Saturday, October 3, 2015

Torres v. Simpatico, Inc.

Opinion handed down March 25, 2015
The issue at the heart of Torres is the enforceability of a compelled arbitration clause contained in a franchise agreement.[1]  After some franchisees joined together in a putative class action against their franchisers and other individuals associated with their franchise system, alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”),[2] the franchisers attempted to assert the individual arbitration clauses in the franchisees’ contracts.[3]  The district court granted the franchisers’ motion to compel arbitration.  The franchisees then appealed from the district court’s ruling, arguing that the arbitration clauses were unconscionable and unenforceable, but the Eighth Circuit affirmed the district court’s decision.[4] 
I.  Facts and Holding
        The case involved franchisees of Stratus Franchising, LLC, which is a commercial cleaning business.[5]  The Appellants entered into standard unit-franchise agreements, which contained the arbitration provision at issue.[6]  Appellants argued the arbitration term was unconscionable and additionally argued that the arbitration agreement should not be enforceable by members of the Stratus Group who were not signatories to their respective Agreements.[7]  Appellants presented evidence that the costs of individual arbitration exceeded that of the value of each members claim, thus making the arbitration clause cost prohibitive.[8] 
        The case was decided applying Missouri contract law.[9]  The court ultimately upheld the district courts ruling that the arbitration agreement was not unconscionable and that members of the Stratus Group franchise system were legally entitled to invoke the clause as third-party beneficiaries to the franchise agreements.[10]
II.  Legal Background
        Arbitration agreements under the Federal Arbitration Act (“FAA”)[11] are enforced according to their terms.[12]  The policy this creates is a liberal one favoring arbitration, and such agreements are valid unless the provision violates some matter of state contract law.[13]  This is the same approach Missouri takes, as arbitration clauses are analyzed in the same way any contract clause would likewise be considered under Missouri contract law.[14]  The only caveat to this general principle is that no state-law rule that is contrary to the accomplishment of the FAAs objectives should be applied to invalidate an arbitration agreement.[15]  Courts will apply the state-law unconscionability doctrine to see if there is anything in the formation of the contract that would make it inequitable to enforce it.[16]
        Under Missouri law, only parties to a contract and third-party beneficiaries have standing to enforce agreements.[17]  Third parties specifically must clearly express intent to benefit” the third-party in order to bind them to an agreement, and without such express intent, the presumption is that a third-party is not a beneficiary.[18]
III.  Instant Decision
        The court was unmoved by Appellants argument that, as a practical matter, the arbitration agreements price the franchisees out of a viable remedy.[19] Appellants presented only aggregate data regarding the costs of arbitration and such evidence was not the specific evidence” required for the court to find the individual arbitration cost prohibitive.[20]  Perhaps most glaringly, the Appellants failed to provide average costs of arbitration for either Missouri or the other states in which they reside.[21] 
        The court lastly turned[22] to the question of whether other members of the Stratus Group franchise system[23] could enforce the arbitration agreement acting as a third-party beneficiary to the contracts.[24]  Upholding their rights as third-party beneficiaries, the court quoted various provisions of the franchising agreement that set out explicitly that the arbitration provision was intended to benefit and bind” certain non-signatories.[25]  For example,, Stratus had the right to be named as an additional insured on required insurance policies and explicit rights regarding a termination provision.[26]  Therefore, the court found the language of the arbitration provision and contract sufficient to bind other members of the Stratus Group franchise system as third-party beneficiaries, and it upheld the district courts ruling.[27] 
IV.  Comment
        Torres ultimately displays the court’s unwillingness to stretch any of the Appellants arguments to the level required to find the arbitration agreement unconscionable.  Missouri contract law as applied wants to bind parties to agreements they willingly make, and one surmises that it would take a lot more than one party figuring out later that a term is unfavorable to them for the court to throw the term out.
        There may indeed be some merit to the Appellants’ argument that, practically speaking, the arbitration clause prices the franchisees out of a viable remedy.  However, the fatal flaw in Appellantsstrategy may very well have been that none of the data they used to support that claim had much to do with their actual situation.  Had Appellants presented, say, the middle quartile range of arbitration costs within the state of Missouri for these type of contract disputes, it is likely that the Torres court would have been more willing to entertain their plea for relief.  However, it is likely that no such data exists, else it would be shocking that Appellants chose not to use it.
        As to third-party beneficiaries, the terms of the contract cited in the opinion seem to show the sort of clear intent needed to bind such additional parties to the agreement.  That is not to say that Appellants’ point was frivolous.  It could very well have been the case that express intent to bind would require such exact operative language.  However, as these terms are appearing and analyzed under Missouri contract law, the intent of the parties seems reasonably and objectively clear and, as such, the court was well within its rights to rule as it did.
 – Travis Braun

[1] Torres v. Simpatico, Inc., 781 F.3d 963 (8th Cir. 2015).
[2]  18 U.S.C. §§ 1961-68.
[3] Torres, 781 F.3d at 967.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 969.
[9] Id. at 967.
[10] Id. at 971.
[11] 9 U.S.C. §§ 9-14.
[12] Torres, 781 F.3d at 968.
[13] Id.
[14] Id. (citing Robinson v. Title Lenders, Inc., 364 S.W.3d 505, 515 (Mo. 2012)).
[15] Id.
[16] Torres, 781 F.3d at 969.
[17] Id. (citing Verni v. Cleveland Chiropractic Coll., 212 S.W.3d 150, 153 (Mo. 2007)).
[18] Id.
[19] Id.
[20] Id.
[21] Id. at 970.
[22] There was a brief discussion regarding the application and waiver of a RICO claim, but the court dismissed it as beyond the scope of this opinion. Id.
[23] The Stratus Group representatives were not themselves part of any of the agreements. Contracts were entered into through separate franchisers, whose standing was not challenged in this opinion.
[24] Id. at 971.
[25] Id.
[26] Id.
[27] Id.