Sixth Circuit Sends Coffee Beanery Franchisees to Court

ANN ARBOR,  Michigan (Blue MauMau) - The Sixth Circuit Court handed down its amended opinion Friday in the ongoing litigation between the Coffee Beanery and franchisees WW, LLC, under Richard Welshans and Deborah Williams. It states, ". . . we REVERSE the judgment of the district court and VACATE the Arbitrator's award." Again it declares, ". . . WW need not resort to arbitration to vindicate its statutory rights but may instead seek appropriate relief in a court of law." The ruling once again falls back on the one issue: the fact that Coffee Beanery failed to disclose Kevin Shaw's felony conviction of grand larceny, stating that the Arbitrator showed a manifest disregard of law when she issued her award.

In their analysis, the judges stated, "When courts are called on to review an arbitrator's award the review is narrow; it is one of the narrowest standards of judicial review in all of American jurisprudence."  Section 10 of the FAA sets forth the grounds: 1) where the award was procured by corruption, fraud, or undue means; 2) where an arbitrator evidenced partiality or corruption; 3) where the arbitrators were guilty of misconduct; and 4) where the arbitrators exceeded their power. Although the court's ability to vacate is almost exclusively limited to those grounds, it may also vacate an award found to be in manifest disregard of the law, the one issue it latched to. 

After listing the other cases in each of the Circuit Courts, First through Ten, the judges proceeded to say that in light of the Supreme Court's hesitation to reject the "manifest disregard" doctrine in all circumstances, they believe it would be imprudent to cease employing such a universally recognized principle. They state, "Accordingly, this Court [Sixth Circuit] will follow its well-established precedent here and continue to employ the "manifest disregard" standard."

In an interview with Deborah Williams, she stated that she was glad the three-judge panel named all their claims in the opinion. She said, "The panel named everything out. They said Coffee Beanery didn't give us a registered UFOC (Uniform Franchise Offering Circular), they gave us inappropriate earnings claims, and they didn't disclose everything they should have regarding the cafe concept." The franchisees alleged they were induced into buying the costly cafe model when they originally planned to purchase the coffee shop concept. Williams added, "The judges came right out and said the Coffee Beanery defendants were liable [on the manifest disregard issue] and we don't have to re-arbitrate. We can now go to court."

Williams also feels the Sixth Circuit was careful in naming each of the officers of the company, headed by the well-known Shaw family—CEO JoAnne, named in 2000 as IFA's first woman chair; husband Chairman Julius; and sons Vice Presidents Kurt and Kevin—as separate from Coffee Beanery LLC so that there is individual liability. According to a company memo, two of the named officers were terminated last month, one being CFO Ken Coxen. Williams said she was told that two other vice presidents, Walter Pilon and Owen Stearn, have recently resigned

Recent Legal Action after First Decision of Sixth Circuit Court

On August 29, the attorney for Coffee Beanery, Karl V. Fink of Pear Sperling Eggan & Daniels, filed an en banc rehearing petition, a council in which all judges of the court hear the case rather than just the panel of judges. His case for rehearing cites the Hall Street v. Mattel case where the Supreme Court ruled that "manifest disregard of the law" is not ground for vacating an arbitration award set forth in the Federal Arbitration Act (FAA). Fink states the panel's decision directly conflicts with Hall Street. He continues, "The panel's decision in this case is unique because it is the only decision in which a Sixth Circuit Court of Appeals panel has ever vacated an arbitration award of the "manifest disregard of the law." He declares that it conflicts with other the Sixth Circuit case precedents, which he names.

In his en banc petition, Fink also explains how the arbitrator could not have made the statement that Kevin Shaw has a grand larceny conviction as it is not the type of felony offense subject to disclosure requirements, and it did not cause damage to the franchisees. As a footnote he further explains that the conviction happened twenty years ago and was a misdemeanor.

His brief also states that the panel of judges exceeded its authority under FAA by vacating the award and setting aside the arbitration agreement solely on a finding that the franchise agreement was fraudulently induced. According to Fink, the franchisees never asserted that the arbitration agreement itself was fraudulently induced. "The panel did not consider the agreement to arbitrate independently . . .when it ruled that the alleged fraudulent inducement of the franchise agreement resulted in the parties not being bound by the arbitration agreement," he concludes.

