Friday, November 20, 2015

Arbitration ... the good, the bad and the ugly?

Much has been written about arbitration ... and in the franchise world we discuss it quite frequently at conferences and in law journals ... and put it into play when disputes arise.

But most recently, Bruce Schaeffer at Franchise Valuations, pointed out in The Franchise Valuations Reporter (November 2015) that the New York Times published a 3-part series: Part 1 (Stacking the Deck of Justice), Part 2 (Privatization of the Justice System) and Part 3 (Religious Arbitration). To quote from the The Franchise Valuations Reporter, "According to [the] 3-part series ..., arbitration has become primarily an old boys' network and a tool to keep confidential the misdeeds of the more powerful.  The series reveals the many abuses in the process although not really focusing on commercial arbitration between businesses."

Although the Times series does not focus on the commercial world (it concentrates on consumer purchasing matters, such as cellphones, credit cards, cable companies and, to some degree, employment matters), many of the "bad" aspects of arbitration discussed in the series are seen in franchise arbitration agreements. Now when we say "bad" that is from the franchisee-aspect of the franchise equation. What may be "bad" for franchisees is usually "good" for franchisors ... after all they do write the provisions! And, the legal pendulum has swung decidedly in favor of enforcing arbitration agreements. (See the Times series)

When representing franchisees and franchisors, we lawyers struggle over the best dispute mechanism for our clients. Should we go to court? Mediation? Arbitration? Sometimes what seems to be a good idea on paper, backfires in reality. But, like the Part 1-title of the Times series, if we get to draft the Franchise Agreement, truth be known, we do try to stack the deck. This does not mean that the cards are always dealt to the franchise company's advantage, but chances are they will be.

On the franchisee-side, if you have to live with arbitration, make the most of it. Take advantage of the seemingly faster process and select counsel who is familiar with the process and can maximize the experience while reducing the costs typically associated with the judicial process.

Some of the advantages written in favor of franchise companies include:
  • the location of the arbitration hearing will likely be in the company's home court
  • class action arbitration or multi-party arbitration will not be permitted
  • there will be no jury deciding the matter
  • rights of appeal are very limited
  • pre-arbitration discovery may be limited
  • shared or full-cost of arbitrator's fees and administrative fees
  • claims for injunctive relief may be limited or non-existent
Potential franchisees need to understand the risks and limitation associated with arbitration. Franchisors should not go too far in striking a procedural imbalance or they risk having courts declare the arbitration requirement unconscionable and unenforceable.

The ugly we will save for another day -- but when franchise disputes arise and the swords are crossed, almost everyone loses one way or another. Mediation anyone?

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