There are several myths about arbitration which hide its true purpose – to immunize big companies from their fraud and breach of contract with individuals. Arbitration has been touted as an affordable and efficient method of resolving disputes. However, our experience with the process based on representing hundreds of individuals has been that it is not affordable and is slanted heavily in favor of big companies.
THE PERFECT EXAMPLE
Fortman Law represents franchisees in disputes with the franchisor. Here’s how those disputes arise… An individual wants to leave the rat race of the corporate world to become his or her own boss. They like the idea of their success being directly dependent on their own hard work. The person may look around and have some ideas about the types of business which interest them. Ultimately, they come upon the idea of purchasing a franchise. The attraction to a franchise is that the person is buying into an existing brand. They are not reinventing the wheel. They will be in business for themselves rather than by themselves. The individual thinks that they have a better chance of success because there will be help to get them through the rough times.
The individual finds a franchise that they want to explore further. They receive information, including a Franchise Disclosure Document, also known as the FDD. The FDD is required by the Federal Trade Commission and must be provided to the potential franchisee. We will discuss the FDD in a separate blog. The individual looks at all the information and decides to sign a franchise agreement. They pay the required fees and get started. In many of our cases, things then start to sour. The franchisee realizes that the franchisor has lied to them about how much they will make or the support that will be provided. The franchisee has invested retirement funds or they may have a loan through the SBA but they are not making any money. The franchisee then decides to consult with Fortman Law.
The first document we request from the client is the franchise agreement. One of the key considerations in looking at that agreement is whether it contains a provision for arbitration. Many franchise agreements now contain the requirement that any dispute under that agreement or any dispute based upon the franchise relationship at all must be arbitrated. In addition, it usually requires the franchisee to bring the arbitration to the state where the franchisor has its headquarters.
So, what’s the big deal? To answer that question, you have to understand the different ways a dispute can be resolved. The traditional way is to file a lawsuit in court. Under that scenario, we draft a lawsuit, pay a filing fee, and serve the defendant with a copy of the lawsuit. A judge is assigned who oversees the manner in which the case proceeds towards trial. Arbitration differs in a few significant ways. In arbitration, a claim is filed not with the court, but with a private company. The two big companies are the American Arbitration Association and JAMS. In order to file a claim, the party must also pay a filing fee which is calculated based on the amount of money the filing party is seeking. These filing fees can be several thousand dollars. In contrast, to file a case in federal court costs around $400.00. As you can see, the costs are significantly higher to file an arbitration claim as opposed to a lawsuit. Unfortunately for many of our clients, the high initial costs of filing the claim means that they will not be able to go forward. Even if the defendant has committed fraud or failed to live up to its obligations under a franchise agreement, it will never be held accountable.
Even if the franchisee can pay the initial filing fee, there are other differences. The ability to obtain documents from the franchisor or to take statements from the employees of the franchisor is severely limited. In normal litigation, we can get all sorts of relevant documents and to take the depositions of most of the management of the franchisor. In arbitration, we will get a limited number of documents and may only be able to take the depositions of three of franchisor’s employees at most. As you can imagine, that means the franchisor can severely limit the ability of the franchisee to obtain relevant documents and testimony favorable to their case.
Another difference is that in court, the parties are not having to pay a judge an hourly rate. Rather, the judge’s compensation is paid by the taxpayers. In arbitration, the compensation to the arbitrator is paid by the parties. A relatively simple one-day arbitration can end up costing $10,000 or more just in fees to the arbitrator. That does not include paying the arbitrator for his or her time reviewing documents to prepare for the hearing or the time the arbitrator spends after the hearing in deciding the case. It is not unusual for the total costs of a simple arbitration to exceed $25,000. A franchisee who has lost everything simply cannot afford the costs. Once again, the franchisor can avoid having to answer for wrongdoing and can continue the same unethical and illegal practices.
Hopefully, this short discussion about arbitration will cause you to carefully consider any agreement which contains an arbitration provision. The concept of arbitration being sold to the public is that it is desirable to filing a lawsuit in court. In reality, it is only desirable to the big companies who push this false narrative. If you are considering a franchise and the franchise agreement contains an arbitration provision, it is critical for you to seek guidance from an attorney with significant experience in franchise law. Otherwise, you may find yourself faced with financial devastation with no way to seek damages for fraud or breach of contract.
If you are considering the purchase of a franchise, or if you are a franchisee who has been harmed by the fraud of your franchisor or the breach of your franchise agreement by the franchisor, Fortman Law can help. We have extensive experience representing franchisees nationwide and offer free consultation to discuss your situation.