Franchise Fraud: Hard to Swallow
What you pay for when you lose in arbitration.
In civil court, the law almost never requires a losing party to cover the winner's legal costs, let alone its lunch tab. Arbitration is different. Here are the expenses Deborah Williams and Richard Welshans were obliged to pay after losing to Coffee Beanery.
Court reporter/transcription fees: $35,571.24
Holiday Inn conference room: $2,808.16
Arbitrator's fee: $16,800
Arbitration association fee: $8,500
Past-due franchise royalties: $13,710.16
Cost to deliver, house, and feed opposing witnesses: $2,700.14
Coffee Beanery lawyers' lunches: $504.25
Beanery lawyers' commute: $926
Beanery's legal/accounting fees for arbitration, and for defense against Maryland state investigation, to which the couple was not a party: $105,932.40
Total: $187,452.35
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Comments
Arbitration Costs and Injustice
Submitted by Anonymous (not verified) on Wed Mar. 11, 2009 8:44 AM PDT.
Pretty disgusting stuff! Disgusting that these two UNEQUAL parties are mandated to arbitrate to begin with. Did the Federal Arbitration Act really intend that a commercial dispute between a small Mom and Pop business and a Franchisor Corporation be the end of due process for the weaker party? Aren't these costs, as demonstrated above, a slap in the face to due process of law.
The Courts seem to indicate that this is the intent of the Congress when they passed the Federal Arbitration Act, and this is why the arbitrators have the first duty to determine if there has been fraudulent inducement to contract.
If you read the Coffee Beanery Case in full, you will understand that, apparently, a franchisor is never found guilty of fraudulent inducement to contract as long as he has the signature of the franchisee on the binding contract packaged together with the Franchise Disclosure Dolcument and is somewhat in compliance with the FTC Franchise Rule. The FTC Rule doesn't provide a private right of action for a violation of the Rule, and there appears to be tension between federal and state law concerning franchise disputes.
Hopefully, the Congress will take a look at this disgraceful state of affairs and do something about it ---like passing the Bill that would permit arbitration but not mandate arbitration. The due process rights of Mom and Pop franchisees should not be destroyed by law and process. Franchisees should not be mandated to appear before arbitrators who have more power than a judge and whose decisions cannot generally be appealed.
Arbitration Costs and Injustice
Submitted by Anonymous (not verified) on Wed May. 27, 2009 8:43 AM PDT.
I believe that it is fair to assume that all franchisees who go before the Arbitrators have little opportunity to prove to the Arbitrator that they have been fraudulently induced to contract, as is demonstrated in the history of the Coffee Beanery Case, as disclosed by Mother Jones, in another article.
The deck is "stacked" so to speak because of public policy that was develolped out of the FTC Rule, promulgated in the late 70's, supposedly to protect franchisees through pre-sale disclosure of the risks by the franchisors.
The FTC Rule, however, appears in practice to protect the franchisors and immunize them from claims of fraudulent inducement to contract. Because franchisors know they are protected by the FTC Rule, they appear to indulge frequently in fraudulent inducement to contract and develop "churning" and "encroachment" as management tools to grow the gross sales of the franchise systems.
For a better understanding of the problems for failed or failing franchisees in mandated arbitration, and in the Courts, in a Google Search read "Franchising fraud: the continuing need for reform" published by the American Business Law Journal, 1 Jan 2003, and on the Internet in June of 2008.
It appears that many franchisees who are mandated to arbitrate their complaints are forced to pay for their own "lynching" which is rationalized as serving the "public good."
