Arbitration and Consumer Fairness Acts of 2009: Invalidating Pre-Dispute Arbitration Clauses in Franchise and Consumer Agreements Reintroduced in House of Representatives

02 March 2009 Publication
Authors: Roberta F. Howell

Legal News Alert: Distribution & Franchise

On February 12, 2009, the Arbitration Fairness Act of 2009 (Bill) was introduced in the U.S. House of Representatives and referred to the Committee on the Judiciary. The Bill would invalidate pre-dispute arbitration agreements for employment, consumer, and franchise disputes. Rep. Hank Johnson (D-Ga.), one of the Bill’s co-sponsors, contends, “This is not an anti-business bill, but a pro-consumer bill.”

The Bill, which is nearly identical to the Arbitration Fairness Act of 2007 that died in committee during the last congressional session, would limit the scope of the Federal Arbitration Act of 1925 (FAA). See our prior Legal News Alerts discussing the introduction and action on that legislation and The Bill would exclude the following types of disputes from its coverage:

  1. Employment disputes between an employer and employee arising out of their employment relationship as defined by the Fair Labor Standards Act
  2. Consumer disputes between a person (other than an organization) who seeks or acquires real or personal property, services, money, or credit for personal, family, or household purposes, and the seller or provider of such property, services, money, or credit
  3. Franchise disputes between a franchisor and franchisee.

While the prior version of this act died in committee during the last congressional session, there appears to be somewhat more interest and momentum favoring passage this time around. If enacted in its present form, the Bill would void pre-dispute arbitration agreements, or agreements to arbitrate disputes that have not yet arisen at the time of making the agreement. It also would reverse case law that had delegated to arbitrators the responsibility for deciding whether a dispute is subject to an arbitration agreement, and requires that such issues be determined by the applicable court.

The day before the Bill was introduced, the Consumer Fairness Act of 2009 also was introduced in the House of Representatives and referred to the Committee on Financial Services. The latter bill, which applies to “consumer transactions” as defined by the legislation, also voids pre-dispute arbitration agreements, deems such agreements unfair and deceptive trade practices under federal and state law, and applies retroactively to contracts entered into before enactment, if a dispute under the contract arises after enactment.

The definition of “franchise” used in the Arbitration Fairness Act generally tracks the definition used by the Federal Trade Commission (FTC), with one important difference. The FTC definition of a “franchise” requires the payment of $500 or more to the franchisor at any time before to within six month after the franchisee’s business opens. In addition, the FTC definition of franchise contains a number of express exceptions that, generally, exempt transactions between franchisors and sophisticated franchisees. The Arbitration Fairness Act, however, contains no such exemptions, there is no minimum amount of franchise fee that must be paid to qualify as a franchisee, and it expressly recognizes the payment of indirect franchise fees as sufficient to meet the statutory definition, but does not define what constitutes an indirect fee. Unless further definition is provided as the Bill moves through Congress, this will create substantial uncertainty about which relationships meet the statutory definition and will likely result in numerous relationships that most people, including the participants, would not consider a franchise being subject to the Arbitration Fairness Act.

In addition, both the Arbitration Fairness Act and the Consumer Fairness Act define “consumer” very broadly. Read literally, that broad definition would void arbitration provisions in contracts between most dealers and their customers.

Because of the widespread use of arbitration clauses by many manufacturers and franchisors as well as by their distributors and franchisees, Foley’s Distribution & Franchise attorneys will monitor the progress of the bills and similar legislation. Businesses whose contracts contain arbitration clauses also should follow the legislation’s progress closely and consult with counsel before drafting, revising, agreeing to, or attempting to enforce pre-dispute arbitration agreements.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Roberta F. Howell
Chair, Distribution & Franchise Practice
Madison, Wisconsin

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