Sixth Circuit Overturns Arbitrator Who "Showed A Manifest Disregard Of The Law"

Earlier this week, the Sixth Circuit Court of Appeals overturned an arbitration decision in a dispute between Coffee Beanery and a franchisee. The court found that the arbitrator, hired by the American Arbitration Association, “showed a manifest disregard of the law” by siding with Coffee Beanery.

At issue was whether one of Coffee Beanery’s vice presidents, Kevin Shaw, should have been required to disclose his prior conviction for grand larceny to the franchisees, which he didn’t do. Under the Maryland Franchise Registration and Disclosure Law, he was required to make this disclosure, presumably to allow potential franchisees the chance to evaluate his franchise sales claims. The Franchise Act was prescient, it turns out, because Shaw did mislead the franchisees involved in the suit, along with several others, and was sanctioned by Maryland’s Securities Commissioner.

The franchisees sued Coffee Beanery over these misrepresentations, but were sent to arbitration in accordance with the arbitration clause in their franchise agreement. After the arbitrator found in favor of Coffee Beanery, the franchisees appealed the decision, were denied in district court, and ultimately won in the Sixth Circuit. The court held that the arbitrator’s ruling that Shaw was not required to disclose his prior felony, even though Maryland has enacted legislation explicitly stating otherwise, “flies in the face of clearly established legal precedent.” The court also reiterated other courts’ holdings that an arbitration agreement in a fraudulently induced contract is void.

The Sixth Circuit’s opinion was emailed to us, and we couldn’t find an easily accessible online version. The case name and number, for those of you with Lexis/Westlaw, is Coffee Beanery v. WW, LLC, No. 07-1830, (6th Cir. 2008).

(Photo: Getty)

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  1. Phexerian says:

    The attorney that acted as the arbitrator in the case can also be sued in his capacity for his incompetence. Should be careful. I expected something like this from the NAF, but not the AAA. Generally they are pretty good.

    -Phex
    -3rd Year PharmD / MBA Candidate

  2. InThrees says:

    I don’t see how that can be possible. Arbitration firms make money by getting hired, and people who hire a lot of arbitrators (I.E., collectively, make up the bulk of the business for these companies) will hire the firm that produces ‘results’.

    The business is self-sliming. Unless AAA is content with being third-string and dirt poor compared to the competition, I don’t see how being ‘pretty good’ can be a sound business plan.

  3. Binaryslyder says:

    Ah, so that’s why all the coffee beaneries closed in MD. I mean, they weren’t very good either.

  4. Claystil says:

    coffee beanery sucks, but aritration sucks more.

    claystil

    2nd year master’s of awesomeness candidate

  5. RChris173 says:

    I have LexisNexis access and couldn’t find the case…

  6. rbcat says:

    I have access to PACER and downloaded the decision. If anyone is interested in reading, it can be found here:

    [wyvern.org]

    I got it from here: [pacer.ca6.uscourts.gov] (paid login required)

  7. BigBoat says:

    I read the case. The court made it clear that arbitration is very, very tough to vacate. Besides an arbitration ruling “flying in the face of existing law” (as in, not just askew), they gave some talk of requiring the arbitrator to being aware of the law in the first place. In this case the arbitrator did know of the Franchise Act, so they didn’t have that excuse. If there is an arbitrator that’s looking to rule in favor of some group no matter what, I’m sure they’ll try hard to not make a similar concession.

    2L.

  8. bohemian says:

    Hopefully this will do something to further erode this kind of arbitration.

    Bohemian

    4th year Hedonism studies, GHD (Goddess of her own domain) candidate.

  9. cuiry says:

    The opinion is available for free on the 6th Circuit’s website: [www.ca6.uscourts.gov]

    Opinions are free on all US Courts websites. A PACER account is not need.

  10. cotr says:

    @Claystil:

    i second this individuals awesomeness!

  11. Rectilinear Propagation says:

    The court also reiterated other courts’ holdings that an arbitration agreement in a fraudulently induced contract is void.

    Well thank goodness. At least it’s possible there’s something you can do when mandatory arbitration ignores the law.

    Rectilinear Propagation
    First year undergraduate in Fiber Arts

  12. GMFish says:

    You can download the Opinion and Order here.

  13. stupidjerk says:

    shouldn’t somebody at the district court level loose a job or two due to this gross disregard for the system they are sworn to uphold?

  14. jojo319 says:

    I’m completely ignorant on this issue, but why don’t hospitals and clinics use arbitration?

  15. Stonecutter says:

    @Phexerian: The franchise law community is pretty small, so most arbitrators are also practicing lawyers. I had a matter a couple of years ago where one of our arbitrators failed to disclose a relationship with the plaitiff until he was called on it weeks before the hearing. A bar card is not a guaranty of competence.

  16. Phexerian says:

    @InThrees: Your assumption is correct that because they produce results they get more of the business. The National Arbitration Forum (NAF) is known for producing such results for companies. This makes them popular for companies, but also unpopular for the public. The problem is they also get sued more in state and federal court, as do the arbitrators. The American Arbitration Association (AAA) seems to be much more fair to the general public.

