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Cold Stone Puts Freeze on Cutting Edge Lawsuit Despite IFA Support

LOS ANGELES (Blue MauMau) - While the franchise community was eagerly waiting for a decision to be handed down by California's appellate court in what promised to be a "cutting-edge legal issue," Cold Stone Creamery settled the lawsuit with former franchisee Lesa Meyers with little fanfare. The legal matter became particularly interesting when a Superior Court judge denied Cold Stone's motion to compel arbitration, ruling that the company's arbitration provision was unconscionable. James M. Mulcahy, attorney for Meyers, explained his view of the ruling stating, "We're going to have California weigh in on these issues for the first time in a very important way."

That decision proved to be significant enough to bring in the big guns of the International Franchise Association, shooting down the franchisee's arguments and throwing its support to Cold Stone Creamery.  Following Judge Paul Gutman's ruling in April 2007, the IFA filed amicus curiae ("friend of the court" brief) in California's Court of Appeals, chastising the judge's verdict.  IFA declared, "The decision . . . presupposes that arbitration is not an acceptable method for resolving franchise disputes and that the courts alone can properly vindicate the rights of franchisees."

As background to the lawsuit, Lesa Meyers, a former asbestos defense litigator, claimed that the franchisor withheld pertinent information regarding the lease on her store. Her complaint stated that Cold Stone knew the previous owner had been late with rent payments at least 20 times. And, Cold Stone's lease with the landlord dictated that three delinquent payments could cause the company to lose its rights and affect the renewal of the lease. Five months after she closed escrow on her store, Cold Stone called informing her there was indeed a problem with her  lease. Approximately six months later she was forced out. Meyers had $375,000 invested in the franchise, but was only reimbursed $45,000 for the equipment. In order to recoup her losses, she sued the company seeking approximately $2 million in compensatory and punitive damages. 

In defense of the lawsuit, Cold Stone pointed to Meyers franchise agreement, scattered with arbitration requirements. But Judge Gutman ruled that the franchisor's arbitration provision was unconscionable because it requires franchisees to arbitrate disputes, while allowing the company access to the courts. Relying on the famous Nagrampa v. MailCoups case, Judge Gutman stated that the franchise agreement was presented to Meyers on a "take-it-or-leave-it basis," meaning she could not negotiate any of the terms. The forum for arbitration, through the American Arbitration Association, would require Meyers to pay $8,000 initial filing fee, plus other fees--more than 30 times the cost of filing a complaint in the Los Angeles County Superior Court, according to Mulcahy's legal documents.

IFA Shows Judge's Decision as Hostile to Arbitration

In its support brief, filed by the law firm of Faegre & Benson in Minneapolis, IFA stated that Judge Gutman's decision "reflects a fundamental misunderstanding of franchising as a method of doing business and is emblematic of a new judicial hostility to arbitration that conflicts with policies underlying the Federal Arbitration Act." It further explains, "It assumes that franchisees, like consumers and employees, need special protection from opportunistic conduct by large franchisors—franchisors that supposedly present them with one-sided, take-it-or-leave-it contracts that have little alternative but to sign 'as is.'"

The brief defies what one study describes as "the naive franchisee" view (Contract Duration: Evidence From Franchising, 2006), explaining that the standard franchise agreements are the product of franchisors competing head-to-head to attract franchisees—franchisees who have a wealth of information at their disposal as a result of federal and state regulation. "Gone are the days when unscrupulous franchisors could hoodwink unsuspecting franchisees into signing one-sided franchise agreements that left them with no rights," it states.

Parties Reach Confidential Settlement

Although attorneys involved on both sides of the legal action did not want to give comment, they stated that the settlement agreement reached by Cold Stone and its former franchisee is a confidential matter.  One offered that the settlement happened approximately two months ago. Other than its amicus curiae brief being posted on its website, IFA has not posted any announcement of the settlement or its conclusion as it normally does.  A telephone call to David French, president of IFA's government relations, was not returned prior to publishing.

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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.