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Reeves v. Snap-On Tools Company, LLC

03-4563 (U.S. Dist. Ct. D. N.J. 2004) (Unpublished)

CONTRACTS; ARBITRATION—A court analyzes highly restrictive limitations on discovery and claims limitations in a contract’s mandatory arbitration provision and discusses the extent to which each might be enforceable.

Several franchisees brought suit against their franchisor. They claimed that the franchisor engaged in a fraudulent and illegal business. In response, the franchisor moved to compel arbitration pursuant to each franchisee’s agreement. The franchise agreements provided that all claims arising out of the franchise agreement had to be submitted to arbitration within one year following the conduct giving rise to the claim; that joinder of claims was not permitted; that discovery was limited; and that findings in prior arbitrations were not to be binding in subsequent arbitrations. The franchisees contended that they should not be compelled to arbitration because the arbitration clause was unconscionable, resulted from a contract of adhesion, and unduly protected the franchisor from litigation by precluding class action suits, limiting discovery, imposing a one-year time limit for the filing of claims, and preventing prior arbitrations from having collateral estoppel effect. The franchisees conceded that they did not object to pursuing their claims through arbitration as long as they were not constrained by the particular provisions of the arbitration clause.

The Court held that individual provisions within an arbitration clause could be stricken without invalidating the entire clause. Instead, those provisions may be severed from the contract, as long as doing so does not defeat the primary purpose of the contract. Courts will find a contract term unenforceable only when both procedural and substantive unconscionability are present. Here, the franchisees claimed that there was procedural unconscionability because the contract was one of adhesion. According to the Court, however, adhesion alone does not invalidate the provisions of an arbitration clause. To determine whether a contract of adhesion is unconscionable, a court must consider the contract’s subject matter, the relative bargaining positions of the parties, the degree of economic compulsion motivating the “adhering” party, and the public interests affected by the contract.

As to substantive unconscionability, the franchisees first claimed that the provision precluding class actions rendered the provision unconscionable because it effectively precluded them from seeking redress. The Court disagreed, holding that a prohibition on class arbitration does not necessarily render an arbitration, nor the particular provision, unenforceable. Specifically, the franchisee’s contended that they had no means to redress the wrongs committed unless they were permitted to join their claims. They argued, for example, that no single franchisee could obtain the discovery necessary to learn the scope of the franchisor’s alleged fraudulent practices. The Court agreed that the franchisee’s allegations appeared suitable for class action or joinder in that they may have required the franchisees to establish a pattern of conduct. Consequently, the Court ruled that if the arbitrators who decide this case determine that the franchisees would have been precluded from seeking redress, the provision precluding class action should not be enforced.

The franchisees next claimed that the provision’s discovery limits rendered the arbitration clause unconscionable. The Court disagreed, holding that the limitations in this case did not preclude the franchisees from presenting a claim. The arbitration clause explicitly permitted the arbitrators to amend these limitations. Thus, because the agreement allowed the limits to be altered, the Court chose not to strike the limitations without giving the arbitrators the chance to determine whether to modify them.

The franchisees also objected to the collateral estoppel provision. They argued that the franchisor included this provision in its franchise agreement to put potential plaintiffs at a disadvantage by requiring them to re-litigate issues that had been settled in prior arbitrations. The Court disagreed, holding that the provision did not affect the collateral estoppel and res judicata effect of an award between parties in a particular proceeding. Furthermore, parties are free to agree not to be bound by prior arbitrations.

Finally, the franchisees objected to the one-year limitation period for the filing of claims. The Court was bothered by this provision because the one-year period appeared to run from the date of the conduct giving rise to the complaint, rather than from the date when the franchisees could have reasonably discovered the wrong. The franchisees argued that they were not able to discover certain alleged misconduct during their first year as franchisees. According to the Court, this limitation unreasonably limited the franchisee’s ability to investigate claims, and, if enforceable, could have served to prematurely bar the franchisee from seeking redress. Thus, it held this provision to be unconscionable and ruled that the arbitrators should apply the discovery rule to determine when the one-year limitation period should have begun to run when a franchisee is reasonably unaware that an injury has occurred.

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