Alternative Dispute Resolution / Arbitration

This is a forum that has been spun off from the Paul Steinberg's blog entry, Arbitration / ADR.

While it is true that there have only been a handful of franchise cases (most notably DAI v. Casarotto ), there is a 35-year long trend towards favoring arbitrations. An amicus brief in a recent consumer (non-franchise) case may be of interest for those wanting some technical legal background and analysis.

There are real concerns for all of us as citizens when the Federal Arbitration Act   (FAA) is used to overrule the will of the state legislatures. (Note: If you are interested in the articles linked to, most colleges and larger libraries subscribe to the electronic database and can get you copies)

Since Alternative Dispute Resolution (ADR) is such an important topic for franchise purchasers, I have started this on its own thread. Most new franchisees I have ever spoken with do not even know that they cannot go to court, and that even an arbitral remedy may be cost-prohibitive. Many consumers and many employees will be finding that an ADR clause in their consumer contract or employment contract may be the most important clause they never read.

  • Please do post any ADR experiences, and your thoughts pro or con.

Franchisor rationale for forum clause

Michael Webster wrote :

What is the franchisor's legitimate interest in having:a) an forum selection clause, and; b) a substantive choice of laws clause.

A good Q which has gone unanswered so far, so I'l try and make the f'zor case.

On the forum selection: By not having to travel and litigate in distant fora, the stronger party will save on cost and will pass this savings on to the weaker party, thereby enabling the weaker party to enter into the wonderful contract opportunity which would have otherwise been too expensive. (As you can tell, I don't buy this rationale)

Having been a stockbroker in a previous life, I would point out that if you have a complaint against your stockbroker the NASD will make your broker travel to a fora near your residence. (Theoretically the NASD could do the opposite, but I never saw that happen).

On the choice of laws: As Webster points out, there are 2 issues:

  • Procedural law
  • Substantive law

I would not be so quick as Webster to dismiss the importance of procedural law--it can make or break your case. But that is a bit "inside baseball", so I will stick with Webster's substantive law point.A franchisor will claim that it is too confusing to know the laws in all the states in which it sells franchises,and so by only having to know one state's law, it will save money which will be passed along to the... well, you know the refrain.

on February 28th, 2007

ADR and Class Action Suits

Paul, when a motion for a class action suit is made in the Federal Court, can the defendants settle the suit outside of the view of the Court before the court rules on the Motion? Does any such settlement have to be approved by the court and does this become a public record?
If the motion for a Class Action is denied by the court, do the individual franchisee plaintiffs in the "class action" retain their individual substantive rights to address the court ---or are they automatically thrown back into ADR as per the terms of the franchise agreements?

You indicated that ADR can be more expensive than actual litigation in some instances. Why is this? Do they use "mock trials" in ADR as they do in pre-trial procedures and is the decision of the moderator or the mediator binding on both parties under ADR?

on March 1st, 2007

Who Pays for ADR

Under the laws and customs concerning mediation and the Federal Arbitration Act, who pays for the mediation. If one party is found at fault and is responsible for the problem or situation that requires mediation, does the party found to be in fault by the mediator pay the legal fees of the party who was forced to ask for mediation to remedy the problem. ---Does the mediator determine who should bear the costs of mediation?
If the franchisee is not in the financial position to request and pay for mediation, does the franchisor win by default?

on March 1st, 2007

ADR lingo / definitions

Mediation is non-binding; the parties sit down with a neutral and try to work things out. Sometimes the parties are in the same room, sometimes the neutral shuttles between the parties. Frequently, mediation is contractually-required prior to initiation of litigation or arbitration.Arbitration is binding. The largest arbitral body in the US is the AAA which has some good public info on the topic. Some MauMau-ers have raised the issue of due process. And while the Supreme Court brushed this argument aside in Prima Paint , the dissent by Justice Black (joined by Douglas & Stewart) is worth reading; (esp. regarding Michael Webster's Q about what was intended when FAA was passed, and how that morphed into the sledgehammer which FAA has become) Here is how Justice Black begins:

