Inside a Franchise Arbitration

October 16, 2008 Published Work
ABA 31st Annual Forum on Franchising

I. Introduction1
Much has been written about how to compel or avoid arbitration of franchise disputes and how to enforce or vacate final arbitration awards. Many franchise lawyers (even some seasoned litigators) would be embarrassed to admit, however, that they have little understanding of what actually happens between the bookends of compelling arbitration and enforcing or attacking the resulting award. They also may be at a loss as to whether a client should make an effort to seek arbitration or avoid it in a particular dispute because they do not know enough about the process. This paper will provide some insight into these issues.

While our focus will be on the structuring, mechanics and progression of a franchise arbitration, it is nevertheless instructive at the outset to take a cursory look at some of the pros and cons of arbitration versus litigation, with the proviso that reasonable minds may differ. Issues to consider include:

  • while some believe that arbitration is faster and more efficient than litigation, others report arbitrations that have taken several years and more to conclude;
  • filing fees, arbitrator fees, case service/administrative fees and hearing room fees can make arbitration an expensive process;
  • the recognition of "class action" arbitration may be on the rise, while many franchisors once thought that they could more easily avoid group or class actions in arbitration;
  • arbitrations typically allow more control over scheduling and less formal hearings than court cases;
  • while arbitrations may reduce the extent of pre-hearing discovery and motion practice, this is not always the case;
  • the relaxed rules of evidence in arbitration can be a mixed blessing, depending on what type of evidence a party wants to get in or keep out;
  • many franchisors believe that arbitration can avoid the potential for a "runaway jury," but arbitrators have also issued substantial awards;
  • arbitration awards do not create the same type of formal legal precedent as court decisions;
  • an arbitration award is more likely to remain private than a court decision because awards are less frequently published; and
  • the right to appeal an arbitration award is limited.

When all is said and done, there is no across the board consensus among franchisors or franchisees as to whether arbitration or litigation is preferable.

1The authors thank, for their research, assistance and patience, Wiggin and Dana LLP associate Tahlia Townsend and the Richard L. Rosen Law Firm associate Leonard Salls.