    The problem with arbitration is that once the NAF/AAA or the arbitrator is sued, they settle out of court so no court can set a precedent against their business practices.

    The other problem is that companies require it to make it more difficult for you to sue that company. By putting in an extra step into the process, they hope you will be so tired of pursuing it that you will not file an action in court. Honestly, it works pretty well. The same strategy of precedent being awarded in future cases against ones business goes for not only the arbitrators but also the companies they are representing as well.

    There was a great article in Newsweek about arbitration a few months ago if anyone can find it and think it is worth the read. Would be a good idea to know about this stuff since it deals directly with consumers. Consumerist readers, I would imagine, generally like that kind of stuff.

    -Phex
    -24th Year Legal Drug Dealer Candidate and Lord of the Nuvaring

  17. Phexerian says:

    @Stonecutter: You are completely correct. I agree 100%. I hope my first post didn’t lead you to believe I thought they were all competent, because they aren’t.

  18. nequam says:

    This is not a consumer arbitration case, and “manifest disregard” is a broadly-recognized basis for vacating arbitration awards. It troubles me that Consumerist often churns up a lather about consumer arbitration (and we know the problems with that sort) by touting examples from commercial arbitration. In the non-consumer realm, arbitration is a common and (gasp!) often preferred form of dispute resolution due to efficiency, cost and the typicla familiarity of the arbitrators with the industry at issue.

    Also, the misunderstanding on this site regarding the role and operation of the AAA continues to astound me. In commercial arb, especially, the AAA does not do better/worse business based on which side wins. It is an org. that facilitates arbitration (for parties who agree to it, mind you – a matter which a court would decide) by promulgating rules and maintaining a roster of arbitrators (among which both parties have a choice).

  19. Hanke says:

    @nequam: Since when have actual facts or fact checking ever been done on this site?

    Since when has anyone running this site issued a actual correction, including changing a misleading headline, when facts become known?

    The original posts are all one-sided; responses get posted if they are made, but are rarely linked to the original post.

    For instance, the story about hoses no longer being included with wasersx yesterday. INSTANTLY, it’s the retailer’s fault. Turns out it was a decision by the manufacturers to cut costs. That fact is included in the update, but theheadline still says ‘Retailer removes hoses’.

  20. Consumerist-Moderator-Roz says:

    @Hanke: You’re out of line. Read the comment code.

  21. orielbean says:

    It’s almost like we should have our disagreements argued in front of an independent evaluator, or “judge” if you will. And that “judge” would not be paid by plaintiff or defendant, to ensure his/her independence. Let me know if you’ve heard this one before…

  22. Reeve says:

    @Consumerist-Moderator-Roz:
    Not that I agree with Hanke but I am not sure how this is against the comment code? I read it and do not see a provision which prohibits commenting on articles in a way that would be critical of the consumerist’s reporting.

  23. Parapraxis says:

    I feel that arbitration between companies is a sound idea, but between individuals and companies? Not such a good plan in excecution.

    Parapraxis
    4th Year Pimpin’ Major, with an emphasis on Big Daddy Kane
    (It Ain’t Easy)

  24. Alex Chasick says:

    @nequam: A couple of points in response:

    This is not a consumer arbitration case, and “manifest disregard” is a broadly-recognized basis for vacating arbitration awards.

    First, although this isn’t a true consumer arbitration case, a franchise dispute still involves parties of uneven bargaining power and sophistication. Along with consumer and employment disputes, franchise disputes would be blocked from arbitration under the Arbitration Fairness Act, which this site supports. It is therefore relevant to consumer arbitration and the readers of this site. Although I disagree that any basis for overturning arbitration awards is “broadly recognized,” (cf. the holdings of Lee v. Red Lobster Inns of America and God’s Battalion of Prayer Pentecostal Church v. Miele Associates), I still think it is worth noting when an arbitrator gets smacked by a judge for disregarding the law.

    It troubles me that Consumerist often churns up a lather about consumer arbitration (and we know the problems with that sort) by touting examples from commercial arbitration. In the non-consumer realm, arbitration is a common and (gasp!) often preferred form of dispute resolution due to efficiency, cost and the typicla familiarity of the arbitrators with the industry at issue.

    Fine, but a franchise dispute is not a commercial dispute. As above, such disputes would be prohibited from arbitration by the Arbitration Fairness Act, as they should be: the differences between a mom and pop arbitrating against a company and two corporations with in house counsel arbitrating are obvious. I’d also point out that in this case, one of the problems was the arbitrator’s lack of familiarity with the industry at issue, or at least with its governing law.

  25. Loki_Monster says:

    @stupidjerk: And who would you nominate for firing? Some clerk that had nothing to do with the decision? District court judges (and all federal judges other than bankruptcy judges) are Article III judges, which means they are lifetime appointees that can only be impeached. District court judges can’t be “fired.”

  26. krom says:
  27. stupidjerk says:

    @Loki_Monster: you’re putting words in my mouth by saying “fired”.

