Franchisee Compelled To Arbitrate Class Action After Failing To Read Revised Agreements Thoroughly

A franchisee learned a tough lesson from a Northern District of Illinois federal judge:  read all of the terms in a revised agreement before you sign it, even if the other party purports to tell you what has been revised.  In Ace Hardware Corp. v. Advanced Caregivers, LLC et al., No. 12-cv-1479 (N.D. Ill. Oct. 18, 2012), the franchisee's failure to do so cost it—at least—the ability to litigate in the forum of its choosing.  Instead of proceeding with its class action lawsuit filed in Florida, the judge's ruling compelled the franchisee to arbitrate its dispute, despite the franchisee's arguments that it did not know it had agreed to arbitration and had been misled by the franchisor's correspondence.  Applying Illinois law, the judge found the franchisee bound by arbitration provisions in a revised set of franchise agreements that were absent from the initial set.

The case involved a common scenario:  parties to a set of contract documents subsequently sign a revised set of those contract documents because of an error in, or alteration to, the initial set of documents.  Execution of the revised set of documents is preceded by correspondence indicating why a revised set of contract documents must be executed and how the revised set differs from the initial set.  In Ace Hardware, the franchisee and franchisor signed an initial set of franchise agreements in January of 2009.  The initial set did not contain any arbitration provisions.  In May of 2009, the franchisor notified the franchisee by letter that the initial set of agreements contained an error regarding the address of the franchisee's store.  The letter stated that, in view of a change in the store's address, the franchisor needed the franchisee to sign the enclosed revised set of agreements that reflected the new address of the store.[1] Although not mentioned in the letter, the revised set of agreements also contained arbitration provisions.[2] The franchisee apparently did not realize this additional change to the agreements.  In June of 2009, approximately three weeks after receiving them, the franchisee signed the revised set of agreements and returned them to the franchisor.

Two-and-a-half years later, the franchisee filed its class action lawsuit in Florida federal court.  After the franchisee refused the franchisor's demand that it submit the dispute to arbitration in accordance with the revised set of agreements, the franchisor filed a petition to compel arbitration pursuant to Section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, in the Northern District of Illinois.  The franchisor argued that the claims in the franchisee's class action complaint fell within the arbitration provisions found in the revised set of agreements and, therefore, the dispute must be arbitrated.  In response, the franchisee argued that it was unaware that it had agreed to arbitration and, therefore, there was never an agreement between the parties to arbitrate.  The franchisee made four legal arguments to attack the validity of the arbitration provisions:

  1. Mutual mistake:  insertion of the arbitration clauses was an unintentional mistake by both parties;
  2. Failure to give notice:  the franchisor failed to provide notice that arbitration clauses were included in the revised set of agreements;
  3. Procedural unconscionability:  the arbitration clauses were so difficult to find, read, or understand that it would be unfair to find that the franchisee was knowingly agreeing to arbitration; and
  4. Fraud:  fraud induced the franchisee to agree to the arbitration provision.

The franchisee theorized that either the franchisor, upon discovering the store address error, unintentionally sent the franchisee a revised set of agreements with arbitration clauses or the franchisor inserted the arbitration terms without any agreement by the parties.

The judge upheld the arbitration provisions in the revised set of agreements and granted the franchisor's motion to compel arbitration.  He succinctly disposed of all four of the franchisee's arguments.

First, the judge found no mutual mistake because that analysis only focuses on the writing in the agreements.  Quoting Paper Exp., Ltd. v. Pfankuch Maschinen GmbH, 972 F.2d 753, 757 (7th Cir. 1992), he highlighted the "fundamental principle of contract law that a person who signs a contract is presumed to know its terms and consents to be bound by them."  Therefore, because the franchisor expressed in writing its desire to arbitrate disputes and the franchisee signed the agreements, the franchisee's mutual mistake claim failed.

Second, with respect to the franchisee's claim that the arbitration clause was unenforceable because the franchisor failed to provide notice of its inclusion, the judge noted that the franchisee did not cite to any law that would require such notice.  Instead, the judge found that the franchisor had no duty to inform the franchisee of the changes to the agreements.  He cited to Illinois contract law principles for support, including that a party who agrees to terms without understanding them does so at its own peril.

Third, with respect to procedural unconscionability, the judge set forth various facts to sustain his finding that the arbitration clauses were not too difficult to find, read, or understand.  Those facts included:  the revised agreements were each less than 18 pages long; the arbitration clauses contained the title "Arbitration of Disputes" (in bold print and underlined); the word "arbitrate" appeared at least 12 times on the signature page of one of the revised agreements; and, the arbitration clauses were inserted directly above the signature lines.

Fourth, the judge stated that the letter's failure to mention inclusion of the arbitration clauses, while mentioning changes to the store address, might arouse suspicion of fraud.  However, it was not enough to find fraud.  Instead, citing Illinois law, the judge pointed out that the franchisee could have discovered the "fraud" by reading the contract and that the franchisee had the opportunity to do so during the three weeks between receiving the revised agreements and signing them.

The obvious moral of Ace Hardware is that a party to a potential contract needs to read all of its terms thoroughly, even if it is a revised agreement where the opposing party has pointed out changes.  The case also highlights how franchisees and franchisors need to be as clear as possible with one another.  In addition to the franchisee's failure to closely read the contract, the lack of clear, effective correspondence contributed to the resulting petition to compel arbitration.  Both parties spent time and money on court filings that may have been avoided if they had dealt more clearly with one another in their communications.

(The author of this post is admitted to practice law in the state of Illinois.)

[1] The location of the store actually had not changed, but the initial set of franchise agreements did identify an incorrect street address.

[2] The franchisor informed the court that it began regularly including arbitration clauses in its franchise agreements in March of 2009, after the initial set of agreements, but before the revised set.

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Michael Mayer |