As a franchisee, the majority of your legal rights are determined by your franchise agreement. This includes your right to take legal action against your franchisor. Most franchise agreements include dispute resolution clauses, and many of these clauses require franchisees to submit their disputes to franchise arbitration.
If you are facing mandatory arbitration, it is important to know what to expect as you move forward. While arbitration is generally less costly and less time-consuming than litigation, it is still a resource-intensive process that can take about a year (or longer) by the time all is said and done. So, what can you expect if you need to arbitrate a dispute with your franchisor? This article provides an overview of the franchise arbitration process.
The AAA’s Arbitration Process for Franchise Disputes
While there are multiple arbitration providers, the American Arbitration Association (AAA) is by far the most used provider in the United States. Many franchisors prefer to arbitrate before the AAA, and many franchise agreements specifically require the use of the AAA’s arbitration procedures.
The AAA has published a roadmap of its arbitration process. Here are the key steps on the AAA’s roadmap, along with some practical insights for franchisees from national franchise lawyer Jeffrey M. Goldstein:
1. Filing and Initiation
The arbitration process begins when one party files a Demand for Arbitration with the AAA. The filing party must also submit “a copy of the arbitration provision from the contract between the parties,” as well as the applicable filing fee. Once the AAA receives a complete filing, it will set a deadline for the other party to submit a response and/or counterclaim.
2. Arbitrator Selection
Next, the AAA will send both parties a list of potential arbitrators “[b]ased upon the parties’ expressed criteria of qualifications.” The parties will then have a chance to agree on the arbitrator who will hear the dispute. If the parties cannot agree, the AAA will “invite[s] the most mutually agreeable arbitrator(s) to serve on the case.”
In some cases, franchise disputes will be heard by a panel of three arbitrators rather than a single arbitrator. The parties generally have discretion over which option to choose. Utilizing a panel of arbitrators is more expensive, but the additional expense can be worth it in some complex and high-value cases.
3. Preliminary Hearing
Once the arbitrator(s) have been selected, they will schedule a preliminary hearing. The main purpose of this hearing is to set the schedule and terms for discovery (which the AAA calls “information exchange”). The arbitrator(s) will also address “any impasses or challenges related to information sharing,” with the goal of resolving these issues proactively so that the discovery process is as smooth and efficient as possible.
4. Information Exchange and Preparation
In franchise arbitration, the parties engage in discovery that is limited in comparison to the discovery process in litigation but that can nonetheless involve voluminous records and extensive deposition testimony. This is the longest step on the AAA’s roadmap, with an estimated timeframe of roughly four months. Both parties will be required to disclose pertinent records in accordance with the terms established during the preliminary hearing, subject to the right to redact information pursuant to the attorney-client privilege and other protections.
As the AAA explains, “Subject to the right of any party to opt out, in cases where a claim or counterclaim exceeds $75,000, the rules provide that the parties shall mediate their dispute with the AAA concurrently with arbitration, at no additional fee.” While mediation can prove fruitful in some cases, it can be a waste of time in others. When pursuing arbitration, your franchise lawyer can help you decide whether it makes sense to mediate or if you are better off opting out and focusing on getting ready for your hearing.
A hearing in a franchise arbitration proceeding is akin to a condensed and less-formal version of a civil trial in court. Both parties’ lawyers will present arguments and evidence to the arbitrator(s), with the evidence consisting primarily of records and witness testimony. The arbitrator(s) will listen to both sides’ arguments and evidence, address any objections or other issues as they arise, and focus on ensuring that the process itself is as fair as possible.
7. Post-Hearing Submissions
In some cases, arbitrators will allow post-hearing submissions. These may include additional arguments or evidence or challenges to events that transpired during the hearing. The post-hearing submission process is usually relatively short, as the arbitrator(s) goal is to render a decision as soon after the hearing as practicable.
8. The Award
At most, AAA arbitrators have 30 days following the close of a hearing to issue an award. The award must “address all claims raised in the arbitration” and “may direct one or more parties to pay another party a monetary amount, or it may direct parties to take specific actions.”
The issuance of the award formally ends the arbitration. However, this is not necessarily the end of the process overall. Following the issuance of the award, one or both parties may choose to file an appeal. Grounds to appeal an arbitration award exist under the Federal Arbitration Act and in common law. If one or both parties file an appeal, this can extend the overall timeline significantly.
Once the matter is finally resolved, the prevailing party can pursue enforcement of the arbitration award if necessary. Arbitration awards are judicially enforceable, and the courts can use various means of enforcement to compel compliance with an award requiring payment or prohibiting certain conduct.
Request a Confidential Consultation with National Franchise Lawyer Jeffrey M. Goldstein
National franchise lawyer Jeffrey M. Goldstein has well over 30 years of experience representing franchisees in arbitration and other legal matters. If you have questions about arbitrating a dispute with your franchisor, we invite you to get in touch. To arrange a complimentary consultation with Mr. Goldstein, please call 202-293-3947 or request an appointment online today.