Forced Arbitration: You Lose, Now Pay For Our Lunch
Mandatory binding arbitration, which corporations use to dodge accountability for their discrimination, negligence, or harassment, is a caricature of justice that offers no protection to consumers or employees. It's also terrible for small business owners, as one couple found out.
On Wednesday, consumer groups and arbitration victims will head to Congress to demand passage of the Arbitration Fairness Act, which would ban mandatory binding arbitration clauses in consumer, employment, and franchise contracts. We'll be sharing the stories of some arbitration victims here throughout the week. Today's story is by Deborah Williams, a small business owner who was forced into arbitration and ended up paying over $4,000 just to feed, house, and transport the other side's witnesses and lawyers.
Being trapped by the fine print of a contract transformed my dream of opening a coffee bar with my husband into a nightmare.
We had wanted to open a small neighborhood coffee shop, where everyone recognized each other and we would get to know the people and spirit of our community. We wanted a "Cheers" on caffeine.
In 2004, the vice president of Michigan-based Coffee Beanery told us that, in the right location, our café with their franchise could yield $125,000 a year, so we talked it over and decided to sign a 15-year agreement. What the vice president conveniently neglected to tell us, however, is that nearly 40 shops in the Coffee Beanery franchise had failed within three years of opening, leaving their owners bankrupt.
My husband and I soon found ourselves following a similar path. We were receiving bills amounting to far more than we signed up for – and the quality of some of the franchise products we had to use was abysmal. The real costs were so much greater than expected that we had to take out an additional $50,000 loan just to open the store. It didn't take long to realize we were in deep trouble. We struggled to keep up with our expenses but quickly began to fall short.
Then we heard from two other Coffee Beanery franchise owners whose shops were not just failing to thrive, but losing money fast. We had to face the fact that we'd been duped. We tried to get out of our contract but were dragged through the company's mandatory arbitration process. When signing the contract to open our store, we also had to sign away our right to take the franchise to court. You might think arbitration resembles mediation, but you would be wrong. It is biased from the start because the company typically selects the arbitrator it wants.
In our case, the company's lawyer had already worked with this arbitrator and won, making it extremely unlikely that we would do any better than the previous franchise owners. The arbitrator also used the same accounting firm as Coffee Beanery, a conflict of interest that further reduced our chances of having an impartial hearing. As if that wasn't bad enough, an investigation conducted by Maryland's State Attorney General's Office concluded that Coffee Beanery committed fraud in selling us our franchise, a key finding the arbitrator elected to ignore. We should have known that justice would never be served.
Coffee Beanery made us travel from our Maryland home to Michigan for the arbitration. We were forced to fly there four times in the 11 days of hearings, driving up our already hefty arbitration costs. In the proceedings, the company attributed our store's downfall to our own mismanagement, not its faulty sales concept.
The arbitrator unsurprisingly sided with Coffee Beanery, ordering us to pay $187,452 in legal fees and arbitration costs – including almost $17,000 for the arbitrator's services and $500 to cover the cost of Coffee Beanery lawyers' lunches.
We lost everything; we have nothing left. Our home is being foreclosed. We are living out of boxes until the bank sells our house. This past winter, our pipes froze because we could not afford to pay for heat, leaving us without water for three days. Our simple coffee shop dream wrecked our whole life
What's worse, though, is that ours is not an isolated case. Many others have been subjected to the unfairness of binding mandatory arbitration.
Had we been allowed to go to civil court, we would have had a fighting chance for justice. Mandatory arbitration is deceitful and skewed to favor the big companies, not the small entrepreneurs trying to make a living. This isn't just a problem for business owners like us; people unknowingly sign binding arbitration contracts all the time – when they buy a cell phone or house, apply for a credit card, go into a nursing home or take a job.
Besides writing your members of Congress, you can also check out the Fair Arbitration Now website and sign a petition to ban forced arbitration.
(Photo: freaksanon)
Post a comment
Comments:
If you cared to, you could sue the arbitrator directly in state court (not small claims court). Even though you went through binding arbitration, you may still be allowed to sue the coffee franchise. That depends on the judge, as some judges will say mandatory binding arbitration violates due process of law and will allow a law suit. Generally arbitration means you just have to go through an arbitrator first. Besides, a judge can basically make any clause in a contract null and void if he doesn't like it. You should find an attorney to take it on a contingency basis if possible. Good luck.
I would hate having something like this happen to me. Being someone who runs their own business, I find it horrible that compaines can do this.
I would not pay the bullshit arbitrators judgement. When they take it to an actual court, file bankruptcy. Leave them with nothing.
Here's what I don't understand:
By law, doesn't any contract that violates law, or come into existence by violating law, invalidate that contract? If the state Attorney General committed fraud in selling the franchise, doesn't that null the agreement or provide a legal escape to the contract?
Until we stand up to them, corporations will continue to milk us dry. If you don't vote, if you don't complain to Congress, if you don't fight corporation greed you have no one to blame but yourself.
