The Franchise Memorandum

The power to determine the appropriateness of a class arbitration was conferred on an arbitrator last month in a somewhat unusual context in Medicine Shoppe International, Inc, v. Edlucy, Inc., et al., 2012 U.S. Dist. LEXIS 67133 (E.D. Mo. May 14, 2012). This decision arose on franchisor Medicine Shoppe International's (MSI's) federal court motion to enjoin a collective arbitration, as the franchisor argued that separate arbitration agreements necessitated individual arbitration proceedings. In this case, it was MSI that was in the position of arguing that the court (rather than the arbitrator) is the entity that must determine whether or not consolidated or other group arbitration is permissible. The franchisees countered that permission for collective or joint arbitration could be granted by the arbitrator, and that incorporation of the AAA Rules in the franchise agreements required the decision to be made by an arbitrator.

The court held that the power to allow or disallow collective arbitration was given to the arbitrator in this case. The arbitration clause provided that "[a]ny controversy or claim arising out of or relating to [the] Agreement, or its interpretation or enforcement," will be decided "in accordance with the rules then obtaining of the American Arbitration Association." Rule 7(a) of the AAA Rules authorizes arbitrators to determine their own jurisdiction as well as any "objections with respect to the existence, scope or validity of the arbitration agreement." As a result, the court held that it lacked subject matter jurisdiction and denied MSI's motion.