in reference to: Doctor’s Assoc., Inc. v. Stuart
This above case from 1996 illustrates many of the horror stories you read on this blog, particularly site selection and mandatory arbitration clauses.
Several Subway franchisees sued Subway corporate for basically screwing them on site selection.
First a little insight into Subway’s site selection process described in the court’s opinion.
After a Subway franchise is purchased, Subway helps the franchisee to find a site for the Subway shop. If Subway approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with Subway (red flag!).
In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. Subway corporate allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked Subway corporate for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois.
Subway corporate then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants’ objections, Subway corporate made Defendants locate their second Subway store in Granite City, less than two miles from Defendants’ first store. The opening of this second shop cut into the sales of Defendants’ first Granite City shop.
Subway corporate is your landlord. They can dangle an eviction notice in the face of franchisee to compel desired behavior. If Subway had the franchisee’s best interests in mind, that franchisor-landlord relationship could work in theory. Intuitively, you would think that maximizing the franchisee’s profits would maximize Subway’s profit, right? Wrong. (see The hidden ways franchisors make money off franchisees)
So you think, "If they try to screw me, I"ll sue them!", right? Well, you can’t because like most franchise agreements, the Subway franchisees agreed to settle disputes using an arbtration service instead of the government courts:
Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by arbitration
Convincing a judge the arbitration clause is unconsciounable is a very high hurdle, but can be done as Rob Boulter has done recently in California representing Mail Box Etc. franchisees.. That means you have to argue your case in front a “unbiased” private arbitration company. Ironically, arbitration companies compete verociously for Subway’s business. If Subway thinks the arbitration company is unfair, it can contract with another arbitration company. In arbitration, there is no jury, few evidenciary and discovery rules, and the outcome is binding. You can sue them if you find a technicality in the contract (which the case above found in the Sublease Agreement which did not contain an arbitration clause like the Franchise Agreement).