Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDIll: Arbitration Clause in Franchise Agreement Executed to Correct Erroneous Address Was Enforceable Under Illinois Law , (Oct 22, 2012)

By Peter Reap, J.D., LLM

An arbitration clause that a franchisor of hardware stores (Ace Hardware Corporation) inserted into revised Brand and Membership Agreements that it requested its franchisee (Advanced Caregivers, LLC) to execute in order to correct an incorrect street address for the franchisee’s store was valid and enforceable under Illinois law, the federal district court in Chicago has decided (Ace Hardware Corporation v. Advanced Caregivers, LLC, October 18, 2012, Darrah, J.). Therefore, Ace’s motion to compel arbitration of the parties’ dispute was granted.

Background

On January 8, 2009, the parties executed the franchise documents and Advanced Caregivers paid the required $5,000 fee in order to become a franchisee in Ace’s system. Those documents included both Brand and Membership agreements, neither of which contained an arbitration provision.

In a letter, dated May 26, 2009, Ace notified Advanced Caregivers that the Brand and Membership agreements contained an error regarding the address of Advanced’s store. In order to correct the error, Ace asked Advanced to sign revised Brand and Membership agreements.

Advanced signed the second set of agreements on June 16, 2009. Apparently unbeknownst to Advanced, the second set of agreements contained arbitration provisions, which were not included in the first set of agreements. The second set of agreements also eliminated a provision in the first Brand Agreement allowing Ace to bring any dispute arising out of the relationship in an Illinois court. Although the first set of agreements did not include arbitration clauses, Ace claimed that it regularly began including arbitration clauses in its agreements on March 26, 2009.

On January 6, 2012, Advanced filed the underlying action in Florida, on behalf of itself and a putative nationwide class, alleging Ace defrauded it in connection with its decision to purchase an Ace franchise. Ace asserts that all of the allegations in Advanced’s complaint fall within the mandatory arbitration provisions found in the second set of agreements and seeks to compel arbitration.

Enforceability of Arbitration Provisions

The crux of Advanced’s position was that it was unaware it was agreeing to arbitration when it received the second set of agreements and that, therefore, there was never any agreement between the parties to arbitrate. Advanced first attacked the arbitration clause by claiming that the insertion of the clause was an unintentional mistake by both parties. Next, it argued that the clause was unenforceable because: (1) Ace failed to provide notice of the inclusion of the clause; (2) the clause was procedurally unconscionable; and (3) Advanced was induced to agree to the clause by fraud.

Mutual Mistake. A basic principle of contract law is that in order to be binding, a contract requires a meeting of the minds and a manifestation of mutual assent, the court noted. Advanced suggested that Ace simply made a mistake by inserting the clause in the second set of agreements.

Advanced’s argument was unavailing because the analysis must focus solely on what was put in writing, according to the court. It was a fundamental principal of contract law that a person who signed a contract was presumed to know what was in it.

Failure to give notice. Although Advanced argued that the clause was unenforceable because Ace failed to give notice of its inclusion in the second set of agreements, Advanced cited no law that required notice in this regard, the court observed. Illinois contract law provided that it was not the duty of one party to a contract to inform the other party of the duties or obligations assumed under the contract. Therefore, Ace had no duty to inform Advanced of the changes to the contracts.

Procedural unconscionability. Under Illinois law, procedural unconscionability referred to a situation where a term was so difficult to find, read, or understand that a plaintiff could not be fairly said to have been aware he was agreeing to it.

The two June 2009 contracts were less than 18 pages long in total and both contained the title “Arbitration of Disputes” (in bold print and underlined). Additionally, the word “arbitrate” appeared at least 12 times on the signature page of the Membership Agreement and the arbitration clauses were inserted directly above the signature lines of the agreements.

Given the placement and language of the brief arbitration clauses, Advanced could not show that they were too difficult to find, read, or understand, the court ruled. The arbitration clause was not procedurally unconscionable.

Fraud. Under Illinois law, as long as the complaining party could have discovered the alleged fraud by reading the contract and had the opportunity to do so, there was not a valid claim for fraudulent inducement. Given that the arbitration clause in both the June 2009 agreements appeared directly above the signature lines and, in one agreement, the word “arbitrate” appeared at least a dozen times, Advanced could have easily discovered the alleged fraud had it simply examined the contracts in the three weeks it had between receiving them and returning them, signed, to Ace, the court held. Thus, the claim of fraud also failed as a matter of law.

The case is No. 1:12-cv-01479.

Norman Mitchell Leon (DLA Piper US LLP) for Ace Hardware Corporation. Amy Elisabeth Keller (Wexler Wallace LLP) for Advanced Caregivers, LLC.

Cases: FranchisingDistribution IllinoisNews