The recent 1st Circuit case Fantastic Sams Franchise Corp. v. FSRO Association Ltd. pitted the hair salon chain against owners of regional franchises. The franchisees claimed that the Fantastic Sams corporation was depressingthe sale price that they could obtain for the businesses by failing to issue legally required disclosure statements— a document similar to a prospectus a franchisee must obtain before selling his business.
The parties had contractually agreed to arbitrate disputes arising under their franchise agreements. The franchisees wanted to arbitrate their claims in an association action—essentially meaning that an association of franchisees would represent the interests of the individual franchise owners collectively in a single case.
“Some courts have said unless the agreement expressly provides for class arbitration, then you cannot have a class action,” says Liz Kramer, a shareholder at Leonard, Street and Deinard. “Now a number of circuit decisions have said that’s not the right interpretation of Stolt-Nielsen. Courts are now saying that arbitrators have to analyze these agreements as a contract and determine the parties’ intent based on the agreement and the surrounding circumstances.”
The decision gives leverage to proponents of class arbitration. For many small consumer cases, the question of whether class proceedings will be permitted is the determining factor in whether the case will be brought in the first place. For instance, if consumers allege that a credit card issuer improperly charged cardholders $10 per month, each individual customer’s damages are likely too small to be of interest to attorneys. On the other hand, if class members can pool their claims and their resources, then the collective amount of damages may be high enough to merit hiring an attorney.