ARBITRATION CLAUSES IN FRANCHISE AGREEMENTS—MAY BE ENFORCEABLE EVEN IF THE FRANCHISE AGREEMENT IS NOT.

Most franchisors make sure that every franchise agreement provides that all disputes with Franchisee will be arbitrated.  More often than not that arbitration clause will be mandatory and will provide for arbitration to take place in the home state of the franchisor and not the franchisee. That certainly was the case Adrian Finch when entering into a franchise agreement with Hounds Mounds. Yes it is a pet poop disposal business.

It may be that Finch had good grounds for voiding the franchise agreement with Hounds Mounds.  Finch brought an action in the Florida Circuit Court to do just that. The first problem faced by Finch was that the franchise agreement provided for mandatory arbitration in Texas, where Hounds Mounds was located. In fact, Hounds Mounds has already commenced arbitration in Texas.

Finch convinced the Circuit Court to stay the arbitration, arguing that the arbitration provision was unenforceable because the entire franchise agreement was unenforceable. Hounds Mounds took an appeal to the 4th DCA that resulted in the decision in Hounds Mounds, Inc. v. Finch 153 So. 3rd 368 (Fla. Dist. Ct. App., 4th Dist., December 17, 2014).

The 4th DCA reversed the Circuit Court decision.  Both federal and state law in almost always favor enforcement of arbitration provisions. The 4th DCA relied on the 2010 version of the Florida Arbitration Code §682.03(4) Fla.. Stat. (2010) as well as an analysis of the Federal Arbitration Code and held that:

“Nevertheless, under either Florida or federal law, only a challenge to an arbitration clause itself may be determined by the trial court. A challenge to the entire agreement is an issue which must be arbitrated. This principle was established by the United States Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204,163 L. Ed. 2d 1038 (2006)” Hounds at 369

Under the current version of the Florida Arbitration Code in §682.03 (2) Fla. Stat. (2013). the courts finding in Hounds would likely be the same. §682.03(2) Fla. Stat. (2013) now provides that:

On motion of a person alleging that an arbitration proceeding has been initiated or threatened but that there is no agreement to arbitrate [emphasis added], the court shall proceed summarily to decide the issue. If the court finds that there is an enforceable agreement to arbitrate, it shall order the parties to arbitrate.

What is the moral of Mr. Finch and his doggy poop franchise? –When entering into a franchise agreement, the franchisee must be advised, that if there is a mandatory arbitration clause in the franchise agreement, that the franchisee almost certainly will be forced to arbitrate disputes with the franchisor. If the franchisor provides for arbitration in another state, the franchisee will be forced to hire counsel in that state as well as other advisors to help with the arbitration. This will generally be a substantial burden for the franchisee both financially and in terms of time.

However, franchisors should not take total comfort from decisions in line with Hounds. As all of us that represent Franchisors know, the courts look on franchisees as a protected class under state franchise statutes and may treat the franchisee as the court would treat a consumer in similar circumstances. It would not be surprising to see a court find that a burdensome mandatory arbitration clause is unconscionable by relying on state and federal consumer protection decisions and franchise law cases, but that is a post for another day.