Pressure Grows to Rethink the Use Of Mandatory-Arbitration Clauses

Among the concerns is that there is no guaranteed right of appeal. ""You have to take what the arbitrator decides,""…

The Wall Street Journal
June 3, 2009

Pressure Grows to Rethink the Use Of Mandatory-Arbitration Clauses
Richard Gibson

What is the best way for franchisers and franchisees to settle their disputes?

Most franchise contracts once called for mandatory arbitration of issues, rather than going to court. But these days there is growing pressure — from franchisees, judges, Congress and even some franchisers — to rethink that longstanding arrangement.

"The trend toward arbitration has pretty much ended," says Peter Lagarias, a franchisees' attorney in San Rafael, Calif.

Among the concerns is that there is no guaranteed right of appeal. "You have to take what the arbitrator decides," says Joshua Becker, an in-house counsel for fast-food franchiser Kahala Corp. For that reason, he says, Kahala, whose brands include Blimpie submarine sandwiches and TacoTime, favors resolving issues with franchisees in court.

Another concern is cost. Arbitration can involve three arbitrators, each of whom may charge $300 to $600 an hour. Some critics say there is little incentive for arbitrators to speed things up since they are paid by the hour. Some proceedings can cost upward of $100,000, depending on how complex the issues are and how long it takes both sides to testify. So these days, arbitration isn't always cheaper than going to court.

One complaint from franchisees: Because arbitration typically occurs in the home state of the franchiser, the individual involved must travel to that venue and secure temporary housing and legal counsel, and bear those expenses.

Even Congress has gotten into the fray. Last fall, Sen. Russ Feingold from Wisconsin and Rep. Hank Johnson of Georgia, both Democrats, introduced what they called the Arbitration Fairness Act of 2007. Part of their concern, says Sen. Feingold, is "that mandatory arbitration clauses are slowly eroding the legal protections that should be available to all Americans." Their bill would apply not only to franchising but also to consumers and employees.

The proposed legislation, which is being reviewed by the Senate Judiciary Committee, wouldn't prohibit arbitrating a dispute, but it would prevent one party with greater bargaining power — typically the franchiser — from contractually forcing individuals into arbitration.

The International Franchise Association, a trade group representing franchisers, opposes the legislation, contending it would make existing binding-arbitration clauses in franchise contracts unenforceable. But several consumer and employment-rights groups support the measure.

Write to Richard Gibson at moc.senojwod|nosbig.kcid#moc.senojwod|nosbig.kcid

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