Let Franchisees Decide to Arbitrate

I. Introduction

Franchises are a strong component of the U.S. economy.  In
2004, there were over 767,000 franchises in the United States which
contributed 9.8 million direct jobs to the economy. [1]  According to a
2002 study, half of the franchise agreements analyzed contained
arbitration clauses. [2]  With the passage of the Federal Arbitration
Act and subsequent court rulings, a policy favoring arbitration has
been established. [3]  In fact, most courts will enforce arbitration
clauses in a majority of the cases. [4]  In contrast to this trend,
both congressional legislation and court decisions have been seen to
back away from an unwavering support of pre-dispute arbitration. 
Should the courts and congress become more involved in the use of
arbitration in the context of a franchise relationship?

II. Benefits of Arbitration

There are many reasons that arbitration is one of the oldest
forms of dispute resolution [5] and a useful alternative to
litigation.  First, arbitration provides flexibility in the dispute
resolution process.  The parties are able to decide the procedures to
be followed and the applicable substantive law that is to be used. [6] 
Additionally, arbitration can be faster, cheaper and more private than
normal litigation.  [7]  The use of the arbitrator in the proceedings
is also seen to often reduce the uncertainty that can be introduced
into a proceedings with a jury. [8]

Many of the same arguments that are made for arbitration can be
used to make the case against arbitration as well.  The discovery
process in an arbitration hearing is often much more limited in scope
than an adjudicated setting. [9]  This may lead to a faster overall
process but can lead to trial by ambush because there is no necessary
right to take depositions before a hearing begins. [10]  This
double-edged sword of arbitration can also be seen with regard to the
cost of arbitration.  Although a benefit for arbitration can be the
reduced cost of the proceedings, since many arbitrators are paid by the
hour, there may be little motivation by the arbitration organization or
its employees to speed up the process. [11]

III.  Trends in Arbitration

Attitudes towards arbitration have changed over the years.
[12]  In the late nineteenth century and early twentieth century,
courts largely refused to force parties to arbitrate when the
arbitration agreement stipulated arbitration pre-dispute. [13]  If
parties agreed to arbitrate post-dispute, the contracts were enforced.
[14]  Since then, the Federal Arbitration Act and subsequent court
rulings have enforced pre-dispute arbitration agreements in a variety
of situations. [15]

In recent years, attitudes have started to swing somewhat back
toward skepticism of enforcement of pre-dispute arbitration agreements
in all situations.  This modest shift in attitude has been seen in
congressional action as well as federal court rulings.  In Nagrampa v. MailCoups,
Inc., the Ninth Circuit Court of Appeals refused to enforce a mandatory
arbitration clause in a franchise agreement on the grounds that it was
unconscionable. [16]  Congressional action is seen in the federal
Automobile Dealers' Day in Court Act, enacted in 2002.  This
legislation essentially states that all agreements to arbitrate between
an automobile manufacturer and the dealer must be made in writing after
a dispute arises. [17]  Another example of congressional action was
made during the 109th Congress when a provision was added to a defense
authorization bill that prohibited mandatory arbitration agreements in
payday loan contracts made with service members. [18]  The Arbitration
Fairness Act of 2007 has also been introduced in Congress.  This piece
of legislation, co-sponsored by more than seventy members of Congress,
would ban mandatory arbitration agreements in employment, consumer, and
nursing home contracts. [19]

IV.  Arbitration's Future

Arbitration will continue to play a significant role in dispute
resolution for franchise owners but they need some help.  As stated
earlier, as many as half of all franchise agreements contain
arbitration clauses. [20]  This statistic only makes sense given the
advantages of the agreements for the franchisor.  The franchisor is
allowed to define the terms of the arbitration including location and
arbitrator before any dispute even exists.  Furthermore, the franchisor
is usually in a much stronger bargaining position than the individual
franchisee and can often dictate the terms of the agreement.  Given
that Congress is already pursuing a prohibition of mandatory
arbitration in consumer contracts with the Arbitration Fairness Act
[21], and franchise agreements exhibit many of the characteristics of
consumer contracts [22], why not help the franchisee as well?  This
conclusion does not deny the potential benefits of arbitration for
either the franchisee or the franchisor.  The strength of a claim by a
franchisee can even the playing field and allow bargaining surrounding
the terms of arbitration on more equal terms.  If arbitration really is
the better alternative to litigation given the circumstances of the
dispute, a smart entrepreneur will make the right decision.

 

[1] Jill Schachner Chanen, Troubled Kingdoms: As Franchises Seek to Expand Their Empires, Individual Operators Look for Ways to Protect Their Turf, 92 A.B.A.J. 52, 52 (2006).

[2] Edward Wood Dunham & Erika L. Amarante, DAI v. Downey: Associational Standing and Arbitration, 16 Franchise L.J. 16, 16 (2007).

[3] Lewis S. Chronowski Jr., Arciniaga v. General Motors Corp Suggests Possible Expansion of Rights Regarding Arbitration Clauses Under ADDCA, 25 Franchise L.J. 124, 124 (2006).

[4] Edward Wood Dunham & David Geronemus, Franchise
"Litigotiation": Understanding the Interplay of Litigation and
Arbitration Outcomes and Settlement Negotiation in the Resolution of
Franchise Disputes
, 9 A.B.A. Sec. Litigation Conflict Mgmt. 3, 3 (2005).

[5] Stephen Yeazell et al., Civil Procedure, 496 (6th Ed. 2004).

[6] Id.

[7]  Id. at 497.

[8]  Id.

[9]  Kevin M. Kennedy, Stolt-Neilsen SA: Prehearing SubPeonas on Third Parties Upheld by Arbitrators, 25 Franchise L.J. 122, 122 (2006).

[10] Id.

[11]  Dunham, supra note 4, at 16.

[12]  Yeazell, supra note 5, at 497.

[13]  Id. at 498.

[14]  Id. at 499.

[15]  Id.

[16]  Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

[17]  Chronowski, supra note 3, at 124.

[18]  Lewis S. Eidson, A Good First Step, 43 Trial 9, 9 (2007).

[19]  Am. Assoc. for Justice, Momentum Builds in Congress to End Mandatory Arbitration, 44 Trial 12, 12 (2008).

[20]  Dunham, supra note 2, at 65.

[21]  Am. Assoc. for Justice, supra note 18, at 12.

[22]  Nagrampa, 469 F.3d at 1282.

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