How horrible. Arbitration is very horrible, I know when my partner got fired from his job his only recourse was arbitration (though I guess other people did successfully sue that away later). Anyways it was suppose to be setup so that his job would pay fees to the American Arbitration Association... which they stalled and never did. And then they asked for tons of documents to be handed over to themselves and when he decided to keep those documents for a possible real court case they asked it be dismissed since he failed to produce all and any saved documents/files/audio recordings. The guidelines were never followed. All and any deadlines were missed. There was nothing on the AAA website or guidelines that suggest the company was privy to all pertinent documents, especially when he had requested a hearing to review such documents in person.
He was fired in direct breach of the family medical leave act (his own illness) and for refusal to commit fraud. He also sued on grounds of discrimination as the company claims to be LGBT friendly. He works in mortgage, and the company that fired him really started this whole banking crisis... I think you can guess.
I want to thank you guys for all the info you provide (will donate later today.) I remember when i bought my car a few months ago when they passed me the slip to agree to arbitration. Of course they tried to sugar coat what it really is. I laughed hard and said "I don't think so." The salesman and sales manager looked at each other and moved on.
@Phexerian: I was wondering about that. I recall a news magazine show looking into arbitration and how it benefits the company over consumer. In it, a Ford employee had a vehicle which was obviously a lemon as demonstrated to the journalist. Long story short, employee discounts are tied to binding arbitration which ruled in Fords favor. He sued anyway and it was going to be allowed to go to trial. Based on that report, I thought people were able to take a shot at filing a law suit despite binding arbitration clauses.
@WraithSama: I was wondering the same thing. That clause should have allowed them to take it to court, since the other side would immediately ask for dismissal due to the arbitration clause, they could instantly bring up the state AG's findings, and many judges would have allowed it based on that.
I'm curious, though; if the AG found it to be fraud, why aren't they going forward with criminal charges?
From the linked Consumerist story:
Although the Sixth Circuit Court of Appeals eventually overturned the arbitration award, this is an unlikely outcome, and Coffee Beanery is planning to appeal.
Any update on this aspect of the story?
Should've read the contract.
@Cliff_Donner: As of yesterday evening, when I saw this on the local Baltimore news, that is where it stood.
I know that the point of this story is that arbitration is often biased -- however, I don't want people to be misled into thinking that the losing party having to pay for things like the winning party's costs and fees is limited to the arbitration context. Had the franchisees in this story managed to bring their case in court, and lost there, their expenses would likely have been even higher. (The proposed legislation will do away with mandatory binding arbitration, but that does not mean it will do away with clauses under which the loser pays the winner's legal fees.)
What's this about losing their home, now?
Isn't this the whole point of incorporation, so that you aren't personally liable if your company goes bust?
Last I checked, incorporation wasn't cheap (usually several hundred dollars/year), but that's far cheaper than losing your home.
Why would their house be involved? Doesn't a corporation keep your personal assets separate from your commercial? Please tell me they set up a corporation to do business with Beanery.
The majority of businesses are sole proprietorships or partnerships, neither of which have a liability shield. However, even if their business WAS some form of LLC or corporation, it's possible they were using their personal finances to fund it (along with loans.) There's certainly no law against that. Moreover, regardless of the source of the funding, if they were doing the coffee shop thing full time and not making any money whatsoever, then surely their savings would dry up naturally and result in foreclosure due to their inability to pay bills... the arbitration judgment may have made things much worse, but the business was probably taking a big toll as well.
@Phexerian: you may still be allowed to sue the coffee franchise
If the court agrees with the AG that there was fraud in the inducement with regard to the contract the whole thing is void.
I'm not sure I understand the statement that the AG "concluded that fraud had occured." The AG is not a court, so I doubt they would go on record and state that fraud occured. There is no detail provided here as to what happened that constitutes fraud.
The fact that the company has used the same arbitor in the past and the arbitor found in favor of the company is not particularly meaningful, and the fact that the arbitor and the company use the same accounting firm is entirely meaningless.
The fact that she was not told that 40 of prior franchises had failed is not meaningful.
According to the web there are over 200 Coffee Beanery locations in the US. If 40 out of every 240 fail then the odds are better than average with regard to small businesses - especially in food service.
I agree that these arbitration clauses are crap, but all the dots don't connect on the case above.
@dmuth: Actually incorporation is not an end to liability as most contracts require you to sign not only as the corporation but as yourself, an individual. They will require you to provide your personal guarantee in addition to that of the corporation. The whole hiding-behind-a- incorporated-business is not something the real world allows, unlike what they teach at business school.
I should know. My corporation in addition to myself was sued by my business school. Ironic?
@Cocoa Vanilla: I think all they have to do is file a judgment, which leaves them open to liens and garnishments.
@dmuth: Incorporation only protects the corporation's debts and obligations. A new corporation is like a 17 year old -- no credit history. Unless you have the cash up front from savings, you're going to have to incur personal debt tied to your own name to secure the funds, and so a corporation can't save you from that.
I really want to know more about this $500 lunch part. Why stop at $500? Why not just go to the most expensive wine place in town? After all, someone else is paying for it.
