Dispute Resolution

Who will resolve your dispute? How will it be done? Where will it be done?

Franchise agreements can contain a dizzying array of confusing terms—“mediation,” “choice of law,” “arbitration,” and so forth.  To help you better understand what these terms mean and how they may affect you, we have put together a simple guide to help you understand the basics.

Litigation. Litigation is a term that refers to dispute resolution by a court.  Typically when a complaint if filed in court, the case will go through three stages:  First, there is the pleadings stage in which the parties exchange the complaint, an answer or motion to dismiss, and perhaps a counterclaim.  It is at this stage that the court may consider the question whether a complaint, as stated on the paper, is good or not.  If the court decides the claim is good, that simply means that you can go on to the next stage; it does not mean that the court is endorsing your claim.  The second stage is the discovery stage. In this stage, the parties demand documents from each other, take depositions of knowledgeable witnesses, and otherwise find out information about the other’s position. The next stage, typically, is called the “dispositive motion” stage. At this point, the parties may engage in motions that gather together the evidence taken during the discovery stage in order to present it, on paper, to the court. This is usually called a motion for summary judgment, and one party or the other is asking the court to decide the case on the papers, without a trial. If the case is not decided in this way, then it will go to trial either before a judge or a jury. Once a verdict or decision is rendered, the parties usually have the right to appeal.

Litigation of a case may be as short as a few months or as long as 10 years if multiple appeals are involved.

The place where a case is heard by a court is called the venue.  Usually, a court located in the franchisor or franchisee’s location will be the venue of a case.  The contract between the parties may specify that litigation will take place in a particular venue.  Typically, franchise agreements state that the venue will be the location selected by the franchisor.  Under some circumstances, these choice of venue provisions may not be valid.

Choice of venue should not be confused with choice of law. “Choice of Law” refers to the law that will apply to a dispute and that the court will decide.  Usually, if there is no contract provision, a court will apply the law of the state where it sits in deciding a case.  A contract, however, may state that the law of another state will govern.  When a contract contains a choice of law provision and a choice of venue provision, they usually will be the same, but do not have to be. It is possible, for example, that a court in New York could apply Florida law or that a court in California could apply Illinois law.

A number of states have franchise laws, and these laws may override either a choice of venue or a choice of law clause. Thus, for example, if you are a franchisee in New Jersey, which has a strong franchise act, a franchise agreement that chooses Missouri law and requires suit to be brought in Missouri (choice of venue) will not necessarily control because New Jersey law would override it.  Sometimes issues of choice of law or choice of forum will get decided by which party sues first and where.

Arbitration.  Arbitration is a way of resolving disputes in which an arbitrator—usually a lawyer but not necessarily—sits as a “judge” and hears each side present evidence and then makes a decision.  It is like litigation but there are several important differences.  First, there is no right to appeal from an arbitrator’s decision.  Second, there is usually no right to discovery in arbitration, although in franchise and dealer cases, the parties often agree to allow discovery because of the complexity of the issues.  It is, however, entirely possible that the parties go to arbitration without any documents or discovery from the other side.

Arbitration usually is faster than litigation; a case may be decided in arbitration less than a year after the arbitration complaint has been filed.

The arbitrator is usually selected by the parties from a list supplied by an organization (usually the American Arbitration Association) that supervises the process.  The parties must pay the arbitrator as well as the organization that supervises the process.  In this regard, arbitration can be quite costly.

Arbitration usually takes place instead of litigation because the agreement between the parties requires arbitration.  A provision like this usually cannot be overturned, although there are some exceptions.  Further, if there is a choice of law or choice of venue provision in the arbitration clause, it will almost always be upheld.  Even if there are state laws that would override such a provision in litigation, they will not override it in arbitration.

Mediation.  Mediation, unlike arbitration or litigation, is a voluntary dispute resolution process that is like a negotiation—except that it is guided and supervised by a mediator, who is typically a retired judge or other attorney with considerable experience.  Mediation has become very popular in recent years because it is a quick and efficient way of resolving disputes without going through the lengthy process of litigation or arbitration.  Usually, a mediation takes one day.  The parties and their lawyers meet with the mediator, who then puts each side in a conference room and goes back and forth trying to broker a deal.  If the mediator is successful in getting the parties to agree to a settlement, then that settlement becomes binding on them.  If they do not agree to a settlement, then the mediation process is not binding, and everything that is said in it is confidential.