If you own a franchise, any disputes that arise between you and your franchisor will be subject to the terms of your franchise agreement. Most likely, this means that your dispute will be subject to mandatory mediation or arbitration—or perhaps both. As franchise lawyer Jeffrey M. Goldstein explains, while these forms of alternative dispute resolution (ADR) are supposed to be neutral, there’s a reason why franchisors almost universally require ADR.
To see why the vast majority of franchisors require ADR, we can look at the similarities between mediation and arbitration. Then, to see what you can expect during each of these forms of ADR, we can look at their differences. As a franchisee, knowing what to expect is important, as this will help you make informed decisions should you need to enforce your legal rights.
Similarities Between Franchise Mediation and Arbitration
So, why do franchisors like mediation and arbitration? Here are some of the attributes that are common among both of these forms of ADR:
There Are Costs Involved – There are costs involved in pursuing both mediation and arbitration. For many franchisees, these costs are a serious consideration, and they can be enough to prevent franchisees from taking legal action in some cases. But, in other cases, franchisees may have no choice but to take legal action in order to protect their investment.
Franchisors Can Select the Venue – When requiring mediation or arbitration (or both), franchisors can also designate the venue where ADR will take place. Nearly all franchisors designate the city where their headquarters are located. This makes managing the process easy for them—and more challenging, time-consuming and costly for their franchisees.
They Involve Limited (if Any) Discovery – Discovery isn’t generally a feature of mediation, and in arbitration, discovery is significantly limited in comparison to courtroom litigation. Limiting franchisees’ access to the information they need in order to assert their legal rights is another way that franchisors protect themselves through mandatory ADR.
They Delay (or Avoid) Litigation – Requiring mediation or arbitration (or both) allows franchisors to delay facing lawsuits from their franchisees—if not avoid these lawsuits entirely. While mediation and arbitration help franchisees avoid litigation in many cases as well, franchisors generally have more to lose in terms of facing unfavorable precedent, and franchisors typically reserve the unilateral right to go to court when necessary.
Franchisees’ Allegations Remain Private – Finally, since franchise mediation and arbitration are both private proceedings, franchisors can avoid facing negative publicity as a result of their franchisees’ claims and complaints. Combined with franchisees’ contractual confidentiality obligations, this helps protect franchisors against reputational harm.
While these aren’t all of the similarities between franchise mediation and arbitration, these factors are among the main reasons why franchisors prefer these forms of ADR. As a franchisee (or prospective franchisee), you may not have much of a choice other than to accept your franchisor’s mandatory ADR clause—and while you may not anticipate getting into a dispute when you sign your franchise agreement, franchisors rely on their mandatory ADR clauses to protect them in a wide range of circumstances.
Differences Between Franchise Mediation and Arbitration
But, while mandatory ADR clauses may protect franchisors in many respects, franchisees can—and do—win in franchise mediation and arbitration. Being prepared is one of the keys to success, and this starts with knowing what you can expect during the process. With this in mind, here are some of the key differences between the two main forms of mandatory ADR:
1. Mediation is Focused on Settlement
In franchise mediation, the focus is on settlement. The parties are required to act in good faith and attempt to negotiate a resolution that helps them avoid further dispute resolution proceedings. While the parties can always settle during arbitration proceedings (and frequently do), the primary focus of franchise arbitration is presenting the parties’ arguments to a neutral third-party decision-maker.
2. While Mediators Make Recommendations, Arbitrators Make Decisions
Since mediation focuses on settlement, the mediator’s role is that of a facilitator. After hearing from both parties, the mediator will make recommendations focused on facilitating an amicable resolution. In contrast, the role of an arbitrator (or arbitration panel) is to make a decision that resolves the parties’ dispute. As a result, the parties don’t have the final say, and the non-prevailing party’s ability to appeal is limited under the Federal Arbitration Act (FAA).
3. Arbitration Guarantees a Binding Resolution While Mediation Does Not
In arbitration, the arbitrator’s (or arbitration panel’s) decision is binding—subject to the non-prevailing party’s right to appeal. Additionally, a final decision in arbitration is virtually guaranteed. However, in mediation, there are no guarantees. It is up to the parties to attempt to work out a settlement (with the mediator’s assistance); and, if their negotiations break down, the mediation process can end without a resolution.
4. Arbitration is a More Structured (and More Prolonged) Process
Given that franchise arbitration results in a binding decision from a third-party neutral, arbitration is a more structured (and more prolonged) process than franchise mediation. There are several discrete steps in the franchise arbitration process, and the process culminates in a hearing which is akin to a “mini trial.”
5. Arbitration Generally Costs More Than Mediation
This additional structure also means that arbitration is generally more costly than mediation. As a result, franchisors that have sufficient financial resources will often prefer arbitration over mediation, as it presents an even greater bar to franchisees asserting their legal rights. However, arbitration can still cost significantly less than litigation, and it does provide a viable avenue for franchisees to pursue in many cases.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
Do you need to know more about mediating with your franchisor or pursuing a claim against your franchisor in arbitration? If so, we invite you to get in touch. Franchise lawyer Jeffrey M. Goldstein has well over 30 years of experience exclusively representing franchisees and dealers. To request a free consultation, please call 202-293-3947 or contact us online today.