A story reported by the Missouri Law Blog, highlights the importance for franchisors of careful drafting of the arbitration clauses in their franchise agreements. In a rare case where the Court issued two opinions, the Missouri Court of Appeals, Western District found an arbitration provision in a contract between an insurer and a chiropractor unconscionable and unenforceable. A quote from the case:
While an ordinary person could reasonably expect general arbitration provisions in an adhesion contract, an ordinary person would not reasonably expect provisions that allow the other party to unilaterally revise the arbitration rules, render the arbitrator powerless to resolve a large class of claims, or fail to provide an adequate remedy for the dispute. The practical effect of these provisions is to grant BCBS immunity for improper conduct in declaring procedures medically unnecessary or, as in this case, re-categorizing a treatment as medically experimental and, therefore, not subject to reimbursement. While purporting to provide a remedy for disputes between the parties through arbitration, the limitations placed on the arbitrators' authority prevent arbitration from providing much, if any, remedy at all. As noted by the trial court, "[t]he arbitrators are rendered practically powerless and arbitration is effectively no remedy at all." Where, as here, the practical effect of forcing a case to arbitration would be to deny the injured party a remedy, requiring the case to be arbitrated is unconscionable.
The case is interesting because the Court, in rejecting the arbitration provision, uses an unconscionability analysis that is not often used successfully outside of the State of California or the United States Court of Appeals for the Ninth Circuit. That being said, the Court's analysis is very similar to the reasoning found in cases coming out of the western states. The contract was found to be procedurally unconscionable as the agreement on the whole was offered on a "take-it-or-leave-it" basis, with no chance for negotiation. The contract was also found substantively unconscionable for the reasons stated in the quote above — the arbitration provision was found to be oppressive and one-sided because it allowed the insurer to unilaterally change the arbitration rules midstream.
The opinions, which can be downloaded here, underscore the importance to a franchisor of using an arbitration provision that is fair to both sides. While many franchisors offer their contracts on a "take-it-or-leave-it" basis leaving little room for negotiation, an arbitration agreement is more likely to withstand scrutiny if it is applied equally to both parties. For example, an arbitration provision I recently saw in a franchise contract provides that the franchisee is required to arbitrate all disputes with the franchisor, but that the franchisor can decide unilaterally whether it will arbitrate, or litigate in court, any dispute that it has with a franchisee. This type of provision would probably not survive unconscionability analysis like the one conducted by the Missouri Court.
Litigation over issues like this — whether a dispute must be submitted to arbitration or instead whether it can be decided by a court — is a huge drain on the parties' resources (time and money). In other words, the parties can spend tens of thousands of dollars fighting the issue about where the fight will be located: in court or in arbitration. Because of this, a franchisor would be well-advised to think carefully about heavily one-sided arbitration clauses before including them in its agreements.
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