Oct 5, 2016 - Blog by |

When comparing different franchise opportunities, there are several factors that come into play. Brand recognition, royalty rates, training, the initial investment – these are all issues that, for most prospective franchisees, are top of mind.

But, there is another issue that can be just as important as these (if not more), and that also serves to differentiate certain franchisors from others. This is the issue of mandatory arbitration. While you may not be concerned about getting into a dispute with your franchisor right now, what your franchise agreement says about arbitration can be critical to understanding – and protecting – your rights should a dispute arise down the line.

What is Mandatory Arbitration?

Arbitration is a voluntary form of alternative dispute resolution (ADR) that is intended to provide consenting parties with an efficient and cost-effective way to avoid the burdens of full-blown litigation. In many commercial situations, it will be in both parties’ best interests to acknowledge their differences and work toward a resolution without spending unnecessary time (and money) going to court.

But, if arbitration is “voluntary” and designed to save money, why are we talking about “mandatory” arbitration; and, why have we said that arbitration is not necessarily fair for franchisees?

If your franchise agreement has an arbitration clause, then you are subject to mandatory arbitration. Essentially, when you signed the agreement, you “voluntarily” agreed to submit all relevant disputes to arbitration regardless of whether it is in your best interests to do so when the time actually comes. Franchisors tend to like mandatory arbitration clauses for a number of reasons – all having to do with protecting them against their franchisees.

The Pitfalls of Mandatory Arbitration for Franchisees

For franchisees, mandatory arbitration clauses can present a number of potential concerns. While the specifics of mandatory arbitration clauses vary from one franchise agreement to the next, most tend to have the following characteristics:

  • They designate a forum that is convenient for the franchisor. Unless you happen to live near your franchisor, this means that you will need to travel if you end up in a dispute involving your franchise agreement.
  • They exempt situations where the franchisor needs to enforce its rights. While technically neutral, as a practical matter, provisions that exempt payment disputes (i.e. non-payment of royalties) and intellectual property-related disputes (i.e. enforcement of a franchisee’s confidentiality obligations) from the mandatory arbitration requirement favor the franchisor.
  • They limit the time window for asserting claims. Franchise agreements often have very short “limitations” periods. If you do not file your arbitration claim in time, you can lose your rights.

These are just a few of the issues. Equally important, franchisors often consider their arbitration clauses to be “non-negotiable.” As a result, if the franchise agreement for your desired franchise includes a mandatory arbitration clause, you may have little choice but to give your franchisor an unfair advantage.

Speak with Franchise Attorney Jeffrey M. Goldstein of the Goldstein Law Firm

If you are considering a franchise opportunity, or if you are a franchisee facing a dispute with your franchisor, we invite you to contact us for a consultation. The Goldstein Law Firm is a national franchise law firm that exclusively represents franchisees and dealers. To speak with attorney Jeffrey M. Goldstein about your legal needs, please call (202) 293-3947 or contact us online today.

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