Dispute Resolution: Arbitration or Litigation?

When buying or selling a franchise, the last thing either party wants to think about is what happens if the relationship goes south. Litigation is expensive and distracting, and can drag on for years. It's no wonder then that many franchisors choose to include mandatory arbitration provisions in their franchise agreements. Arbitration can streamline the dispute resolution process. Although not without its own drawbacks, arbitration is less formal, quicker, and usually cheaper than litigation. It therefore makes sense to consider (or revisit) whether arbitration makes sense for your system.

Choosing the decision-maker

One advantage to arbitration is the ability to participate in the selection of an arbitrator. Parties to an arbitration can choose someone with specialized experience, such as in franchising. In litigation, cases are randomly assigned to judges, and parties have no say in the selection process, much less the ability to require a decision-maker with a certain skill set or qualifications.

Confidentiality

Parties concerned about confidentiality, such as the protection of trade secrets, can agree to keep arbitration proceedings confidential. In litigation, proceedings are public by default, and there is a strong presumption that documents that are filed or exchanged among the court and the parties should be publicly accessible. While parties often enter into confidentiality agreements to protect certain information exchanged in litigation, litigants face a heavy burden to convince a court that information should be kept confidential. In contrast, arbitration proceedings are private. The hearing is usually held in a private setting selected by the parties. When disputes arise, they are typically resolved over the phone between the parties and arbitrator. Filings are exchanged among the parties, the arbitrator, and a case administrator, not on a publicly accessible database as in all federal and in some state court litigation.

Efficiency

The informality of the arbitration process can allow for faster resolution. The parties may agree to limit discovery (or even forgo it altogether) and quickly set a merits hearing. Unlike a judge, who may have hundreds of pending cases, an arbitrator is paid by the parties and usually has few, if any, other cases at one time. Arbitrators apply a set of rules designed to make the process efficient and economical, which enables them to assist the parties in moving through limited discovery to a final hearing in relatively short order.

Access to courts for emergencies

A mandatory arbitration clause does not foreclose access to the courts for emergencies. When a franchisor needs immediate intervention to stop trademark infringement or the breach of a non-competition covenant, a well-drafted arbitration clause permits the franchisor to choose between raising the matter with an arbitrator or taking it to court.

Arbitration clauses are to be enforced as written

Absent some showing of fraud or duress tainting the arbitration clause itself, the terms and provisions of an arbitration clause are to be enforced as written. This enables franchisors to include in their arbitration clauses provisions designed to enhance the efficiency and economy with which disputes are resolved. For example, the U.S. Supreme Court has recently made clear that a provision in an arbitration clause that prohibits class arbitration is enforceable.

Finality

One important advantage of arbitration is finality. In litigation, an appellate court can review the judgment for mistakes of law or fact. By contrast, the grounds upon which a court might vacate or modify an arbitration award are prescribed by statute and limited to where the award was procured by fraud or corruption, or where the arbitrator was biased, committed some misconduct, or exceeded their authority. Simply put, not only will a dispute be resolved far sooner in arbitration than in litigation, it is far more likely to remain resolved once the arbitrator rules. And while critics of arbitration point to finality as a drawback--no review of an arbitrary or runaway arbitrator--they tend to overlook the fact that a franchisor may hedge against such an unlikely result by providing for non-judicial review of an arbitration award, such as by an arbitral appeal panel.

Conclusion

Few things are certain in life and even fewer in litigation. Given that arbitration agreements will generally be enforced as written, arbitration pursuant to a thoughtful and well-drafted arbitration clause can afford greater certainty and predictability than litigation. It makes sense to consider whether arbitration is right for your system; or, if your franchise agreement already includes an arbitration clause, whether it provides the most efficient and effective process for resolving the types of disputes facing your system.

Amy Haywood is an attorney with the Chicago law firm of Cheng Cohen LLC. She focuses in the areas of litigation and dispute resolution. Contact her at 312-957-8368 or amy.haywood@chengcohen.com.