Bill is aimed at contract abuses

House debates consumer protection in arbitration reform

October 26, 2007|By Rob Tricchinelli | Rob Tricchinelli,Capital News Service

Deborah Williams and Rick Welshans opened a Coffee Beanery franchise in 2004 and experienced problems right from the start.

Their store, at 2641 Riva Road in Annapolis, hemorrhaged money, and an arbitrator denied their claims to recover their losses. They have been scrambling to avoid financial ruin and were scheduled to testify yesterday before a House committee on a bill to limit the role of arbitration in consumer contracts.

Their experience with arbitration is an example of how the system can be biased against consumers, the bill's supporters say.

The couple's story starts in 2003, when Welshans was laid off from his job as a sales representative for Rohm and Haas, a chemical manufacturer.

The couple then thought about running their own business. They looked at different coffee-shop franchises, including Starbucks and Caribou Coffee, before deciding on Coffee Beanery.

They met with company representatives and signed the paperwork to open a cafe-style store, which sold more items than the company's coffee carts and kiosks.

Before the couple could open the franchise, Coffee Beanery had to provide a Uniform Franchise Offering Circular. The UFOC, which is required by federal law, requires franchisers to divulge certain information about their company and their business model.

When the couple read the UFOC, they said, the document didn't make a distinction between the kiosk and cafe-style stores.

Three months later, "we absolutely knew we were in trouble," Williams said. The cafe model wasn't what they expected. They were obligated to honor contracts to third-party vendors, which ran up significant costs.

Their store also had equipment problems. An $8,000 pastry case broke in March 2004 and still hasn't been fixed, they said.

After realizing some of the problems that were developing, the couple got on the phone with other franchisees: "Every one of us was having the same problems," Williams said.

They were advised by Dale Cantone, a franchise specialist in the Maryland attorney general's office, not to waive their right to a lawsuit, which, he said, was an important bargaining chip. They chose not to waive that right.

Maryland then issued an order allowing them to recoup some of their losses. The order, however, would have forced them to give up their right to a lawsuit.

"We remain the only franchisees who have been asked to waive our rights as a condition" of accepting such an order, Williams said.

Instead, they entered arbitration.

A Michigan arbitrator, JoAnne Barron, dismissed the couple's claim entirely in March and ordered them to reimburse the Coffee Beanery for past due royalties, attorney fees and other expenses.

The final judgment was more than $150,000. Factoring in the couple's cost of arbitration, which was more than $100,000, they said they have lost more than $1 million.

The Coffee Beanery did not return calls for comment.

The arbitrator also ruled that the couple had given up their right to a lawsuit, leaving them with little recourse. This year, a circuit judge in Michigan upheld the arbitration ruling.

"I have nothing left to lose," Williams said.

The couple also sent out a letter saying they will close their store Wednesday: "While our cafe is the first step in losing everything we have ever had, our home will be next."

The House Judiciary Committee's Subcommittee on Commercial and Administrative Law is considering their testimony as part of its hearing on the Arbitration Fairness Act, sponsored by Rep. Hank Johnson, a Georgia Democrat.

The bill would ban "pre-dispute mandatory binding arbitration," in which consumers signing contracts for certain services - credit cards or car loans, for example - give up their rights to sue and agree to enter arbitration instead.

The bill's supporters argue that arbitration - especially in pre-dispute cases - is often biased, costly and inconvenient.

"For consumers, mandatory arbitration is an albatross," Johnson said in a statement. "And despite what companies may say, it is not more affordable than going to court."

A report from Public Citizen showed that 94 percent of credit card arbitration cases handled by a major California firm, for example, went in favor of the credit card companies.

U.S. Reps. Elijah E. Cummings and John Sarbanes, both Maryland Democrats, are co-sponsoring the bill.

Arbitration advocates maintain that arbitration is efficient, cheap and fair.

"The simplicity and efficiency of arbitration provides all parties with fair and affordable access to civil justice," said Roger Haydock, managing director for the National Arbitration Forum. "We oppose the proposed act because it would take these benefits away from consumers, employees, and franchisees."

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