Are They Franchisees or Employees? Court Not Impressed with CleanNet's Tactics

This putative class action of Sanchez v. CleanNet USA, Inc., 2015 WL 231450 (N.D. Ill. 2015) arises out of Plaintiff Jose Sanchez's participation as a franchisee in a nationwide network of commercial cleaning franchise businesses.

Initially, on March 26, 2014, Plaintiff filed an 8-count complaint alleging that the franchisor Defendants CleanNet U.S.A., Inc. ("CleanNet USA") and CleanNet of Illinois, Inc. ("CleanNet IL," and collectively, "Defendants") improperly classified him and other franchisees as independent contractors instead of employees, thereby depriving them of the benefits of an employment relationship under the Fair Labor Standards Act, the Illinois Minimum Wage Law, and the Illinois Wage Payment and Collection Act. Plaintiff also alleged that Defendants engaged in fraud in the inducement to entice him to enter into the franchise agreement, and that Defendants violated the Illinois Franchise Disclosure Act.

This case was before the court on Defendants' motion to dismiss or, in the alternative, motion to stay Sanchez's complaint pursuant to the Federal Arbitration Act, ("FAA"), on the ground that his individual claims were subject to final and binding arbitration pursuant to the dispute resolution provisions in his franchise agreement. Under the terms of the Franchise Agreement, the franchisee waived his rights to collect punitive damages, consequential damages, loss of profits, and attorneys' fees and costs. Instead, under the franchise agreement, the franchisor was only liable for "the percentage of total account lacking, multiplied by the initial franchise fee multiplied by 80%" in the event that CleanNet provided at least one customer, but failed to meet its guaranteed monthly billing quota."

Sanchez argued that the Defendants' misguided take-it-or-leave-it negotiation approach, Defendants' failure to explain every term in Spanish, and the length and presentation of the arbitration provisions within the Franchise Agreement were grounds for procedural unconscionability. The court easily rejected these arguments explaining that it is expected that modern contracts will contain terms that are "nonnegotiable and presented in fine print in language that the average consumer might not fully understand," that "driving a hard bargain is not a wrongful act," and that the "disparity in size of the parties entering into an agreement ... without the wrongful use of that power" is insufficient to render an arbitration agreement unenforceable.

Similarly, the Court held that the franchisor's failure to translate the entire Franchise Agreement into Spanish or explain every provision of the Franchise Agreement in Spanish did not render the agreement unenforceable. The court concluded its rejection of the procedural unconscionability argument concluding that "Although the language barrier presented in this case combined with the length and complexity of the Franchise Agreement creates a degree of procedural unconscionability, this is not enough on its own to render the arbitration provision unenforceable."

The Court next examined the franchisee's argument that the arbitration clause within the Franchise Agreement was substantively unconscionable. The court explained that "Indicative of substantive unconscionability are contract terms so one-sided as to oppress or unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain, and significant cost-price disparity." In this regard, Sanchez had argued that the Franchise Agreement's dispute resolution provision contained four substantively unconscionable terms: (1) requiring mediation first, with the filing party paying the filing fee and the remainder costs being borne by the parties equally; (2) requiring arbitration if mediation is not successful with the filing party paying the filing fee and the remainder costs being borne by the parties equally; (3) waiving of punitive damages; and (4) limiting remedies to the actual damages sustained except as otherwise provided in the Franchise Agreement and barring recovery of attorneys' fees. Refusing to find the first two terms substantively unconscionable, the court did void the latter terms reasoning that "Because the Illinois Franchise Disclosure Act makes franchisors liable to franchisees for damages and attorneys' fees, the remedial limitations in the Franchise Agreement -- which includes Sanchez's waiver of punitive damages and recovery of attorneys' fees and costs -- are unenforceable."