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Franchisors, Franchisees at Odds Over Arbitration Fairness Act

The battle lines have been drawn with the proposed Arbitration Fairness Act of 2009 in both houses of Congress. Attorney Neal M. Eiseman, partner of Goetz Fitzpatrick law firm, has this excellent op-ed piece explaining both sides of the issue in the New York Law Journal ($$ subscription required).

The Arbitration Fairness Act is championed by consumer, employment and franchisee groups who advocate arbitration as a choice, not a mandate where consumers and franchisees are "strong-armed" into arbitrating disputes outside their state and into relinquishing the right to participate in class action lawsuits.

Public Citizen, a non-profit organization with 100,000 members which represents consumer interests issued a study concluding:

(i) corporations - not consumers - chose binding mandatory arbitration;

(ii) in more than 19,000 cases, 94.7 percent of the decisions were for business;

(iii) arbitrators have a strong financial incentive to rule in favor of the companies that file cases against consumers because they can make hundreds of thousands of dollars a year conducting arbitrations;

(iv) the National Arbitration Forum arbitrations were shrouded in secrecy with a lack of due process safeguards and

(v) the arbitrations often cost consumers more than had they proceeded in court.

Fearful that it will no longer have business, the American Arbitration Association on the other hand strongly opposes the act, stressing:

Its Institute for Legal Reform just released a poll stating that 71 percent of likely voters oppose removing arbitration agreements from consumer contracts and 82 percent prefer arbitration over litigation as a means to settle a serious dispute with a company.

The U.S. Chamber of Commerce and the AAA stress that existing protocols can fix issues of unfair and mandatory binding arbitration clauses. The AAA says:

The protocols are designed to ensure that (i) arbitrators are truly neutral and make appropriate disclosures to ensure impartiality and (ii) the arbitration's cost, location, time-limits and access to information are "reasonable" to consumers.

However, a study by congress issued its findings of the shortcomings of the the modern application of the 1925 Federal Arbitration Act:

  1. The Federal Arbitration Act was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power.
  2. The series of U.S. Supreme Court decisions have changed the meaning of the act so that it now extends to disputes between parties of greatly disparate economic power.
  3. Private arbitration companies are sometimes under great pressure to devise systems that favor the corporate repeat players who decide whether those companies will receive their lucrative business.
  4. Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators' decisions.

The International Franchise Association opposes this bill. Franchisee groups such as the American Association of Franchisees and Dealers, the Coalition of Franchisee Associations and Dunkin’ Donuts Independent Franchise Owners supports it.

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