II. Benefits of Arbitration

There are many reasons that arbitration is one of the oldest forms of dispute resolution [5] and a useful alternative to litigation.  First, arbitration provides flexibility in the dispute resolution process.  The parties are able to decide the procedures to be followed and the applicable substantive law that is to be used. [6]  Additionally, arbitration can be faster, cheaper and more private than normal litigation.  [7]  The use of the arbitrator in the proceedings is also seen to often reduce the uncertainty that can be introduced into a proceedings with a jury. [8]

Many of the same arguments that are made for arbitration can be used to make the case against arbitration as well.  The discovery process in an arbitration hearing is often much more limited in scope than an adjudicated setting. [9]  This may lead to a faster overall process but can lead to trial by ambush because there is no necessary right to take depositions before a hearing begins. [10]  This double-edged sword of arbitration can also be seen with regard to the cost of arbitration.  Although a benefit for arbitration can be the reduced cost of the proceedings, since many arbitrators are paid by the hour, there may be little motivation by the arbitration organization or its employees to speed up the process. [11]

III.  Trends in Arbitration

Attitudes towards arbitration have changed over the years. [12]  In the late nineteenth century and early twentieth century, courts largely refused to force parties to arbitrate when the arbitration agreement stipulated arbitration pre-dispute. [13]  If parties agreed to arbitrate post-dispute, the contracts were enforced. [14]  Since then, the Federal Arbitration Act and subsequent court rulings have enforced pre-dispute arbitration agreements in a variety of situations. [15]

In recent years, attitudes have started to swing somewhat back toward skepticism of enforcement of pre-dispute arbitration agreements in all situations.  This modest shift in attitude has been seen in congressional action as well as federal court rulings.  In Nagrampa v. MailCoups, Inc., the Ninth Circuit Court of Appeals refused to enforce a mandatory arbitration clause in a franchise agreement on the grounds that it was unconscionable. [16]  Congressional action is seen in the federal Automobile Dealers' Day in Court Act, enacted in 2002.  This legislation essentially states that all agreements to arbitrate between an automobile manufacturer and the dealer must be made in writing after a dispute arises. [17]  Another example of congressional action was made during the 109th Congress when a provision was added to a defense authorization bill that prohibited mandatory arbitration agreements in payday loan contracts made with service members. [18]  The Arbitration Fairness Act of 2007 has also been introduced in Congress.  This piece of legislation, co-sponsored by more than seventy members of Congress, would ban mandatory arbitration agreements in employment, consumer, and nursing home contracts. [19]

IV.  Arbitration's Future

Arbitration will continue to play a significant role in dispute resolution for franchise owners but they need some help.  As stated earlier, as many as half of all franchise agreements contain arbitration clauses. [20]  This statistic only makes sense given the advantages of the agreements for the franchisor.  The franchisor is allowed to define the terms of the arbitration including location and arbitrator before any dispute even exists.  Furthermore, the franchisor is usually in a much stronger bargaining position than the individual franchisee and can often dictate the terms of the agreement.  Given that Congress is already pursuing a prohibition of mandatory arbitration in consumer contracts with the Arbitration Fairness Act [21], and franchise agreements exhibit many of the characteristics of consumer contracts [22], why not help the franchisee as well?  This conclusion does not deny the potential benefits of arbitration for either the franchisee or the franchisor.  The strength of a claim by a franchisee can even the playing field and allow bargaining surrounding the terms of arbitration on more equal terms.  If arbitration really is the better alternative to litigation given the circumstances of the dispute, a smart entrepreneur will make the right decision.

[1] Jill Schachner Chanen, Troubled Kingdoms: As Franchises Seek to Expand Their Empires, Individual Operators Look for Ways to Protect Their Turf, 92 A.B.A.J. 52, 52 (2006).

[2] Edward Wood Dunham & Erika L. Amarante, DAI v. Downey: Associational Standing and Arbitration, 16 Franchise L.J. 16, 16 (2007).

[3] Lewis S. Chronowski Jr., Arciniaga v. General Motors Corp Suggests Possible Expansion of Rights Regarding Arbitration Clauses Under ADDCA, 25 Franchise L.J. 124, 124 (2006).

[4] Edward Wood Dunham & David Geronemus, Franchise "Litigotiation": Understanding the Interplay of Litigation and Arbitration Outcomes and Settlement Negotiation in the Resolution of Franchise Disputes, 9 A.B.A. Sec. Litigation Conflict Mgmt. 3, 3 (2005).

[5] Stephen Yeazell et al., Civil Procedure, 496 (6th Ed. 2004).

[6] Id.

[7]  Id. at 497.

[8]  Id.

[9]  Kevin M. Kennedy, Stolt-Neilsen SA: Prehearing SubPeonas on Third Parties Upheld by Arbitrators, 25 Franchise L.J. 122, 122 (2006).

[10] Id.

[11]  Dunham, supra note 4, at 16.

[12]  Yeazell, supra note 5, at 497.

[13]  Id. at 498.

[14]  Id. at 499.

[15]  Id.

[16]  Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

[17]  Chronowski, supra note 3, at 124.

[18]  Lewis S. Eidson, A Good First Step, 43 Trial 9, 9 (2007).

[19]  Am. Assoc. for Justice, Momentum Builds in Congress to End Mandatory Arbitration, 44 Trial 12, 12 (2008).

[20]  Dunham, supra note 2, at 65.

[21]  Am. Assoc. for Justice, supra note 18, at 12.

[22]  Nagrampa, 469 F.3d at 1282.