In a telephone conversation with Karl Fink, he said they did not wish to make a comment on the amended opinion at this time.

In response to Fink's brief, Harry M. Rifkin of Cohan, West, Rifkin & Cohen, attorney for franchisee WW, LLC and Welshans, stated that Coffee Beanery and its officers have not met their heavy burden in seeking further review of the August 18 court opinion. He tells the court that if his clients had known of Kevin Shaw's felony conviction and the other omitted information, the undisputed testimony is that the Welshans would not have bought the franchise, entered into a lease for their store, and they would not have lost in excess of a million dollars in operating the franchise. "For The Coffee Beanery to now claim that there is any question as to whether the Maryland law required the disclosure is highly disingenuous," he said.  He further stated that at the oral argument, Coffee Beanery counsel Karl Fink conceded that Kevin Shaw's felony conviction, which he now seeks for the first time in this case to deny, was required to be disclosed under Maryland law.

Rifkin argues that this case does not implicate the Hall decision, stating that it involves choice-of-law clause inserted by Coffee Beanery in an amendment to its standard franchise agreement that selects Maryland's Franchise and Disclosure Law rather than the Federal Arbitration Act. In an interview Rifkin said, "If you read the Hall Street case it only raises questions. It doesn't reject it."

Rifkin said the latest decision is further vindication of his client's claims of fraud and misrepresentation. But he goes farther saying, "I think it is a victory for the judicial system and a warning to arbitrators that they don't just have carte blanche to do whatever they want regardless of what the law and facts are."  He said the decision helps to restore some due process rights that he feels have been lost with the increase in arbitration and the overwhelming rate of rejection of appeals of arbitration cases. "This restores a little bit of balance and proves that if an arbitrator acts totally in disregard of the law, that arbitrator is not above the law," he said.

Arbitration Contracts on Same Footing as Any Contract--But Not More So

Williams said she clearly remembers Paul Bland, Jr., Staff Attorney for Public Justice, repeatedly stressing to them that arbitration clauses are contracts and are on the same footing as any contract, but not more so.  He also reminded them that Coffee Beanery wrote the contract to arbitrate, that when they contracted for the Maryland Franchise Act they expanded judicial review. Rifkin concurred, saying, "When The Coffee Beanery amended its franchise agreement to the court to determine claims under the Maryland Franchise Act, that amendment was certainly enforceable. That's the basis for allowing these claims to be heard in court." 

As a result of this decision, Williams hopes other franchisees will stand up for their rights and fight. She feels it’s important for them to know that the Federal Arbitration Act is not a wherewithal where franchisees and their attorneys have to just lay down thinking they are never going to get out. Arbitration is always an uphill battle, an expensive battle, but it can be won under the right circumstances. She said, “The Supreme Courts has issued it in more than one ruling that it does need to be put on equal footing with other contracts, not on a higher or different level.  

Road to Recovery

In closing, Rifkin said "This has been an interesting journey, seeing the best and the worst of our judicial system. The wheels of justice turn slowly, but at least they are turning and we are moving forward." He continued, "A decision like this restores your faith, seeing that the judges in the system haven't abandoned citizens when it comes to arbitration."

But he emphasizes that this is just the first step, that now they need to work toward recovery. “My clients have not been compensated yet. I’m looking forward to recovering some of the money they lost, which amounts to over a million dollars. Although nothing will make up for the loss of five years of their lives, it will certainly make it easier for them going forward in rebuilding their lives.”

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Related reading:

• Rare ruling (Franchise Times Magazine- October, 2008)
• Coffee Beanery Franchisees Win on Appeal; Arbitration Decision Vacated
• Coffee Beanery Franchisees Testify for Arbitration Fairness Act
• Coffee Beanery Brief Attacks Franchisees on Jurisdiction, Issues
• Coffee Beanery Franchisees Uncover Arbitrator Bias