As a franchisee, you need to know that you are making informed decisions when facing a dispute with your franchisor. For most franchisees, making informed decisions starts with looking for information online, and in New York, a good place to go for reliable information is the New York State Attorney General’s website.
Or, at least, this should be the case. Recently, however, New York franchise attorney Jeffrey M. Goldstein came across a paragraph on the State Attorney General’s website that gave him cause for concern. The paragraph states:
“Litigation usually signals the end of a business relationship, but the franchise community has increasingly sought the use of mediation to solve franchise disputes. Franchisees who do not want to resort to litigation and believe they can still work with their franchisors should consider alternative dispute resolution (ADR). While ADR is less expensive than litigation, franchisees should understand that the result of ADR is a mutually agreed-upon resolution, not a finding of fact by a judge, and therefore is not legally binding on either party. One organization that provides franchise mediation program services is the International Institute for Conflict Prevention & Resolution.”
There are several issues with this paragraph, and it is concerning that it appears on the New York State Attorney General’s website. Franchisees need to ensure that they are relying on accurate information—especially when facing disputes with their franchisors—and this paragraph is inaccurate in several important respects.
Issues with the New York State Attorney General’s Statement About Franchise ADR
What is wrong with the information about franchise ADR on the New York State Attorney General’s website? The most significant issues include:
“The Franchise Community Has Increasingly Sought the Use of Mediation to Solve Franchise Disputes”
This is misleading at best. The “franchise community” isn’t really a community at all. There are two clear sides: franchisors and franchisees. Franchisors largely dictate the terms of the franchise relationship through their franchise agreements, and this includes specifying means of dispute resolution.
Franchisors often favor mediation for several reasons—including reasons that make it unfavorable to their franchisees. For example, mediation adds a layer of cost to the dispute resolution process. While mediation is less costly than litigation, there are still costs involved, and if mediation is unsuccessful, franchisees may still need to incur the costs of litigation (or arbitration). Even if an amicable resolution clearly isn’t in the cards, franchisees may be contractually obligated to pursue mediation in order to assert their legal rights.
“Franchisees Who Do Not Want to Resort to Litigation and Believe They Can Still Work with Their Franchisors Should Consider Alternative Dispute Resolution (ADR)”
Since most franchisors mandate ADR through their franchise agreements, franchisees don’t really have a choice about whether to pursue mediation or arbitration. If franchisees can still work with their franchisors, then informal discussions will likely be the best path forward. If informal discussions aren’t viable, then the likelihood of reaching an amicable resolution through mediation is usually relatively low in the franchise dispute resolution context.
“The Result of ADR is a Mutually Agreed-Upon Resolution, Not a Finding of Fact By a Judge”
The result of mediation is a mutually agreed-upon resolution. But, there are two forms of ADR: mediation and arbitration.
Arbitration is very different. In franchise arbitration, the franchisor and franchisee present their respective cases to an arbitrator (or panel of arbitrators) who renders a decision. Arbitration decisions are only subject to appeal on limited grounds; as a result, they functionally have the same effect as a judgment in court.
“And Therefore is Not Legally Binding on Either Party”
When mediation is successful, the end result is a settlement agreement between the franchisor and franchisee. This settlement agreement is legally binding, and if either party violates it, the other party can pursue appropriate legal or equitable remedies. Whether a franchise dispute is resolved through mediation or arbitration, the end result is both legally binding and legally enforceable.
“One Organization that Provides Mediation Program Services is the International Institute for Conflict Prevention & Resolution”
Technically, this statement is true. However, when franchisees need to pursue mediation or arbitration, they can’t just pick a dispute resolution provider of their choosing. Instead, they must initiate mediation or arbitration in accordance with the terms of their franchise agreement. Franchisors frequently designate a dispute resolution provider (which is often the American Arbitration Association (AAA)), and they almost always require franchisees to initiate any dispute resolution proceedings in the city where their headquarters are located.
Making Informed Decisions About Franchise Disputes in New York
So, what do you really need to know if you are facing a franchise dispute in New York? Here are some key considerations:
- You Need to Review Your Franchise Agreement – If you are facing a dispute with your franchisor, you need to review the relevant terms of your franchise agreement. If you are required to pursue mediation or arbitration (or both), you need to take this into account when deciding how best to proceed.
- You Need to Comply with Your Franchise Agreement – You also need to comply with the relevant terms of your franchise agreement. Mandatory ADR provisions are generally enforceable in New York, and if you go to court when you aren’t allowed to do so, you could incur unnecessary costs (in addition to putting yourself in breach of your franchise agreement).
- You Need to Make Informed and Strategic Decisions – As we said in the introduction, informed decision-making is critical when facing a dispute with your franchisor. To ensure that you are giving yourself the best chance of saving your franchise (if desired) or avoiding unnecessary post-termination liability and obligations, you should consult with a New York franchise attorney as soon as possible.
Schedule a Complimentary Consultation with New York Franchise Attorney Jeffrey M. Goldstein
Are you facing a dispute with your franchisor in New York? If so, we encourage you to contact us promptly for more information. Call 202-293-3947 or contact us online to schedule a complimentary consultation with New York franchise attorney Jeffrey M. Goldstein.
