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SAINT LOUIS – In a complex dispute resolution matter, an arbitrator has ruled that Medicine Shoppe franchisees will be allowed to arbitrate their issues as a group instead of individually.
Medicine Shoppe had previously filed four different lawsuits against franchisees seeking to stop the arbitrations, despite the franchisor’s requirement of franchisees sign in their franchise agreement that both parties must first seek arbitration to settle disputes in their franchise agreements. The franchising firm had hoped that the court would step in to prohibit the cases from proceeding on a “group” basis. But the franchisees argued that the courts did not have jurisdiction to hear the arguments, because the parties, franchisees and the franchisor, had signed an arbitration clause. After owners won on that issue, all four cases were dismissed by the courts. Franchisees are now seeking attorney fees in each of those cases, arguing that Medicine Shoppe forced them to unnecessarily incur filing fees.
Medicine Shoppe then filed for arbitration under the Federal Arbitration Act against franchisee Edlucy, Inc. and twenty-seven others who operate Medicine Shoppe pharmacies. The franchisor argued that because all but two of the franchise owners had provisions in their franchise agreements stating that “the parties agree that arbitration shall be conducted on an individual, not a class-wide, basis” arbitration should proceed individually.
After filing for “collective arbitration” with the American Arbitration Association (AAA) in December 2011, the franchisees asserted in district court that the arbitrator had the authority to decide whether their contracts permitted “collective” or individual” arbitration. The franchise owners argued that with common issues of fact and law, one arbitrator could consolidate the cases, making the process more efficient and less costly for both parties.
District Judge Charles A. Shaw (Rtd.), arbitrator for JAMS (Judicial Arbitration and Mediation Service), issued his order on May 14, 2012 stating that he agreed. “Based on the parties’ various submissions and the similarity of the Franchise Agreements and the fact that there is one Demand for Arbitration in which all the Claimants [franchisees] have joined, an Arbitrator could consolidate the discovery between all these parties for efficiency and consistency and the cost of litigation would be reduced. . .”
Attorney Robert Einhorn of Zarco Einhorn Salkowski & Brito, said, “We are very pleased that we can now proceed as a group and not have the burden of filing separate cases, which would have made it very difficult.” He said in all the case represents fifty-five Medicine Shoppe franchisees who have various dispute resolution provisions in their franchise contracts. “The ones that are not in arbitration are in court. Our goal is to get to the merits of the case, which we think is very strong, and avoid a lot of procedural obstacles.” He said they split up their group of franchisees based on how their particular franchise agreements read.
Einhorn emphasized that in franchising arbitration is used by franchisors as a means to create obstacles for franchise owners in pursuing their disputes because of the huge expense in arbitrating. He said AAA has exorbitant filing fees. “It costs one franchisee as much as $10,000 to start a case. That makes it particularly difficult for an individual franchisee to pursue a case.” He adds, “Franchisors know that. That’s why they put arbitration clauses in their contracts. They know that will prevent some franchise owners from ever being able to assert their legal rights.”
An outside view of the ruling
Attorney Justin Klein of Marks & Klein said the parties allowing the arbitrator to decide the meaning of the contract is consistent with what the law says. He thinks it is interesting that the arbitrator ruled as a matter of fact that the agreement is silent on joinder and therefore they were allowed to proceed as a group. “That is different than a class action,” Klein said.
The New Jersey attorney said the interesting thing going on here is you have different courts and circuits ruling differently with respect to interpreting arbitration clauses. And you’ve got arbitrators, paid neutrals, interpreting contracts differently in similar situations. He thinks the deference that courts are giving to arbitration clauses could lead to legislation to rectify the inconsistency. “That’s either good or bad for franchisees or franchisors, depending on the legislation.” Klein said the message to both sides is “live by the sword, die by the sword.”
“We’re stuck with what the arbitrator has ruled and it’s not appealable,” he explained. “Perhaps in the future you’ll see a different agreement from Medicine Shoppe that specifically identifies the different types of claims that can or can’t be brought.”
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