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Fourth Circuit Reverses District Court’s Ruling That Franchise Arbitration Clause Was Unconscionable
Posted in Arbitration

The Fourth Circuit overturned a district court’s decision not to enforce a franchise agreement’s arbitration clause in Muriithi v. Shuttle Express, Inc., 712 F.3d 173 (4th Cir. Apr. 1, 2013). The lower court had denied Shuttle Express’s motion to compel arbitration after concluding that the arbitration clause was unconscionable because of (1) a class action waiver; (2) a requirement that the parties split arbitration fees; and (3) a one-year limitation on claims arising under the agreement. The Fourth Circuit concluded that the district court’s first rationale was not sound in light of the controlling Supreme Court precedent in AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740 (2011). Under Concepcion, courts are prohibited from altering an otherwise valid arbitration agreement by applying the doctrine of unconscionability to eliminate a class action waiver. Therefore, the Fourth Circuit found that the district court had erred in holding that the class action waiver was unconscionable.

The Fourth Circuit next decided that the lower court erred in finding the fee-splitting provision in the arbitration clause to be unconscionable. The appellate court agreed that an arbitration clause could be unconscionable where it imposed on an aggrieved party fees that are so prohibitive as to effectively deny access to the arbitral forum. However, the court noted that it is the plaintiff’s burden to prove that the actual costs were prohibitive. Although Muriithi claimed that the cost of arbitration would far exceed the value of his claim, the Fourth Circuit decided that he had not provided evidence of the value of his claim and provided insufficient evidence of the actual cost of arbitrating. Finally, the Fourth Circuit held that the district court had erred in finding the franchise agreement’s one-year limitation on claims to be unconscionable. Because the limitation was part of the general terms of the parties’ contract, and not part of the arbitration clause itself, it was improper for the district court to consider the provision while analyzing the enforceability of the arbitration clause. The court stated that arguments about the general terms of the contract, as opposed to specific arguments about the arbitration clause, should be left for the arbitrator to decide. Therefore, the Fourth Circuit vacated the district court’s judgment and remanded with instructions to compel arbitration.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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