Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Commercial cleaning franchisee must arbitrate fraud, employment benefits claims, (Jan 20, 2015)

By Greg Hammond, J.D.

A commercial cleaning service franchisee’s Illinois Franchise Disclosure Act (IFDA) and employment benefits claims against his franchisor were subject to an arbitration clause in the franchise agreement, the federal district court in Chicago has ruled. The franchisor’s motion to dismiss the court action in favor of arbitration was granted, despite franchisee claims that the arbitration clause was unconscionable (Sanchez v. CleanNet USA, Inc., January 15, 2015, Zagel, J.).

Background. CleanNet USA, Inc. is a master franchisor of commercial cleaning franchises, and is represented by area operators, such as CleanNet of Illinois, Inc. (CleanNet IL), that offer unit franchises to investors interested in owning and operating a commercial cleaning business. Jose Sanchez, a Spanish speaker, entered into a 41-page franchise agreement with CleanNet IL in May 2011.

He filed suit against CleanNet IL and CleanNet USA, alleging that the two franchisors incorrectly classified him and other franchisees as independent contractors instead of employees, depriving them of the benefits of an employment relationship under the Fair Labor Standards Act, the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Act. In addition, Sanchez alleged that the franchisors engaged in fraud in the inducement to entice him to enter into the agreement, in violation of the IFDA. CleanNet USA and CleanNet IL moved to dismiss the complaint, and in the alternative, to stay Sanchez’s complaint, subject to final and binding arbitration.

Procedural unconscionability. In opposing the franchisors’ motion to dismiss, Sanchez argued that the arbitration provision was procedurally unconscionable because the take-it-or-leave it negotiation approach, the defendants’ failure to explain every term in Spanish, and the length and presentation of the arbitration provisions within the agreement deprived him a meaningful choice during the formation of the franchise agreement. To determine whether a meaningful choice existed, Illinois courts consider: (1) the manner in which the contract was formed; (2) whether each party had a reasonable chance to understand the contract; and (3) whether key terms were hidden in a maze of fine print.

The court first concluded that the franchise agreement is a contract of adhesion, which has long been recognized in Illinois as “a fact of modern life,” and not a reason to render the arbitration clause in this case unenforceable. It further found that the defendants had no obligation to translate the entire franchise agreement or explain every provision in Spanish. Although the court determined that the language barrier combined with the length and complexity of the franchise agreement in this case created a degree of procedural unconscionability, it was not enough to render the arbitration provision unenforceable.

Substantive unconscionability. Sanchez also argued that the arbitration provision contained four substantively unconscionable terms: (1) requiring mediation first, with the filing party paying the filing fee and the remaining costs to be split among the parties equally; (2) requiring arbitration if mediation is not successful with the filing party paying the filing fee and the remaining costs to be split among the parties equally; (3) waiving punitive damages; and (4) limiting remedies to the actual damages sustained except as otherwise provided in the franchise agreement and barring recovery of attorney fees.

The court found that the first two identified terms were not unconscionable, as the American Arbitration Association Rules allow for reduced filing and administrative fees in cases of hardship, and no administrative fees for mediation. The final two terms, placing remedial limitations on Sanchez, were deemed substantively unconscionable, however, because the IFDA specifically allows franchisees to collect damages and attorney fees. Nevertheless, the unconscionable terms were severed from the contract, since they did not affect the intent of the franchise agreement’s arbitration provisions; the parties included a severability clause in the agreement; and strong policy in favor of enforcement of the arbitration agreements is best served by allowing valid portions to remain in force while severing the unconscionable ones. The court therefore found that the arbitration provision was valid and enforceable, and ordered Sanchez to arbitrate his claims against CleanNet IL.

Coverage of nonparty. In addition to his unconscionability arguments, Sanchez asserted that his claims against CleanNet USA were not subject to the arbitration clause because CleanNet USA was not a party to the franchise agreement. The court, however, determined that equitable estoppel prohibited Sanchez from avoiding arbitration, since his claims treated CleanNet IL and CleanNet USA as a single concerted entity that are inextricably intertwined. Because Sanchez’s claims against CleanNet USA arose out of the same operative franchise agreement, the court granted the defendants’ motion to dismiss and ordered Sanchez to arbitrate his claims against CleanNet USA.

The case number is 14 C 2143.

Attorneys: Christopher J. Williams (Workers' Law Office, PC) for Jose Sanchez. Darren Mason Mungerson (Littler Mendelson, PC) for CleanNet U.S.A. Inc. and CleanNet of Illinois, Inc.

Companies: CleanNet USA, Inc.; CleanNet of Illinois, Inc.

Cases: FranchisingDistribution IllinoisNews