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).