The Court here holds that the United States Arbitration Act, 9 U.S.C. ss 1-14, as a matter of federal substantive law, compels a party to a contract containing a written arbitration provision to carry out his ‘arbitration agreement’ even though a court might, after a fair trial, hold the entire contract-including the arbitration agreement-void because of fraud in the inducement. The Court holds, what is to me fantastic, that the legal issue of a contract's voidness because of fraud is to be decided by persons designated to arbitrate factual controversies arising out of a valid contract between the parties. And the arbitrators who the Court holds are to adjudicate the legal validity of the contract need not even be lawyers, and in all probability will be nonlawyers, wholly unqualified to decide legal issues, and even if qualified to apply the law, not bound to do so. I am by no means sure that thus forcing a person to forgo his opportunity to try his legal issues in the courts where, unlike the situation in arbitration, he may have a jury trial and right to appeal, is not a denial of due process of law.

Arbitration is conducted either in person or sometimes by mail submissions. It may have a single arbitrator or a panel. The arbitrator is a private judge, and generally his decision will be enforced by the courts, and there is a treaty governing recognition of arbitral awards internationally. (Grounds for vacatur may be found under state or federal law). Which law can be important here: for example, under NY law if you participate in the proceeding you waive any jurisdictional objection, but if you conduct your proceeding under the federal law, that is not true. Parties to a contract may agree to grant the arbitrator power to issue injunctive relief. Some franchisors put such a clause in their contracts, but some deliberately leave it out precisely because the f'zor wants to be able to go to federal court for injunctive relief based on Lanham Act (Intellectual Property) or other claims (which the f'zor will likely win) while simultaneously forcing the f'zee to arbitrate on the f'zors home turf. You can see an example of a court noticing this in footnote 2 at the end of the Florence Bolter case . (This decision also discusses the nexus between adhesory contracts and unconscionability).The leading reporter critical of arbitration is Reynolds Holding of the San Francisco Chronicle, whose October 7-9, 2001 series of articles caused a huge ruckus out in California (ironically, the ABA Forum on Franchising was meeting in SF at the time). If I can find a public database with the articles, I wil post hyperlink; I highly suggest asking your local library to pull up the series from one of the library subscription databases. Of particular note is the repeat player phenomenon , which is mentioned by a former Prez of the Academy of Arbitrators in the above article, mentioned by the co-chair of JAMS (cite on fn  840) and the AAA even had a "marketing effort" to convince corporations to send their business to AAA (cite fn 834), was documented in employment cases , and in Prima Paint the Black dissent noted: "I think it raises serious questions of due process to submit to an arbitrator an issue which will determine his compensation."Class action is a separate and distinct issue. You can have class action claims in litigation and class action in ADR. The leading authority on the use of ADR clauses in franchise agreements is Edward Wood ("Jack") Dunham of Wiggin & Dana, who advocates their use as a means of effectively prohibiting franchisees from bringing a class action claim. The leading academic is Professor Jean Sternlight, who has written about the topic primarily in the context of ADR bars to class action in consumer cases .I am a huge fan of ADR and believe that it can be particularly beneficial in cases where the parties have an interest in maintaining a relationship and/or where the "real" issues in a case may not be susceptible to judicial resolution-- such as franchise, business partnerships, matrimonial/family law cases, etc.BUT... there are ways of abusing ADR and the FAA, and we should be realists about this, particularly given the growing importance of ADR in all walks of life.

on March 1st, 2007

Does Procedural Law deny due process in Franchise Disputes

Since Procedural Law may deny access to recourse under Substantive law for franchisees who can't afford to arbitrate in distant forums, is this a denial of due process of law protections for the franchisee? Is this why some of the courts are striking the franchisors' requirements that mediation take place in distant fora?
If franchisees are denied due process of law under a contract of adhesion, and this works to the advantage of the stronger party, can it be said that franchisee is denied both due process of law and equal protection of the law.
This appears to be what has happening under public policy and the rule of law that governs the franchisee-franchisor relationship.

