Torres v. Simpatico, No. 14-1567 (8th Cir. Mar. 25, 2015), the Eighth Circuit Court of Appeals affirmed a district court’s order compelling individual arbitration in a putative class action suit, rejecting claims of unconscionability.
The individual plaintiffs were or are unit franchisees of Stratus Franchising, LLC (“Stratus”), a commercial cleaning business. Stratus sells master franchises, which granted the master franchiser the exclusive right to sell Stratus unit franchises in a particular regional market. Each plaintiff entered into a standard-unit franchise agreement, which included a broad, standard-form arbitration provision. Plaintiffs filed a putative class action against their respective master franchisers and other individuals and entities of Stratus alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Applying Missouri contract law, the district court granted Defendants’ motion to compel individual arbitration.
On appeal, the Eighth Circuit noted that the validity of an arbitration provision is a matter of state contract law. If an arbitration provision is valid, then any disputes within that agreement must be submitted to arbitration. Applying the Supreme Court’s decision in Concepcion, that state laws that are obstacles to the Federal Arbitration Act’s objectives should not be applied, the court discussed the type of unconscionability that courts may consider and determined it was limited essentially to unconscionability in the formation of the contract.
Plaintiffs pointed to the terms of the arbitration provision requiring individual arbitration participants to pay all of the filing fees and to reimburse Stratus if it prevails in arbitration. The Eighth Circuit determined that Plaintiffs had to show more than a “hypothetical inability to pay” to overcome the federal policy favoring arbitration. The evidence submitted by Plaintiffs included an American Arbitration Association (“AAA”) schedule of filing fees for claims of certain dollar amounts, an AAA study of average daily rates charged by arbitrators in different jurisdictions and Plaintiffs’ counsel’s affidavit estimating the length and cost of each hearing and asserting that each plaintiff’s costs in arbitration would exceed the amount of any class member’s claim. The court held that this did not constitute the specific evidence necessary to establish that individual arbitration is cost prohibitive. None of the plaintiffs resided in the geographic areas that the arbitrator fees related to, and the court noted that the arbitrator could allocate costs and expenses as he or she saw fit in the award. The court did not accept the attorney’s affidavit that the individual plaintiffs could not afford the cost, as they did not submit individual affidavits or declarations concerning their inability to pay.
Plaintiffs also argued that individual arbitration was unconscionable because of the waiver of punitive or exemplary damages and attorney’s fees otherwise available in a RICO action. However, the Eighth Circuit noted that it had previously held that whether the prospective waiver of punitive damages violates the public policy underlying RICO is a matter for the arbitrators in the first instance.
Plaintiffs also argued that individual arbitration could not be enforced as to non-signatories to the franchising agreement. However, the court noted the broad language of the franchising agreement, and the requirement that the franchisees buy insurance naming Stratus Franchising, LLP as an additional insured. This led the court to conclude that the contract was intended to benefit non-signatories, including the application of the arbitration provision.
A version of this post originally appeared in the May 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.
