• Supreme Court Reaffirms Enforceability of Arbitration Clauses, and New York Franchise Case Immediately Follows
  • March 16, 2006 | Authors: Arthur L. Pressman; Gregg A. Rubenstein
  • Law Firm: Nixon Peabody LLP - Boston Office
  • The United States Supreme Court recently reaffirmed the federal courts' strong support for enforceability of contractual arbitration provisions in Buckeye Check Cashing, Inc. v. Cardegna, 163 L. Ed. 2d 1038 (Feb. 21, 2006). While the law has long held that generalized claims of fraudulent inducement of a contract that includes an arbitration clause do not invalidate contractual arbitration, in Buckeye the Supreme Court addressed the hitherto unresolved question of whether an arbitration provision in a contract alleged to be void ab initio was nonetheless enforceable. A contract that is void ab initio is one that is invalid on its face because, generally, it is illegal or its purpose is illegal (examples of illegal contracts are usurious contracts, contracts for gambling debts in some states, and contracts to commit an illegal act).

    In Buckeye, the Court reviewed a check-cashing contract by which the plaintiffs received cash for a personal check, less a finance charge. The plaintiffs, relying on several lower court opinions that refused to enforce arbitration provisions in contracts held to be facially invalid, claimed that their contracts were illegal and void ab initio because the contracts charged usurious interest rates and violated various consumer protection statutes. Because the entire contracts were illegal, the plaintiffs reasoned that the arbitration provisions contained within the contracts were also unenforceable. Based on its prior decisions, the Supreme Court rejected this argument to hold that regardless of whether a contract can be avoided because it was fraudulently induced or is wholly illegal by operation of law, absent a basis for specifically challenging the arbitration provision, the entire matter must be referred to arbitration for resolution.

    Less than two weeks after the Supreme Court issued its Buckeye decision, the decision was applied in the franchise context in Rubin v. Sona International Corp., C.A. No. 05 Civ. 6305 (SAS), 2006 U.S. Dist. LEXIS 8379 (SDNY Mar. 3, 2006). In Sona, plaintiff franchisees sought to avoid an arbitration provision on the basis that the franchise agreement that contained the provision was illegal. The plaintiffs argued that the franchise agreement was void ab initio because the franchisor failed to register its offering circular with the New York Law Department. Applying Buckeye, the Court rejected this argument. Because the franchisees made no argument that the arbitration provision itself was illegal or barred by applicable law, the Court held that the issue of the franchise agreement's legality must be resolved by an arbitrator. Accordingly, the Court dismissed the case and ordered the parties to arbitrate their dispute.

    Buckeye and Sona should put to rest any lingering issues about the enforceability of arbitration provisions in franchise agreements. While errors in UFOCs and registrations may still ultimately carry the day for a franchisee, franchisors who rely upon arbitration as their preferred means of dispute resolution should be confident that any decision concerning such matters will be made by an arbitrator (for better or for worse), and not by a judge or jury.