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Arbitration Clauses in Franchising Agreements

Posted on Date: Oct 25, 2019

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Under Fire in Federal Court: Can a claim of racial discrimination be forced to arbitration?

United States Court of Appeals for the Second Circuit in New York ruled in August on a very interesting case our firm is handling that may have far reaching effects with respect to racial discrimination in granting franchises and, more broadly, on the right of franchisors to enforce arbitration clauses against prospective franchisees.    

The case, Doctor's Associates, Inc. (the franchisor of Subway® restaurants) v Girum Alemayehu, stems from civil rights litigation in the United States District Court for the District of Colorado. That case, Girum Alemayehu v. Connie Gemignani, John Marshall, Clear Stone Development, Inc., a Colorado corporation, and Doctor's Associates, Inc., a Delaware corporation, alleges systematic racial discrimination in the selection of franchisees by Subway, the world's largest fast food company with 44,000 outlets.   

At the heart of Doctor's Associates, Inc. v Girum Alemayehu, is a charge of racial discrimination against DAI/Subway by our client, Mr. Girum Alemayehu, a black Ethiopian immigrant with a Master’s degree in education and a forthcoming PhD in public policy, who wished to buy an existing Subway® franchise from a long-term franchisee in the Denver area. It has been stalled since last year when DAI/Subway filed a Petition to Compel Arbitration with the United States District Court for the District of Connecticut based on the arbitration clause in the signed franchise application which required arbitration to take place in Bridgeport, CT.  

While the three-judge panel vacated the ruling by Janet C. Hall, Chief Judge of the United States District Court for the District of Connecticut in New Haven, that an arbitration clause in an application for a franchise cannot be enforced, they also remanded the case for further proceedings on questions we raised relating to the scope of the arbitration provision, the lack of consideration for the alleged contract as a whole and DAI’s alleged bad faith in contracting.  Because Judge Hall had ruled that the arbitration clause was unenforceable, she did not rule on our additional arguments.  With the appeals court ruling, Mr. Alemayehu now has a chance to continue his case against Subway in public courtrooms as opposed to under the cloak of secrecy in arbitration.  

Among the arguments we will be making are:  

  • As a matter of law, an application is not a contract. It is a solicitation for an offer, which when accepted, and accompanied by consideration, can then become a contract. 
  • There was no consideration because there was no detrimental reliance by either party. Contrary to DAI’s assertions, the application did not require DAI to consider Mr. Alemayehu’s application, nor did it require DAI to obtain any information about Alemayehu even though it had obtained his consent to do so. There was, in fact, no consideration. 
  • On its face the arbitration clause only applies to unasserted claims. It therefore can only apply to people with pre-existing relationships with DAI, which Mr. Alemayehu does not have. 
  • Under Connecticut law -which governs because of the parties' choice of law language -the arbitration clause cannot exist independently from the document that holds it. The arbitration clause can only be an arbitration clause if is part of a contract. Given that this clause is part of an application, under Connecticut law it cannot be an arbitration clause. 

Should Judge Hall rule for Mr. Alemayehu on the arguments above, the racial discrimination case that spawned the litigation over arbitration in franchising applications will proceed. It alleges that Mr. Alemayehu and Gary Newcomb, the second-largest Subway franchisee in the State of Colorado at that time, negotiated a purchase of one of Mr. Newcomb’s Subway franchises and an application was completed, signed and submitted to DAI/Subway by Mr. Alemayehu and his wife.   

However, in late May of 2017, defendant Connie Gemignani, an employee of Clear Stone Development, Inc., a “development agent” for DAI/Subway in Colorado, called Mr. Newcomb and, according to his sworn testimony, said she denied Mr. Alemayehu’s application because she was worried that Mr. Alemayehu would “play the race card.”  A few months later, after learning Alemayehu was still interested in operating the store, Mr. Newcomb contacted Ms. Gemignani and asked her if she would be willing to speak with Mr. Alemayehu again.  Mr. Gemignani repeated her refusal to approve Mr. Alemayehu because of his race and because Ms. Gemignani and her associates were worried that Alemayehu would be “playing the race card.”  Given the use of the phrase, “play the race card” in political discourse and because Mr. Alemayehu is African-American, Mr. Newcomb testified that he believed that Mr. Alemayehu’s race was the reason DAI/Subway was denying the application. 

Once Judge Hall rules on the aforementioned arguments, potential franchisees will know if they are be compelled to arbitrate or if an arbitration clause in an application for a franchise is unenforceable.  More broadly, we will know if arbitration clauses in franchise and other applications will continue to trample an individual’s civil rights. Until then, get advice of counsel before signing any application that includes an arbitration clause that forces you to give up your right to go to court to solve disputes. 

Jeffrey Cohen, an accomplished litigator with more than 30 years of experience, represents Alemayehu. Mr. Cohen’s law firm, Cohen LLC in Denver, Colorado, is an affiliated member of the AAFD Franchisee LegaLine. He successfully represented franchisees who sued Quizno’s and also currently represents franchisees suing Gigi’s Cupcakes.  For more information, go to http://cohentrial.com. 

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