on March 1st, 2007

Procedural and Substantive Law and ADR

It was indicated by the poster, Tinker, that the franchnisor went to the court and asked for an injunction when they asked for mediation under the contract and that the judge indicated that the franchisor could not refuse to mediate with the franchisee under the terms of the contract---and under the conditions described by Tinker.
But, it appears that most franchise contracts permit the franchisors to address the courts directly when there is a disagreement over royalties, etc. and ask for an injunction
Is this term or condition in franchise agreements that is "procedural" also a violation of equal protection under the law? Have the courts addressed this inequality?

on March 1st, 2007

Is typically split between both parties

I am going off the AAA (American Arbitration Association) rules dealing with Commercial transactions - my understanding is the party filing the complaint pays the fee. If the opposing party wishes to counterclaim, then the opponent must also pay a fee for the counterclaim. I imagine this is the norm, or fee splitting is the mechanism by which arbitrators maintain at least a semblence of neutrality. Also, the franchise agreement may have language on the payment of legal fees by the losing party. Whether or not that would be a valid provision is a separate analysis.

Thus if the franchisee attempts to circumvent the ADR provisions, they could possibly be found in breach of their agreement, perhaps even if their justification is that they did not have the funds to pay for such the ADR services. The fact that the franchise agreement "picks" a certain ADR service may or may not be persuasive in arguing that the clause is unenforceable; however, there is a general trend toward allowing ADR to occur, ostensibly to lessen the burden on the courts. But from a practical monetary standpoint, the AAA staggers the payment fees dependent upon the amount of alleged damages; however, it does not appear that their fees are much different from costs associated with filing a complaint in court.

Incidentally, mediators are involved in mediation and arbitors are involved with arbitration. While similar, they are separate concepts. Although there are arguments as to FAA trumping state statutes and regulations on ADR, it may be prudent to research your locale's rules on the topic as well.

on March 1st, 2007

Franchisor's Legitimate Interest in ADR

Paul, thank-you for your responses. 

Here are some other ideas, in defence of the franchisor picking the state or forum.

1.  The franchisor has a legitimate interest to prevent forum shopping, avoiding overly friendly jury jurisidictions, which may frame the battle as big rich person versus small injured person.

2.   The franchisor has a legitimate interest in maintaining control and consistency over different complaints, which would be lost if forum selection were given up.

3.   The franchisor has a legitimate interest in defeating frivolous lawsuits, which given the US system of cost consequences engenders more frivolous lawsuits.

4.   The franchisor has legitimate expectation that all the disputes involving the brand be adjudicated in a single forum for consistency.

Can anyone think of other rationale?  (To tip my own hand, I don't believe that any of the above suffice.)


Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on March 2nd, 2007

Great questions but just a clarification.

It wasn't mediation, but rather (request for) arbitration that was necessary before they could ask the courts for an injunction.

Posted by Tinker on March 1st, 2007

The difference between Arbitration and Mediation ?

But, what is the difference in the legal sense between Arbitration and Mediation? And, if an agreement isn't reached, do the parties still have substantive rights in the courts?

on March 1st, 2007

From a layman's perspective

Mediation is when both parties and attorneys get together with a mediator who tries to find some middle ground and compromise that allow both parties to 'settle' their lawsuit.  The mediators are usually retired lawyers, judges or law professors that are contracted to provide this service.  The fee is usually split 50/50

An arbitrator (binding arbitration) is literally like a private judge who hears the case presented by the attorneys.  Discovery and witnesses are allowed and in the end the arbitrator makes their ruling.  Again these are contracted individuals.

Posted by Tinker on March 1st, 2007