The Franchise Memorandum

A federal court in Pennsylvania recently ruled that a cleaning service franchisee must arbitrate his claims against a franchisor on an individual basis, upholding the franchise agreement's arbitration clause and class action waiver. Torres v. CleanNet USA, Inc., 2015 WL 500163 (E.D. Pa. Feb. 5, 2015). Torres claimed CleanNet and its two subfranchisors engaged in a scheme to misclassify franchisees as independent contractors to avoid their obligations under state labor laws. Citing the United States Supreme Court's decision in AT&T Mobility LLC v. Concepcion, the court rejected the argument that arbitration would prevent Torres from vindicating his rights by limiting discovery, requiring a filing fee, and precluding him from collecting certain statutory damages or attorneys' fees. Concepcion held that vindication of state statutory rights is not a legitimate basis to invalidate an arbitration agreement. The court also found all of the defendants could enforce arbitration on the basis of equitable estoppel, even though only one of the three defendants was a signatory to the franchise agreement.

Similarly, in Estrada v. CleanNet USA, Inc., 2015 U.S. Dist. Lexis 22403 (N.D. Cal. Feb. 24, 2015), a California court compelled arbitration in an action filed by former CleanNet franchisees under similar franchise agreements. The court rejected Estrada's argument that the alternative dispute resolution provisions were unconscionable, finding that the agreements were not substantively unconscionable and any procedural unconscionability was very minor. The court also held that Estrada must arbitrate his state labor law claims on an individual basis because the Federal Arbitration Act preempts the California statute preventing an employee from waiving his right to bring an action under the applicable state labor law.