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What is Arbitration and do I have to attend it to resolve my dispute

Franchise Agreements always have a section on how disputes will be resolved, more often by binding arbitration (rather than litigation in court). The process is generally quicker, and generally less expensive since most of the formalities of litigation practice are eliminated. Both sides basically come to the scheduled hearing with their witnesses and evidence and take turns presenting their case and defense similar to a court proceeding but without all the motions and discovery paperwork that takes place leading up to a court trial. The hearing usually takes place between 4-8 months after the case is filed and usually lasts 1-3 days for most types of franchise disputes. The case is presented before an arbitrator, who is usually an attorney, or possibly a retired judge and takes place in a conference room. Parties need not have an attorney represent them but it is highly recommended.

The American Arbitration Association was started decades ago as a non-profit association to fill this need for an alternative to court litigation for a more efficient dispute resolution mechanism, and has become the predominant forum named in arbitration clauses in contracts. But there are a number of other companies and private firms and attorneys and judges that serve as arbitration forums and arbitrators. Fees are generally assessed based on the amount in controversy, plus the arbitrator's hourly rate. In addition to the general efficiencies of arbitration, the hearings are private and not open to the public, and the case documents are not available for public inspection.

The arbitrator will hear the case and issue an "Award" generally within 30 days, describing the prevailing party and the damages or relief granted. An award is enforced by a simple court petition process where a judge will be asked to enter judgment from the award. The prevailing party then has a judgment against the losing party.

Arbitration is binding-there is no option for appealing except for bias or misbehavior on the part of the arbitrator. The Award is final even if it does not apply the law correctly. When parties agree to binding arbitration they risk a potentially bad ruling, as a tradeoff for the quicker and efficient resolution. However arbitrators are experienced attorneys and retired judges who have significant legal experience in the subject matter. (You will have many to chose from if using the American Arbitration Association)

Franchise Agreements almost always have binding arbitration clauses for most (but not all) disputes, and almost always require the hearing to take place in the Franchisor's home state, regardless of where the franchisee is located. This is clearly more burdensome for an out-of-state franchisee, and therefore, over the years, many states, including California have enacted laws that void out-of-state venue clauses franchise agreements for arbitration or litigation. However franchisees may not realize this when faced with a arbitration demand filed in an out-of-state venue by a franchisor. Most franchisees will assume they have no choice to go attend the hearing in the franchisor's home state and do not realize they can challenge this venue, and win.

While this is an effective method to avoid an out of state arbitration, it is not always black and white and depends almost entirely on the wording of the arbitration clause, as well as state laws and to some extent case law on the subject. Arbitration venue clauses have become the recent hot topic of challenges because franchisors are getting around any state law restrictions by using certain language.

If you have an arbitration clause in your franchise agreement and are concerned as to its legality and applicability, it is incumbent on you to have a franchise attorney take a look at your state laws, and the arbitration clause and the required state law addenda in your FDD, in order to advise you of your rights and options. Call a franchise attorney today!

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