Coffee Beanery Petitions Supreme Court to Address Big Issues on Arbitration

Words on the top of the Supreme Court building: "Equal Justice Under Law"

ANN ARBOR, Mich. – On Tuesday The Coffee Beanery, through lead counsel William L. Killion of Faegre & Benson, filed its petition to the U.S.  Supreme Court requesting its review of a case between The Coffee Beanery and its franchisees in Annapolis, Maryland. While the issue at hand surrounding an arbitration ruling seems rather silly—a felony conviction against the officer of a company for stealing traffic cones some years ago—many big issues will surface relating to the Supreme Court’s decision on whether or not it will review the case and, if it does, its final ruling. With all the attention being given to the Arbitration Fairness Act (H.R. 1020) today, which would ban mandatory arbitration, rulings from the courts related to arbitrations are hot topics for the franchise community.

The litigation between franchisees Deborah Williams and Richard Welshans (under WW, LLC) and the coffee franchisor has been extensively followed here on Blue MauMau and in Franchise Times magazine. As background, the dispute arose after the Welshans allegedly discovered material omissions and misrepresentations given to them orally and in writing after they signed their franchise agreement in 2003. They also claim they were never given the proper legal franchise disclosure documents when they bought their franchise. 

After the Welshans filed a complaint in Maryland federal court, not only against Coffee Beanery but also against its owners and officers, the franchisor filed a petition to compel arbitration in Michigan Federal Court, which was granted, and moved to stay the franchisees' lawsuit filed in Maryland.

Click to read petition, pdf

The Securities Commissioner of Maryland then launched an investigation related to the franchisees' claims, resulting in Coffee Beanery entering into a consent order with the Commissioner, giving the Welshans a rescission offer. But they refused to respond to it as it was conditioned on a release of their considerable damages claims.  The Maryland federal court stayed its action pending the ruling by the Michigan court as to whether the claims were subject to arbitration.  In the consent order, The Coffee Beanery admitted numerous violations of Maryland law in the sale of the franchise to Williams and Welshans but reserved the right to deny the admissions in another legal proceeding so long as The Coffee Beanery abided by the terms of the consent order.  Williams and Welshans provided evidence of continuing violations of Maryland franchise law which the state continues to investigate.

In addressing the major issues in his petition to the Supreme Court, Killion explains, “This case cleanly presents the question whether manifest disregard of the law is a valid common-law or statutory ground for vacating an arbitration award under the FAA [Federal Arbitration Act]. Nothing in the history or procedural posture of the case will hinder or limit the [Supreme] Court’s review.”

The Supreme Court Petition for a Writ of Certiorari challenges a decision by the Sixth Circuit Court reversing the ruling of a district court and vacating an arbitration award in favor of Coffee Beanery, solely on the ground that the arbitrator manifestly disregarded the law by holding that the franchisor was not required to disclose a conviction of one of its officers.

Killion asserts that the only claim relevant in his petition is the franchisees’ contention that Coffee Beanery violated Maryland’s franchise law by failing to disclose that one of its officers, Kevin Shaw, had previously been convicted of a felony larceny for stealing traffic cones. After Coffee Beanery moved for rehearing and rehearing en banc on the ground that the Sixth Circuit contradicted the Supreme Court decision in the renowned Hall Street Associates v. Mattel, Inc case, the circuit court withdrew its original decision and issued an amended version that addressed whether manifest disregard of the law continues to exists as a valid common-law ground for vacating an award after Hall Street.   

The Coffee Beanery’s Plea for Review

In asking the U.S. Supreme Court to review the petition, Killion presents that Congress enacted the Federal Arbitration Act to overcome  judicial resistance to arbitration and create a uniform “national policy favoring arbitration,” citing Buckeye Check Cashing, Inc. v. Dardegna (pdf, Supreme Court Opinion). But he states that the Circuits’ treatment of the doctrine of manifest disregard of the law has been anything but uniform.

