Thursday, September 18, 2008

Franchise Agreement’s Arbitration Clause Unenforceable; No “Meeting of Minds”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

There was no meeting of the minds between a franchisor of window covering businesses and a franchisee concerning the arbitration provision in their franchise agreement because of an advisement in the franchisor’s Uniform Franchise Offering Circular (UFOC) that the provision may not be enforceable under California law, a California state appellate court has ruled.

Accordingly, the court upheld a trial court denial of arbitration of the franchisee’s claims for rescission and damages.

In reaching its conclusion, the trial court relied on Laxmi Investments, LLC v. Golf USA (CCH Business Franchise Guide ¶11,706). In Laxmi, the Ninth Circuit refused to enforce a forum selection clause requiring that arbitration between an Oklahoma franchisor and a California franchisee be held in Oklahoma, since the UFOC advised the franchisee that the clause might not be enforceable under California law. The appeals court held that the parties had never clearly agreed to an Oklahoma forum.

In this case, the franchisor’s UFOC included a California appendix that stated:

“The franchise agreement requires binding arbitration. The arbitration will occur at Dallas County, Texas with the costs being borne by the losing party. This provision may not be enforceable under California law. The franchise agreement requires application of the laws and forum of Texas. This provision may not be enforceable under California law.”

The franchisor contended that the trial court erred in relying on Laxmi, without analyzing the later case of Bradley v. Harris Research, Inc. (CCH Business Franchise Guide ¶12,221). However, the trial court did consider Bradley and properly found it was distinguishable, the appellate court held.

In Bradley, the Ninth Circuit held that the Federal Arbitration Act preempted that portion of the California Franchise Relations Act that rendered unenforceable forum selection provisions restricting venue to a forum outside of the state. However, in Laxmi, the Ninth Circuit concluded that even if that statutory provision was preempted, the parties did not agree to the out-of-state forum.

The Bradley court did not consider a UFOC advisement that the arbitration provision might be unenforceable under California law because the UFOC delivered by the franchisor was not made part of the record. Thus, in Bradley, there was no evidence in the record to support a Laxmi analysis.

Accordingly, Bradley did not overrule the reasoning in Laxmi, and the trial court correctly relied on Laxmi to hold that the arbitration provision was unenforceable, according to the appellate court.

The decision is Winter v. Window Fashions Professionals, Inc., to be reported at CCH Business Franchise Guide ¶13,965.

No comments: