Franchisor Is Subject to Collective Arbitration with Franchisees, Despite Contract Provision Requiring Individual Arbitrations

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

Despite the inclusion of a provision that arbitration must be conducted “on an individual, not a class-wide, basis” in its franchise agreements, a franchisor of pharmacies and 28 of its franchisees clearly and unmistakably agreed to submit questions of arbitrability to an arbitrator by incorporating the American Arbitration Association’s (AAA’s) Rules into their arbitration agreements, a federal district court in St. Louis has decided.

Thus, the court denied the franchisor’s motion to stay a collective arbitration claim filed by the franchisees and for an order compelling the franchisees to proceed with individual, bi-lateral arbitrations.

An arbitration clause in the parties’ agreements stated that all controversies, disputes, or claims "shall be heard by one arbitrator in accordance with the then current Commercial Arbitration Rules" of the American Arbitration Association (AAA). The clause thus incorporated the AAA’s Rules, the court held. The current version of AAA Rule 7(a) provides arbitrators with the authority to determine their own jurisdiction, and so the parties agreed to submit arbitrability questions to the arbitrator.

The franchisor argued that the arbitration clause also provided that the AAA Rules will apply “except as otherwise provided in this Agreement,” and pointed out that the clause expressly stated that arbitration must be conducted “on an individual, not a class-wide, basis.”

The franchisor contended that as a result of this language, the Rules did not vest in the arbitrator the power to interpret the requirement that the respondents arbitrate on an individual basis. However, there was no exception bearing on the applicability of Section 7(a) of the AAA Rules and, therefore, on the question of whether the parties agreed to submit questions of arbitrability to the arbitrator, the court ruled.

The franchisor’s argument that an arbitrator was without power to determine whether a collective arbitration may be allowed—because the arbitration clause stated that arbitration must be conducted “on an individual, not a class-wide, basis”—was unpersuasive. Whether this provision could be construed to prohibit or permit joinder or collective arbitration was a matter of contract interpretation. It was for the arbitrator to determine whether the clause was properly construed to prohibit or permit collective arbitration, in the court’s view.

The franchisor cited a recent Eighth Circuit case, Green v. Supershuttle Int’l, Inc. (Business Franchise Guide 2010-2011 New Developments Transfer Binder ¶14,673), in which the court enforced a franchisor’s class action waivers. However, Green was distinguishable from this case on several grounds, the court determined. Here, the franchisees sought to enforce the parties’ agreement to have questions of arbitrability resolved by an arbitrator, they did not challenge the class action waiver in the agreements based on state law or otherwise, and they have not filed a class-wide arbitration.

Unlike the plaintiffs’ argument in Green, the franchisees’ argument, that the issue of whether the agreement permitted joint or collective arbitration is for an arbitrator, has not been squarely rejected by the U.S. Supreme Court as a matter of law.

The decision is Medicine Shoppe Int’l, Inc. v. Edlucy, Inc., CCH Business Franchise Guide ¶14,822.