The Franchise Memorandum

The franchisor has gained a victory in the ongoing litigation between Coverall North America, Inc. and its franchisees. In Awuah v. Coverall North America, Inc., 2012 U.S. App. LEXIS 26461 (1st Cir. Dec. 27, 2012), the First Circuit held that a sub-group of purported class members who became Coverall franchisees by signing Consent to Transfer Agreements or Guaranties to Coverall’s franchise agreements must arbitrate their claims against Coverall. The district court had determined that this sub-group did not have to arbitrate their claims because, as a matter of contract construction, they did not have adequate notice of the arbitration clauses contained in the franchise agreements. Coverall appealed this determination, and the First Circuit reversed.

The franchisee/appellees had become franchisees by entering into Consent to Transfer Agreements or by Guaranties, but they did not sign the franchise agreement which either contained or incorporated by reference a mandatory arbitration provision.  They argued that the language of these Consents and Guaranties did not sufficiently incorporate the franchise agreements’ arbitration clause. The Consents and Guaranties did explicitly state that the franchisees had agreed to perform all responsibilities, duties, and obligations under the franchise agreement. The First Circuit held that no “magic terms” such as “incorporated by reference” are required in order to bind a party to a contractual provision. Rather, if the agreement at issue clearly communicates the obligation to arbitrate, as it did in this case, then it is enforceable.

The franchisees also argued that they could be not be bound by the arbitration provision because they had not received appropriate notice of the requirement. They relied primarily upon cases involving federal employment statutes, including the Americans With Disabilities Act, the Civil Rights Act of 1991, and the Age Discrimination in Employment Act, which held that a special heightened notice standard applied to agreements to arbitrate disputes involving federal employment statutes. The First Circuit held that the district court erred by relying on these cases. Instead, the district court should have looked to Massachusetts state commercial contract law, which explicitly does not impose a special notice requirement upon agreements containing arbitration clauses.  Even if Massachusetts law did impose a special notice requirement, any such requirement would be preempted by the Federal Arbitration Act.