Many franchise agreements include provisions requiring franchisees to submit to binding arbitration in the event of a franchisor-franchisee dispute. While these “mandatory arbitration” provisions are supposedly designed to minimize both parties’ costs in the event that a dispute would otherwise lead to litigation, the reality is that these provisions routinely serve franchisors’ interests to the detriment of their franchisees.
What is Arbitration?
Arbitration is a form of alternative dispute resolution (ADR) proceeding that falls somewhere in between mediation (where a neutral “mediator” helps disputing parties reach a consensus) and litigation (where a judge renders a binding decision in court). In arbitration, each party will typically conduct limited discovery, and then each party will present its case in the arbitration venue. The dispute may be heard by a single arbitrator or a panel of three (or more) arbitrators; and, at the conclusion of the proceeding, the arbitrator(s) will render a binding decision which, if necessary, can be enforced by obtaining a judgment in court.
Where Does Arbitration Occur?
Typically, franchise agreements will require arbitration proceedings to take place in the city where the franchisor’s headquarters are located. This usually means that franchisees are forced to incur travel costs in order to assert their legal rights (and this is one of the first ways that mandatory arbitration provisions tend to work in the franchisor’s favor). Franchisors can also designate specific arbitration service providers in their franchise agreements, and hearings will typically take place at these providers’ office locations. Two of the most-commonly-used arbitration services for franchise disputes are:
How Much Does Arbitration Cost?
The cost of arbitration depends on a number of factors, including the number of arbitrators chosen, the length of the arbitration proceeding, and whether your franchise agreement includes a provision for shifting attorneys’ fees. Once again, while these are often drops in the bucket for franchisors, they can represent insurmountable barriers for franchisees.
Am I Really Required to Submit to Arbitration?
The reality is that if your franchise agreement contains a mandatory arbitration provision, you already submitted to arbitration when you signed the agreement. Can you challenge the enforceability of your agreement’s mandatory arbitration provision? Maybe. However, the grounds for challenging an arbitration provision that you have already agreed to are limited, and the costs of challenging the provision can often exceed the costs of compliance. Franchisors know this as well, and they will often stretch the bounds of enforceability knowing that their franchisees will have little practical choice but to comply.
In short, while mandatory arbitration clauses are supposedly “neutral” contract provisions, in practice they often strongly favor the franchisor. Are you thinking about signing a franchise agreement that contains a mandatory arbitration clause? Are you facing a dispute that is subject to mandatory arbitration? If so, we encourage you to contact us for a free, no-obligation consultation.
Learn More about Your Franchise Rights
For more information about the risks of mandatory arbitration provisions for franchisees, you can contact the Goldstein Law Firm to schedule a free and confidential consultation with franchise litigation attorney Jeffrey M. Goldstein. Call (202) 293-3947 to schedule an appointment, or contact us online and we will respond as soon as possible.