The Franchise Memorandum

In another putative class action in Connecticut, a federal court declined to dismiss an employee misclassification lawsuit against Coverall North America, Inc., a janitorial services franchisor, but agreed to stay the action and compel arbitration. Bille v. Coverall N. Am., Inc., 2020 WL 1185251 (D. Conn. Mar. 11, 2020). Plaintiffs Caribe Billie and Quincy Reeves, both Coverall franchisees, alleged that Coverall had misclassified them as independent contractors and withheld portions of their wages in violation of Connecticut law. Coverall sought to dismiss the case, in part, for lack of personal jurisdiction or for failure to state a claim. Alternatively, Coverall sought to stay the action and compel arbitration. The court declined to dismiss the suit for lack of personal jurisdiction or for failure to state a claim, but it granted Coverall’s request for a stay and motion to compel arbitration.

In arguing that the court should not exercise personal jurisdiction over Coverall, the company first argued that it was not subject to Connecticut’s long arm statute because it was not a party to the Coverall franchise agreements that the franchisee-plaintiffs had signed. Rather, those Coverall franchises were granted by a master franchisee of Coverall to the franchisees. However, the court found that the long arm statute nonetheless reached Coverall because it derived significant benefits from the agreements, both due to the control that Coverall exercised over the franchisees as well as the fees that franchisees paid to Coverall. In addition, Coverall’s contacts to Connecticut included providing support and services to franchisees in Connecticut (including through in-person visits) and maintaining an interactive website that offered services in Connecticut, among others. These contacts were sufficient to satisfy the requirements of due process.

Despite declining to dismiss the case, the court ultimately found that a stay was required because of the parties’ arbitration agreement. The franchisees sought to avoid arbitration, arguing that the arbitration provision in the parties’ agreements was procedurally and substantively unconscionable. The court disagreed, finding that the franchisees’ claims regarding the adhesive nature of the contract or unequal bargaining power were insufficient, and that the arbitration clause — which was written in bold, capital letters — was not “obscure and buried,” as the franchisees alleged. The court further found insufficient evidence that the cost-splitting provision, provision that assigned attorneys’ fees to the prevailing party, or the confidentiality provision were substantively unconscionable. The court found that there was a lack of case law to support these claims and, further, a lack of evidence in the record to demonstrate, for instance, that the costs would be exorbitant or that the plaintiffs lacked the ability to pay. The court further held that inclusion of the confidentiality provision, which applied equally to the plaintiff and defendant, was not unilateral and was supported by existing case law. The court therefore issued a stay and administratively closed (but did not dismiss) the case pending the outcome of arbitration.