Make Mandatory Arbitration Illegal

On April of 2007 I wrote, “Many hotel franchise agreements stipulate arbitration over litigation.  At first glance, this may appear to be more beneficial to franchisees but nothing could be further from the truth." I went on to say, "Compulsory arbitration protects franchisor interests while diluting franchisee remedies.”

What are the disadvantages of mandatory arbitration?

  • Arbitrators may be friendly with your franchisor since the choice of venue is usually in the franchisor’s HQ City.  In court, however, the dispute will be resolved by a jury of your peers.

  • Arbitration is very expensive because arbitrators receive $250 to $500 per hour while judges in state and federal courts are compensated by taxpayer dollars.

  • The discovery process is very limited.

  • The normal rules of evidence and procedure do not apply as they would in state or federal court.

The bipartisan Arbitration Fairness Act 9 (H.R. 1020 and S. 931) was introduced in Congress on April 29, 2009.  The bill aims to make pre-dispute agreements requiring mandatory arbitration for any franchise, consumer, employment or civil rights disputes unenforceable.  Hotel franchisees complain that there is little opportunity to negotiate the terms of an arbitration clause in franchise agreements.  It is a “take it or leave it” situation.

Don Sniegowski, editor of Blue MauMau reports:

Consumer advocates say there is widespread support across party lines for the Arbitration Fairness Act.  They cite a recent poll from Lake Research Partners that shows that some six in ten voters support the act and that 59% of likely voters oppose the use of mandatory binding arbitration clauses like those found in franchise contracts and credit card agreements.

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Comments

Hotel Arbitration

Stan;

My guess is that faced with large legal bills, both the franchisee and franchisor would do well to consider a formal mediation process first. 

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Venue & right to jury

Stan Turkel wrote:

What are the disadvantages of mandatory arbitration?

  • Arbitrators may be friendly with your franchisor since the choice of venue is usually in the franchisor’s HQ City.  In court, however, the dispute will be resolved by a jury of your peers.

The venue provision would exist in either arbitration or litigation. Such a provision forcing you to go to the franchisor's hometown will be upheld in either case.

This has been settled law since 1985 (Burger King v. Rudzewicz )

Also, the assertion that in court "the dispute will be resolved by a jury" is not necessarily true. The Southern District of New York probably has more business contract disputes than any district in the country, and it has consistently held that "The parties to a contract may, by prior written agreement entered into knowingly and voluntarily, waive the right to a jury trial." (Morgan Guaranty Trust Co. v. Crane, 36 F.Supp.2d 602 [1999])

I do agree with Mr. Turkel's other points, but it is important to remember that passage of the Arbitration Fairness Act would not change many of the underlying problems which frequently operate as a de facto deprivation of franchisee remedies.

 

Paul SteinbergFranchisee Attorney, New York City, Ph: 212-529-5400

Waiver

Paul, you are right.

But, what do you think the practical effect of having to elect for arbitration or litigation will be, after a dispute is involved?

It might be very hard for a drafter to allow the election, but demand before hand that venue, jury trial be waived if litigation is chosen over arbitration. 

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

The problem is the people

do not know the results in arbitration due to it  being private.  Why don't they make it public knowledge in arbitration disputes?  Then people will know how many zees loose in arbitration?  Can anyone be a testimony with their experience in arbitration?  I am sure many zees would like to know.