Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—1stCir: Janitorial Service Franchisees Must Arbitrate Claims Under Franchise Agreements Despite Lack of Notice of Arbitration Clauses, (Dec 28, 2012)

By Tobias J. Gillett, J.D., LLM.

Janitorial service franchisees must arbitrate claims under the arbitration clauses in their franchise agreements, even though they may not have had notice of the clauses, the U.S. Court of Appeals in Boston has ruled. Under Massachusetts law, the guaranty and transfer agreements they signed incorporate the arbitration clauses by reference, and Massachusetts law does not impose a heightened notice requirement for arbitration agreements. Moreover, the Federal Arbitration Act would preempt any such heightened notice requirement even if it had applied (Awuah v. Coverall North America, Inc., December 27, 2012, Lynch, S.).

Coverall North America contracts to provide janitorial services to building owners and operators through a network of franchisees who perform the services. In the present litigation, the plaintiff franchisees had asserted a variety of state law claims against Coverall, including breach of contract, misrepresentation, deceptive and unfair trade practices, misclassification as independent contractors, and failure to pay wages.

Although many franchisees had signed Franchise Agreements containing arbitration clauses requiring arbitration of the claims, a class had been certified of other franchisees who were not subject to the arbitration clauses in the franchise agreements. Another group of franchisees had signed Consent to Transfer Agreements, or Guaranties to Coverall Janitorial Franchise Agreements, which did not contain arbitration clauses but incorporated by reference obligations under Franchise Agreements that did contain such clauses, although the franchisees did not receive copies of the Agreements.

The district court had concluded that those franchisees that had not received a copy of the Franchise Agreement could be part of the class as well, since they did not have sufficient notice of the arbitration clauses. The First Circuit reversed, finding that the district court had erred in imposing a heightened notice requirement.

The court initially concluded that the district court had correctly determined that it should decide whether the franchisees had assumed obligations under the arbitration clauses, since the question of whether the parties “an agreement at all to arbitrate” was one for the court, not the arbitrator.

The court also determined that, although the Transfer Agreements did not necessarily employ “the traditional language of ‘incorporating by reference’ the arbitration clause of the Franchise Agreement,” the Transfer and Guaranty Agreements did accomplish the incorporation by reference. Some of the Transfer Agreements contained language providing that the transferees became liable for “all” the obligations imposed by the Franchise Agreements, while all of The Guaranty Agreements provided that the franchisees “guarantie[d] to Coverall performance of all responsibilities, duties, indebtedness and obligations of the Franchisee under the [Franchise] Agreement.” Despite an argument by the franchisees that these provisions only referred to their obligations to pay financial sums owed to Coverall, the court concluded that the provisions covered all obligations, including the obligation to arbitrate.

However, the court disagreed with the district court’s conclusion that the arbitration clauses could not be enforced unless the franchisees had received sufficient notice of them. The court responded to an argument by the franchisees that “it would be unconscionable to bind [them] to an arbitration clause that they never even saw” by noting that the parties had not agreed to have the court decide the unconscionability question. Since the court found the arbitration clause applied to the franchisees, the unconscionability question was one for the arbitrator.

The court found that Massachusetts law holds parties to a written agreement to be bound whether or not they read the agreement, and “does not impose a special notice requirement upon agreements containing arbitration clauses.” The court noted that the district court had derived its notice requirement from federal cases holding a notice requirement applicable to agreements to arbitrate claims arising under federal civil rights laws rather than from state law, which governed here. Moreover, the court found that the federal cases had expressly limited their holdings to claims under those civil rights laws.

Furthermore, the court observed that the Federal Arbitration Act provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The court found that this provision preempted state law defenses that only applied to arbitration, and therefore that any state law principle that imposed a heightened notice requirement on arbitration agreements would be preempted.

Therefore, the court reversed the district court’s orders expanding the certified class and denying Coverall’s motion to stay proceedings pending arbitration, and remanded for further proceedings, including an issuance of a stay pending arbitration of the claims of those franchisees that the district court had erroneously included in the class.

The case is No. 12-1301.

Norman M. Leon (DLA Piper LLP) for Coverall North America, Inc. Hillary Schwab (Lichten & Liss-Riordan, P.C.) for Pius Awuah.

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