striking distinction to their judicial counterparts on the West Coast. Franchise practitioners must keep this judicial discrepancy in mind when establishing or overhauling franchise systems of national scope. David J. Kaufmann, senior partner of Kaufmann, Feiner, Yamin, Gildin & Robbins LLP in New York, wrote the New York Franchise Act and represents franchisors nationwide. ::::FOOTNOTES:::: FN1 Bus. Franchise Guide (CCH) �12,035 (Cal. Ct. App. 4th App. Dist. March 9, 2001). FN2 499 U.S. 585, 111 S.Ct. 1522, 113 L.Ed. 2d (1991). FN3 121 F.3d 956, 965 (5th Cir. 1997). FN4 265 F.3rd 931 (9th Cir., Sept. 12, 2001). FN5 New York Law Journal, Sept; 27, 2001, page 24, column 1 (Sup.Ct., Nassau Cty., Sept. 27, 2001).

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