A franchisee employer may not bind an employee to arbitrate his or her dispute with an arbitration panel administered by its franchisor and constituted entirely of parties affiliated with other franchisees, according to the Washington Court of Appeals.

In Rodriguez v. Windermere Real Estate/Wall Street, Inc., No. 59526-1-I, 2008 WL 217086 (Wash. Ct. App. Jan. 28, 2008), Rodriguez became a real estate agent for Windermere Real Estate/Wall Street (WRE/WS). The parties executed a broker contract, which contained an arbitration agreement.

After a dispute regarding commissions, WRE/WS terminated Rodriguez. Rodriguez requested arbitration regarding the dispute, but WRE/WS did not respond. Rodriguez then filed suit against WRE/WS, which prompted WRE/WS to move to compel arbitration. Rodriguez opposed the motion, alleging that the arbitrator selection process was inherently unfair because all arbitrators were related in some way to WRE/WS's franchisor, Windermere Real Estate Services (WRES). The trial court agreed and denied the motion to compel.

The Court applied WASH. REV. CODE. 7.04A.110(2), which states that "[a]n arbitrator who has a known, direct and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party may not serve as a neutral arbitrator." It held that requiring all potential arbitration panelists to be an owner, broker, manager, or sales associate of a WRES franchisee, and empowering the franchisor WRES to unilaterally select all panelists, implicated an impermissible "existing and substantial relationship" between WRE/WS, WRES, and all potential arbitrators.

WRES, the franchisor and administrator of the program, denied any substantial relationship between the parties, maintaining that it never appointed panelists affiliated with any franchisee, and never appointed panelists from the same local area as the franchisee. Still, the Court observed that the franchisor had a binding, legal relationship with the franchisee. Such a relationship, according to the Court, "diminishes the independence of the franchisee," and suggests a prohibited existing and substantial relationship between a party and administrator.

The Court also rejected WRE/WS's argument that providing unlimited appointment challenges for cause alleviated any concerns with unfairness, noting that the grounds for "for cause" challenges were never defined within the agreement and there was no mechanism for appealing the WRES administrator's decision regarding any "for cause" challenge.