In presenting his questions to the Supreme Court, Killion asks, “Is manifest disregard of the law a valid common-law or statutory ground for vacating an arbitration award under the Federal Arbitration Act?  Did the Sixth Circuit err in vacating the arbitration award in this case for manifest disregard of the law?”

According to the petition, since the Hall Street case, federal and state courts have divided over whether manifest disregard of the law—a ground not listed in Sect. 10 of the FAA—remains a valid ground for vacating an arbitrator’s award. In the First and Fifth Circuits, the issue is no longer valid, and the Sixth Circuit Court holds that manifest disregard continues to exist as a non-statutory ground. The Second, Seventh and Ninth Circuits concluded that the doctrine survives as a judicial gloss of FAA, Sect. 10, but each court crafted a different standard. Killion declares in his petition that the division of the Circuits is ripe for the Supreme Court’s intervention.

Killion also maintains that The Coffee Beanery case presents the ideal vehicle for reviewing the doctrine of manifest disregard of the law. He asserts that the Sixth Circuit’s decision illustrates perfectly the danger of allowing courts to review arbitration awards for legal error. In claiming that it found a legal error in the arbitrator’s interpretation of Maryland franchise law, he said the Sixth Circuit Court  invalidated an arbitration award that was in fact fully consistent with the Maryland statute.

As a review, Killion states, “The [Supreme] Court should grant review to reverse the judgment of the Sixth Circuit, resolve the divide in the circuits, and hold that manifest disregard of the law is not a basis for vacating an arbitration award under the FAA [Federal Arbitration Act].” He also contends that If the court does not grant review of this case, it risks being unable to address the issue for lack of another “good vehicle.”  “The time for seeking review in this Court has already passed for the decisions of the First, Fourth, and Seventh Circuits . . . without a petition for a writ of certiorari being filed.” Killion, in addition, states that the result in this case demonstrates how little protection the doctrine of manifest disregard provides against courts finding manifest error even in closed cases. Here, the arbitrator’s interpretation of Maryland’s law was better supported than the interpretation adopted by the Sixth Circuit, according to Killion.

In conclusion, Killion states that after the Sixth Circuit incorrectly vacated the arbitration award for manifest disregard of the law, it compounded its error by remanding for litigation “in a court of law” instead of for further proceedings in arbitration.  He points to the court’s decision in Buckeye Check Cashing, where a party disputes a contract’s validity “but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract.  Hence,” he states, “the Sixth Circuit’s Buckeye error does not create any impediment to reviewing the questions presented. Granting review would, however, give the Court the opportunity to craft its own order on remand to be consistent with Buckeye.

In response to Coffee Beanery’s petition to the Supreme Court, franchise attorney Harry Rifkin, Franchise & Business Law Group, representing the franchisees, said, “Nothing in the petition is a surprise. They misrepresent what occurred and they ignored many of the underlining facts. They misread Hall Street Assoc.  This is not the right vehicle for review. This case is an illustration of the worst abuses of an arbitration clause and everything that is wrong with arbitration today.”

Killion did not wish to make comment on the petition at this time.

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Related Reading:

• Forced Arbitration: You Lose, Now Pay For Our Lunch
• Organizations that support the Arbitration Fairness Act of 2009 (pdf, 4 pgs)
• One Couple's Descent into Coffee Beanery Franchise Hell
• Coffee Beanery Attempts to Stay Mandate Pending Supreme Court Petition
• Coffee Beanery Franchisees Testify for Arbitration Fairness Act
• AAA Rejects Coffee Beanery Franchisees Request for Arbitration Expenses
• Coffee Beanery Franchisees Win on Appeal; Arbitration Decision Vacated
• Coffee Beanery Story To Be Presented to Congress
• Coffee Beanery Franchisees Fight On Despite Losses
• Sixth Circuit Denies Coffee Beanery Petition for Rehearing
• Rare ruling (Franchise Times Magazine- October, 2008)
• Coffee concept draws action from Maryland Securities (Franchise