Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ohio App. Ct.: Court, not arbitrator, to decide whether former tool franchisees’ suit should proceed as class arbitration, (Jan 5, 2015)

By Linda O’Brien, J.D., LL.M.

In a putative class action by former tool franchisees against their franchisor, the court, rather the arbitrator, is to determine whether the action could proceed as class arbitration, the Ohio Court of Appeals has ruled. Thus, the trial court order dismissing the franchisor’s counterclaim seeking to prohibit class arbitration was reversed and remanded (Bachrach v. Cornwell Quality Tools Co., Inc., December 31, 2014, Whitmore, B.).

David Bachrach, along with seven other former Cornwell tool franchisees, brought a class action suit against Cornwell Quality Tools, alleging, in part, consumer fraud, deceptive trade practices, and a violation of Ohio’s Business Opportunity Law. The plaintiffs asserted that they entered into similar franchise agreements with Cornwell to purchase its tools and resell them to customers. Cornwell filed a motion to stay pending arbitration. The trial court order denying the stay was reversed on appeal.

Subsequently, Cornwell filed a counterclaim, requesting an injunction prohibiting Bachrach from pursuing class arbitration and a declaratory judgment that class arbitration was not permissible under the franchise agreements. Bachrach then moved to dismiss the counterclaim. In granting Bachrach’s motion to dismiss, the trial court concluded that the arbitrator, not the court, should decide whether class arbitration was permitted. Cornwell and Bachrach both appealed.

The appellate court determined that the trial court erred in dismissing the counterclaim, based on its conclusion that the arbitrator, rather than the court, had the authority to determine whether the case could proceed as class arbitration when the arbitration agreement was silent on the issue. According to the court, the authority of an arbitrator to interpret and enforce a contract was limited to the authority granted by the contracting parties and did not extend to the legality of the agreement. Federal courts have distinguished between “threshold” and “subsidiary” questions and, if the contract between the parties was silent on who was to decide threshold questions about arbitration, the courts should decide whether the claims fall within the arbitration agreement.

In this case, the question was whether the case may be arbitrated as a class threshold or subsidiary matter. In the court’s view, the issue of whether the dispute may be arbitrated as a class was fundamental to the manner in which the parties would resolve the dispute and more aligned with a threshold matter to be decided by the court, absent an agreement to the contrary. Thus, Cornwell’s assignment of error was sustained. The trial court stay of the proceedings was vacated for the limited purpose of allowing the trial court to determine whether Bachrach’s claims may be arbitrated as a class or individually.

The case is No. 27113.

Attorneys: Timothy A. Shimko (Timothy A. Shimko & Associates Co., L.P.A.) and Charles E. Dunlap for David Bachrach. Robert M. Gippin (Roderick Linton Belfance LLP) for Cornwell Quality Tools Co., Inc.

Companies: Cornwell Quality Tools Co., Inc.

Cases: FranchisingDistribution OhioNews