Unconscionability and Franchise LitigationPresentation Transcript
UNCONSCIONABILITY and Franchise Litigation BETHANY L. APPLEBY WIGGIN and DANA LLP New Haven, Connecticut C. GRIFFITH TOWLE BARTKO, ZANKEL, TARRANT & MILLER San Francisco, California CARMEN D. CARUSO SCHWARTZ COOPER CHARTERED Chicago, Illinois
Do these clauses look familiar?
no class or representative arbitration
requiring franchisees to arbitrate in another state
arbitration clauses that lack mutuality
other provisions arguably favoring the franchisor
Freedom Of Contract Supervision by Courts A threat to franchising as we know it?
Wake Forest Empirical Study U.C.C. Cases 1965-2005
28% success rate overall (57% in California).
12% success rate -- both sides were businesses.
4.5% success rate -- equal bargaining power.
Your authors found 11 successful assertions of unconscionability in franchising!
PERSPECTIVE & STRATEGY
Why in the world should we discuss antitrust today? Jefferson Parish Hospital v. Hyde 466 U.S. 2 (1984) Eastman Kodak Co. v. Image Technical Servs. 504 U.S. 451 (1992)
The Fairness Debate
In the early 1970’s, Harold Brown of Boston argued:
Threats to Franchisee Equity were unconcsionable
Franchisors owed Fiduciary Duties
burdens on franchise transfers
sudden termination for non-material breach
out-of-state venue clauses
statutory regulation & public policy
fiduciary duties (general & agency theory)
good faith & fair dealing
independent associations & collective bargaining
fair franchising standards
Equity Seeks To Do Justice
adhesion + surprise?
adhesion + oppression?
adhesion + surprise + oppression?
how “oppressive” must it be?
The Market Power Contradiction “ Precontract, competition … to sign up franchisees prevents [franchisor] from exercising any economic power in setting contract terms with potential franchisees.” Martino v. McDonald’s (N.D. Ill. 1985) (Rejecting claim that requiring franchisees to buy particular soft drinks was an unlawful tying arrangement)
Characterization 53 haircutting franchisees: “ not vulnerable consumers or helpless workers but business people who bought a franchise” Arbitration in MBE agreement: “similar to mandatory employer/ employee… and consumer arbitration” We Care Hair (7 th Cir. 1999) MB Center Owners (Cal. App. 2005)
The Renewal Dilemma “ O bviously, there is almost invariably disparate economic power between a franchiser and an already existing single franchisee …” Martino v. McDonald’s (N.D. Ill. 1985)
Locked-In? Or Not? Subsolutions v. Doctor’s Assoc. 2001 U.S. Dist. LEXIS 24393 *32 (D. Conn. 2001) (alleged unlawful tying of POS system) “ Subway ® must be mindful of the way it treats its locked-in franchisees because it will have ramifications for its ability to sell new franchises.”
was the offensive term foreseeable?
the “surprise” element of unconscionability?
Risks of Inconsistency
Disputed term: “ must arbitrate in Antarctica”
Key Substantive Questions
who wins, loses?
individuals or the “system”?
is there a sliding scale?
are there any absolute wrongs?
Words or Deeds Term: “Franchisor may derive revenue from franchisee purchases of proprietary products”
Loose words ►►► ambiguity
Conduct ►►► unconscionable
Adhesion terms that shock the conscience?
abolish good faith & fair dealing?
arbitrary threats to equity
harmful economic conduct
jury trial waivers
►►► Moving Forward ►►►
course of dealing & performance
scrutiny of intent, interests & effects
market power debate
challenges to conduct
“ evolving standards” &
Improve Bargaining Power!
greater due diligence
document lack of negotiation
support independent associations
demand collective bargaining
seek mutual respect
►►► use unconscionability as a club
ask what terms do you really need?
use prominent and clear language
f’ee sophistication (not like an employee or consumer)