We Care Hair Development, Inc. v. Engen

180 F.3d 838 (7th Cir. 1999)

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Nature of the Case

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Facts

All of the appellant-franchisees entered into franchise agreements with We Care Hair, Inc. The agreements contained a clause requiring arbitration as a condition precedent to the commencement of legal action for all disputes arising out of or relating to the franchise agreement. All of the franchisees were required to sublease their premises from a leasing company, We Care Hair Realty, which is an alter ego of We Care Hair, Inc. The rent under the subleases is the same as the rent under the master leases between the landlords, and We Care Hair Realty, and the franchisees are directed to pay their rent directly to the landlords. Arbitration was not required under the subleases. The offering circular also advises prospective franchisees that the leasing company, We Care Hair Realty, could terminate a franchisee's sublease without We Care Hair also terminating the franchise agreement, a situation which could render the franchise agreement valueless. A class action suit was commenced in state court by Ds and P filed a suit in federal court to compel arbitration. P prevailed and got an order to compel arbitration, which was appealed. Ds contend that the District Court was in error because the arbitration clause with the cross-default provisions in the subleases was unconscionable and against public policy.