    As I understand it, impeachment is being removed from the job, is it not? my exact words were “shouldn’t somebody… lose a job or two”.

    I suggest reading what you are attempting to discredit a little better before you make an even larger fool of yourself in future instances.

  28. AlexPDL says:

    @nequam: I couldn’t have said it better myself.

    Not all arbitration is fatally flawed. The fact that Sixth Circuit overtuned the arbitrator clearly demonstrates that the system works, yes the damage of a bad arbitrator can be undone by the courts. Is it perfect? No.

  29. Consumerist-Moderator-Roz says:

    @Reeve: Read the part about negativity / assuming good faith. If you’re not sure, email me – I don’t want to derail this thread further.

  30. drrictus says:

    @AlexPDL: Sure, it’s not perfect. What I object to is binding me to an imperfect system.

  31. InThrees says:

    Arbitration is obviously better for the company in a customer-company conflict, since it’s MANDATORY SO OFTEN.

  32. incognit000 says:

    If arbitration was fair, it wouldn’t be mandatory.

    I think the better question is, why do we allow it to be legal to write mandatory arbitration into these contracts when arbitration is clearly designed to permit companies to avoid the law?

  33. Cavinicus says:

    I’m a lawyer who practices franchise law almost exclusively, and I represent both franchisees and franchisors. In addition to the Federal Trade Commission’s Rule on Franchising, franchise relationships are governed by additional state regulations in approximately 20 states. Most of these states prohibit franchisors from requiring litigation to be conducted anywhere but the franchisee’s home state. However, since arbitration is governed by federal law (which trumps state law), mandatory arbitration in a franchise contract allows the franchisor to do an “end run” around the state regulations. The practical effect is to force the franchisee to resolve disputes in the franchisor’s home jurisdiction (which can be incredibly expensive) with an arbitrator that typically has a longstanding relationship with the franchisor. As someone who has actually seen the elephant, I can state with assurance that the system is manifestly unjust in its current state.

  34. GMFish says:

    Oops, you can download the opinion and order here:
    [www.ca6.uscourts.gov]

  35. Reeve says:

    Arbitration is only mandatory when you agree to it. Therefore, if you do not want to be forced into mandatory arbitration do not do business with someone who mandates it in their contracts.

  36. InThrees says:

    @Reeve:

    You evidently don’t realize how much business that will exclude.

    Want to buy a car from a lot? Sorry, the salesman have all been reamed over allowing customers to cross that section out of the contract, so no dice.

    Want a cellphone?

    Credit card?

    House?

    So now you’re homeless, can’t call anyone, have to walk everywhere, (and not a biggie, really) have no credit cards…

    But at least you can sue any one for wronging you. Maybe. Lack of a proper address could muddle this up.

  37. Reeve says:

    @InThrees:
    For things such as a house you can certainly negotiate the terms of a contract.

    Usually these clauses come in for mass market items where it is not worth it for the consumer to higher a lawyer to negotiate every contract. This saves both parties on transaction costs.

    If you search very hard because you are dead set against them then you can find a credit card, a car, etc that does not require signing a contract with an arbitration clause. Usually there will be something you give up for this privilege because of the increased cost to the business.

    The main point is that the cure may be worse than the poison. Without these clauses the price of doing business will increase and that cost will likely be passed on to the consumer. So the choice is sign these clauses or pay higher prices for what you are consuming.

  38. Phexerian says:

    @Reeve: The other thing that could happen, instead of prices going up, would be companies offering better products and better services to avoid litigation. Possibly at a higher cost, but not necessarily.

    @Cavinicus: Nice post. Informative.

  39. Reeve says:

    @Phexerian:
    You could be right. These clauses are sometimes also meant to stop frivolous litigation. Sometimes no matter how safe a product is someone will sue trying to pass blame on.

  40. Parting says:

    I don’t get it. How difficult is it to have a law that states : ”No rule/arbitration can go against the law.”

    The law should trump any contract/agreement.

  41. nequam says:

    @Alex Chasick: Hi, Alex. I appreciate your response (and I respect your use of a “Cf” site, if you know what I mean), but I disagree with your suggestion that that this is not a commercial dispute. I can cite cases too, to show the commercial character of the dispute. I don’t mean to be snarky (nor do I want to quibble), but a franchise agreement is arms-length. The fact that the AAA was included in the brackets for worst company in America has troubled me because the comments left by readers (who are intelligent by any measure) demonstrate a misunderstanding of the world of non-consumer arbitration.

  42. Alex Chasick says:

    @nequam: Thanks for your comment. I agree that there is some misunderstanding about the role of arbitration in commercial settings and of the role of of the AAA (I made a comment on one of the Worst Company in America threads saying that I disagreed with AAA’s inclusion as a company, although I think they were included more as a scapegoat for everything that’s wrong with arbitration). I’m not nearly as opposed to arbitration in a franchise setting as I am to ordinary consumer arbitration, and I think there are obvious commercial aspects to it, but arbitration clauses for franchise contracts would be prohibited under the Arbitration Fairness Act along with consumer and employment disputes, so, at least in that sense, I view it more as a consumer issue.