@1234tu:
"The fact that she was not told that 40 of prior franchises had failed is not meaningful."
Actually it is.
All franchises have to follow the FTC's Franchise laws. Michigan also has additional laws but must also follow the FTC.
And part of the FTC laws say you must disclose a bunch of info about the other franchises part of which is how many were discontinued the previous year with a description as to why.
The link goes to the old rule which was updated in 2007 but was in effect in 2004 when they signed up.
buying a franchise is always a bad idea... and if i ever opened a shop... i would want it to be famous for being a brand i created... franchises are big rip offs, sucks owning a store where you have to play by some other persons rules... NEVER GET INTO THE FRANCHISE BIZ!!!
If you wanted a small friendly neighborhood coffee shop, why would you open a franchise?
hasn't this been run like twice before already?
This is exactly why I opt out of Binding arbitration when I do my taxes....
@anonymousryan: if i were to own a business, i would never want to play by some parent companies rules either... franchises are scams, they only benefit the franchisee who gets a cut of your profits, and forces you to buy there products...
@.357: franchises are scams... why pay 100000$ to expand some con artists brand?... better to be creative, do what you feel like and not share profits with asshats...
I still want to know what universe Coffee Beanery's operating in where it's not only legal, but accepted practice to make the opponent in arbitration foot the bill for the company's lawyers and witnesses. Did the judgment also include a swift kick in the junk from a steel-toed boot-clad executive?
@anonymousryan: Agreed. Not sure why they thought a franchise was the way to go. Not like the franchise they bought into has that good of a name value in Michigan. I have never heard of it and I have lived in Ohio and currently Michigan.
Whoops, stupid lack of an edit button. I meant that if the AG *found* that fraud had been comitted, I didn't mean to imply that the AG comitted the fraud. :P
I hate to say it, but this sounds like a failure of due diligence. Someone starting a business should know the failure rate for that business and should make certain to understand the cost structure before signing any paperwork. The AG did find that fraud was committed, so why not have the AG pursue it as a criminal matter? MBA applies in civil cases, not criminal cases.
I just don't understand why there are so many people so willfully careless as to risk their entire financial livelihood on a proposition they obviously didn't take even a minimal amount of time to investigate. I just really don't comprehend it. I would think that anyone thinking to open up any business would first look around and see how well other businesses of the same time on the same area were doing. WTH? Did these people just paste company names on a roulette wheel and then gave it a spin? How could they be so half-assed about it?
Yep, it would. Which is why the entire statement is suspect. Maybe someone at the office told them they thought it was fraudulent (if it occurred as they described). That would hardly constitute an official declaration and would have no binding effect.
@LJKelley:
If you don't submit the documents, I'm not sure you can claim that they screwed you. It's like if I filed a chargeback and then refused to send in supporting documents when asked. The credit card company would certainly rule against me in that case and it wouldn't make much sense for me to claim they were biased. You have to at least meet them halfway in something like this.
Mandatory binding arbitration is terrible, BUT Deborah and her husband did not seem to do the necessary research on Coffee Beanery BEFORE signing the documents. Did their lawyer look at them? Did they visit other stores and speak to owners?
The fact that they learned AFTER signing the so many stores go under shows they didn't do the research and look what happened? You should know that before you sign a thing.
You mean the franchiser. The little guy is the franchisee.
And not all franchises are scams...just a godawful lot of them.
@henwy:
Agreed. Seems there may have been a lack of due diligence on their part in investigating what they were getting into. Obviously, the VP is not going to tell them about failing and bankrupt franchisees.
@anonymousryan: Franchises can work and can be a good choice. You hook onto an already established and marketed name. You get training on how to run a store and can offer your employees benefits through the parent company. Sure there's lock in, but it's a fast track to what a lot of people would otherwise have to learn on the job.
And, let's face it, lots of small business companies fold within their first year. It's one of those things you gotta get pretty much perfect right out of the gate. Opening a franchise can help with all that.
But this couple got had. Easy. And the parent company knew they were going to screw them, hence the forced arbitration. Even if they didn't go under it probably would have gone wrong at one point or another.
the arbitration is part of the business contract. You can always negotiate.
Arbitration is supposed to be used to make court systems more efficient, so that these stupid fights don't hog up court space for other petty suits.
Perhaps we should establish a separate court system for these types of claims.
@henwy: It was not the Arbitration forum that asked for the documents. It was the company that wanted, and then since he refused to send it to the company (which did not state they would copy the Arbitration people) they asked for it to be dismissed. However, that was a year after the initial complaint regardless as deadlines were passed and we were informed that the company hadn't paid the fees it agreed in the employee handbook when he was hired. So he had long realized it was all a joke. Everything about the process did not confirm to how the employee handbook or the website of the forum stated it should be.
It was a mistake to assume that a franchise would do better, I'd much rather go into a friendly non-chain coffee shop than a franchise.
Not saying it was their fault, the franchise obviously did nothing but profit from their business and wouldn't even let their store go bankrupt without taking another hefty chunk of money. Just more proof that an unregulated market is not fair nor just and the little guy is the one that ends up getting screwed.