Arbitration Is Good for Franchisees and Franchisors

The alarms that sound about arbitration for franchisees are nonsense.  They are built on unexamined anecdotes or examples of bad lawyering or they mistake the exception for the rule.

Trials may work great for franchisees who have kill-the-franchisor cases and so can attract a top-notch contingency lawyer, or for franchisees who have the resources to match the franchisor pound for pound.  For other franchisees, trials crush them in cost and delay.  On exception is that I do believe juries favor franchisees, which takes some explanation, but I'm unaware of any recent franchisee agreement that doesn't require either arbitration or waiver of the right to a jury.

Arbitration should cost much less than any trial.  Yes, in a significant and sophisticated arbitration, costs for the arbitrator and tribunal can be $15,000 - $30,000.  But you avoid pleadings, and summary judgment motions, and unlimited discovery, and pre-trial motions, and the crush of preparing testimony and exhibits to meet the rules of evidence, and post-trial motions and appeals.  The cost for each of these is astronomical.  Any one of these can steps itself can cost $15-30,000 or more.  If your lawyers run up charges as high in arbitration as they would in trial, chances are you have the wrong lawyers.

Arbitration should be much quicker than trial.  Courts are overwhelmed with growing dockets, and they have to put criminal cases ahead of civil ones.  Arbitration should take, on average, 3-6 months, and trial should take, on average, 12-24 months.  If your lawyer runs out arbitration for 12-24 months, chances are you have the wrong lawyers.

Arbitration administering agencies are fair.  I know AAA and CPR the best, and each is superb.  The notion that they have to be biased toward those who write them into their contracts is nonsense.  They have to be fair to both sides.  Otherwise arbitrators' awards can get reversed.  And if awards get reversed regularly because the tribunal doesn't have and apply fair rules, no one will use the tribunal.  The tribunals do make mistakes, but they're rare, and courts make mistakes too.  The remedy for mistakes in arbitration or trial is appeal.  Fortunately, the cost of remedying an arbitration error is much less than remedying a court error.

Arbitrators are fair and good, whereas you don't know what kind of judge you will get in any court.  The AAA, for example, has a process by which either party strikes arbitrators who the party believes are biased, and then they rank others in terms of preference.  And the AAA now has a pilot program where it cuts its fees in about half where the parties voluntarily choose an arbitrator without the strike and rank procedure.  Arbitrators have to disclose every possible connection to either party or their counsel or their expected witnesses.  If arbitrators fail to make full disclosure, that is a major ground for overturning any award.  And once they do disclose, either party can veto the arbitrator if it believes the arbitrator is biased.

I understand why lawyers may dislike arbitration.  We love rules, and we like to turn over every rock and file every motion, and the leisurely timetable of the trial process is far easier to fit into our schedules than the compressed schedule of arbitration, and we have full appeal rights to correct any error, and we make a bundle doing it.  And I understand special situations where businesses may prefer court proceedings, such as where establishing a  judicial precedent is vital, or where a franchisor wants to exert its leverage that comes from the cost and delay of court procedure, or the instances I mentioned in the second paragraph.  But apart from these special circumstances, I don't understand why any business owner, properly educated with the right counsel, would choose trial over arbitration.

About the Author:  Peter Silverman is a franchise lawyer, mediator and arbitrator. You can reach him at psilverman@slk-law.com. Read his biography page.  Any thoughts he offers on Blue Mau-Mau are his personal opinion and are not legal advice.