A new ruling by the United States Court of Appeals for the First Circuit in Awuah v. Coverall case, No. 12-1301, --- F.3d --- (1st Cir. Dec. 27, 2012), is yet the latest in a string of recent court decisions that confirm the strength and enforceability of arbitration clauses in franchise agreements. 

The Awuah case first made waves two years ago when the United States District Court for the District of Massachusetts compared the franchise relationship between Coverall (a janitorial service franchisor) and its franchisees to a “modified Ponzi scheme.”  You can read more about that decision in my prior blog posts here and here.  This latest ruling deals with the enforceability of the arbitration clauses in a number of the subject franchise agreements.

The facts can be summarized as follows: a class of franchisees sued their franchisor, Coverall North America, which is a janitorial cleaning service. The franchisees assert several state-law claims against Coverall, including claims for breach of contract, misrepresentation, and deceptive and unfair business practices. In addition, the franchisees claim that Coverall misclassified them as independent contractors when they are, in fact, employees, and that Coverall failed to pay wages due to them.

Appellees, who are a subset of the overall class, challenge Coverall’s contention that appellees should be required to arbitrate the dispute based on arbitration clauses in the subject franchise agreements. Appellees became Coverall franchisees by signing Consent to Transfer Agreements, or Guaranties to Coverall Janitorial Franchise Agreements. These documents did not themselves contain arbitration clauses, but instead incorporated by reference the terms and provisions of the transferor’s franchise agreements, which did contain such clauses. None of the appellees allegedly received (or requested) copies of the franchise agreement signed by its respective transferor.

Appellees argued to the U.S. District Court for the District of Massachusetts that “it is black-letter law in the First Circuit that an individual may not be bound to an arbitration clause if he does not have notice of it,” citing cases brought under federal employment statutes. Appellees made the point that Coverall had not demonstrated that any of them were shown the transferor’s franchise agreement, or that they were shown the arbitration clause contained therein. The District Court agreed, determining that the appellees did not have to arbitrate their claims against Coverall because they did not have adequate notice of the arbitration clause in the franchise agreement. Coverall appealed.

The U.S. District Court for the First Circuit overturned the District Court’s ruling, finding that under governing Massachusetts law, “one who signs a written agreement is bound by its terms whether he reads and understands them or not.” The Court further found that Massachusetts does not impose any requirement that the parties be given special notice of an arbitration provision. In any event, the Court stated, any such requirement would be preempted by the Federal Arbitration Act, 9 U.S.C. § 1, et seq., which requires that agreements to arbitrate be treated in the same manner as other contracts.

This latest decision serves as a reminder for prospective franchisees to carefully review a proposed franchise agreement before signing.  For existing franchisees, it is a warning that mandatory arbitration clauses are not easily avoided.  For franchisors, the decision highlights the importance of ensuring that, when a franchisee transfer or assign their franchises, the new franchisees receive and sign a full copy of the franchise agreement that will be effective post-sale.