Keith Girard writes in AllBusiness that Richard Welshans and his wife Deborah are typical in many ways of enterprising individuals who choose a franchised business to build a career. After Richard was laid off from his sales job at a chemical manufacturing plant, owning a small business appealed to them.
But in the six years since they signed the franchise agreement in 2003, making them owners of a Coffee Beanery shop in trendy Annapolis, Md., their nightmarish experience has become a cautionary tale for any potential franchisee — beware the fine print.
In particular, their case highlights how many franchisors are misusing mandatory binding arbitration clauses in franchise agreements to gain the upper hand over franchisees in any legal dispute.
On its face, mandatory arbitration seems like a sensible approach to resolve disputes to avoid costly litigation. In fact, the U.S. Supreme Court threw its weight behind arbitration when it ruled in a case several years ago that “any doubt as to the scope of an arbitration provision must be resolved in favor of arbitration.”
The Federal Arbitration Act, enacted more than 80 years ago, sets the ground rules for the use of arbitration and generally pre-empts state franchise laws that address how legal disputes should be resolved. But there are loopholes, and state courts are increasingly citing them to overturn restrictive arbitration clauses in franchise agreements.
In fact, binding arbitration clauses are under assault in several states, and a bill addressing their abuse has been reintroduced in Congress this session. Known as the Arbitration Fairness Act, it would ban mandatory binding arbitration and enact other reforms.
The International Franchise Association (IFA), which represents the industry, has lobbied intensely against the measure, and was able to keep it bottled up last year. But cases like the Welshans’, which has been nationally publicized in magazines like Mother Jones, are building momentum for change.
The Annapolis couple thought a small coffee bar would be right for them and would do well in their trendy, upscale sailing town, which also doubles as the Maryland state capital. They decided on Flushing, Michigan-based Coffee Beanery. They paid $25,000 up front and proceeded to open their shop, even though the company had substantially changed the concept from a coffee bar to a full-fledged cafe with a food menu.
What the Welshans weren’t told was that most Coffee Beanery cafes closed within three years, leaving their owners deep in debt. More than 100 shops have failed during their ordeal, and they soon found out why. The franchisor piled on costs for “required equipment,” such as a surveillance system, a music system, and an obsolete, $14,000 lighting system. Other expensive equipment provided by the company, including a computerized cash register, proved to be faulty, according to Mother Jones.
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