The Secret Is Out! Franchise Arbitration Hearings are Not so Secretive After All

| Nov 15, 2017 | Firm News, Franchise Law

secret

Arbitration is supposed to benefit smaller business by being a cost effective, quick, and binding way to resolve disputes. Franchisors also benefit from arbitration by including mandatory arbitration clauses in franchise contracts that require franchisees to travel to the franchisor’s location to resolve their disputes, limit discovery opportunities, and cut off class actions.

Many franchisors believe that arbitration has the benefit of being a secret proceeding simply because the press is not allowed to attend arbitration and most of the time there are no court reporters recording the hearing. However, the lack of court reporters’ recordings does not necessarily mean that the proceedings are a secret. There is no law or rule that requires the arbitration panel to put a gag order on the proceedings, so any franchisee is welcome to publish the proceedings. Franchisors who win their cases are welcome to share the results of arbitration to deter other franchisees from bringing a dispute.[1]  Franchisees who believe they are being mistreated are also welcome to tell other franchisees about the arbitration and even the arguments that worked for them.

However, the general consensus among practitioners and witnesses is that there will be no consequences for lying in arbitration.[2] This mistaken belief that arbitration proceedings are kept secret has bolstered the confidence of lawyers and arbitrators to skirt the edge of ethical conduct, or in some cases to just dive deep into a pool of lies and exaggerations. For example, one Denver arbitrator hid a conflict of interest in a $1 billion arbitration.[3] In another case, an arbitrator in a $131 million dispute lied about even being a lawyer.[4] Cases like these are more common than you would think are hard to root out because of the lack of reporting.

Arbitration certainly has benefits, but it is not immune from critique meant to improve the process. Transparency would subject arguments and discovery to scrutiny and to help to make both sides testify honestly. As always, the light of day is the best antiseptic.

[1] http://www.motherjones.com/politics/2009/02/franchise-fraud-wake-and-smell-fine-print/.

[2] https://kuscholarworks.ku.edu/bitstream/handle/1808/20194/05_Blankley_Final.pdf;sequence=1

[3] http://www.nytimes.com/2006/02/23/business/arbitrator-in-citigroup-case-accused-of-conflicts-of-interest.html