What are the Relevant Provisions of Your Franchise Agreement?
As with virtually all aspects of franchise ownership, when facing a dispute with your franchisor, one of the first things you need to do is review the relevant terms of your franchise agreement. Franchise agreements almost universally contain several terms that apply specifically to litigation and dispute resolution, and you will want to work closely with a franchise lawyer to make sure you understand how your franchise agreement impacts the options you have available.
Does Your Franchise Agreement Contain a Mandatory ADR Clause?
Many franchise agreements contain clauses that require the parties to submit most (but not all) disputes to mediation or arbitration. When franchisors include these provisions in their franchise agreements, they do so not because alternative dispute resolution (ADR) offers a level playing field, but because they believe that they can benefit from the process.
Generally, mandatory ADR clauses apply to all franchisee-initiated disputes, and they apply to some disputes initiated by franchisors. Typically, disputes regarding franchisees’ payment obligations, unauthorized use of the franchisor’s trademarks and proprietary information, and other similar types of disputes are excepted. When mediation or arbitration is required, then pursuing mediation or arbitration will be a necessary precursor to pursuing litigation—assuming the mandatory ADR clause is enforceable.
Where Does Your Franchise Agreement Require Disputes to Be Resolved?
Franchise agreements also generally include jurisdiction and venue clauses that specify where mediation and arbitration must take place and where lawsuits need to be filed. Typically, this is the city in which the franchisor’s headquarters are located. While franchisors will tell you that they do this so that they can effectively manage their caseload, the reality is that this is designed as a disincentive for franchisees—who will need to incur the costs of traveling back and forth to the franchisor’s chosen venue in order to assert their legal rights.
What Other Requirements and Restrictions Apply?
In addition to mandatory ADR and forum selection clauses, franchise agreements commonly include other provisions that are specific to dispute resolution and litigation as well. Some examples of these provisions include:
- Limitations on Claims – Many franchise agreements contain provisions that limit the amount of time franchisees have to file claims. Typically, the time allowed is much less than that afforded by the applicable statute of limitations.
- Limitations on Remedies – Many franchise agreements also contain provisions that limit the remedies that are available to franchisees. For example, damages caps are common, as are provisions that prohibit franchise agreement termination.
- Costs and Attorneys’ Fees – Franchisors also commonly include provisions in their franchise agreement that require the losing party in any dispute to pay the prevailing party’s costs and attorneys’ fees.
Contact the Goldstein Law Firm
In Part 3 of our Ultimate Guide to Franchise Litigation for Franchisees, we will cover what to expect during mediation, arbitration or litigation involving a franchise-related dispute. In the meantime, if you need legal advice and would like to speak with an attorney, we encourage you to call 202-293-3947 or contact us online for a free and confidential consultation.