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The Myth of Secrecy (and Other Problems) in Franchise Arbitration

Arbitration is heralded as a way of providing for the just and efficient resolution of disputes.  Frequently arbitration fulfills this promise, but too often it does not. 

In franchising, problems begin when franchisors and their attorneys seek advantages for themselves when they insist the franchisee must prospectively agree to mandatory binding arbitration of future disputes at the time the franchisee signs the franchise agreement.  Among the more prominent reasons (whether publicly acknowledged or not) franchisors frequently favor arbitration:

  • The desire to make dispute resolution more expensive for the franchisee, who can be required to travel across the country to arbitrate and pay one-half of the fees to an arbitration association and to the Arbitrators.
  • The desire to limit the discovery available to the franchisee.
  • The desire to bar multiple franchisees from joining as co-plaintiffs in one case or in a class action, and to restrict the evidence to that pertaining to a single franchisee to the exclusion of system-wide evidence.
  • The desire to avoid being bound in a second case to a potentially adverse decision in a first case raising the same issue but with a different franchisee.
  • The desire to have the case decided by Arbitrators with franchise law experience, which typically means experience in representing franchisors resulting in a franchisor-friendly predisposition.

In the same vein, franchisors often say they expect the evidence presented and the arguments made in an arbitration proceeding must remain a secret, not discoverable by other franchisees who might wish to make similar arguments or by prospective franchisees that might be deterred from buying the franchise if they heard the arguments being made by a franchisor hoping to defeat some other franchisee. 

But, the assertion by many franchisors that arbitration hearings must remain secret is wrong. This mistaken belief apparently stems from the fact that the public or the press does not have the right to attend an arbitration hearing as a spectator.  This is an obvious distinction from litigation, where trials and most pre-trial hearings are held in open court that anyone can attend and report on. However, while the public cannot attend an arbitration hearing, this does not equate to a gag-order being imposed on the parties as so many franchisor advocates mistakenly assume

There is no rule of law requiring franchisees to keep secret what is said in the arbitration hearing unless the franchise agreement contains a specific secrecy requirement.  If the franchise agreement requires arbitration but does not require secrecy, then there is no rule of law (or rule of most known arbitration providers) to impose a secrecy requirement on the parties.  To be clear, the Commercial Arbitration Rules of the American Arbitration Association (the preeminent provider of arbitration services in the U.S.) imposes no gag order on what the parties may disclose about the contents of an arbitration hearing.  Neither does the rules for JAMS, perhaps the second largest arbitration provider.  Since the AAA and JAMS rules do not impose gag orders, arbitrator(s) in cases under their respective rules cannot impose a gag order or otherwise restrict speech by an arbitrating party unless both arbitrating parties were to specifically agree.  The franchisor alone is not entitled to an order imposing silence on the franchisee over a franchisee’s objections.

So, what are the consequences of the widespread mistaken belief that what happens in a franchise arbitration must remain in the arbitration (except for disclosure of the Award in Item 3 of the next FDD, something that a franchisor can try to sanitize or otherwise water down to dilute its impact)?

As a wise person said: “Secrecy is the keystone to all tyranny.”1  In franchising (and other areas of law) the negative consequences of presumed secrecy in arbitration are two-fold.  At the big picture level, the mistaken notion of secrecy impedes the development of the common law, which is the body of judge made law, forged case by case over centuries, reflecting accumulated wisdom and always adaptable to new facts and circumstances.  The common law cannot develop where the proceedings themselves and the reasons underlying decisions by the arbitrators in their Awards are largely kept secret so as not to influence subsequent cases (the exact opposite of the common law).  This has serious negative ramifications for franchising and other fields, which would invariably benefit from evolved reasoning in the common law tradition.

And then there is the more immediate risk of injustice when persons speak in the belief his or her words will never see the light of day.  Lawyers in both arbitration and litigation are bound as officers of the court to present a truthful case, not to suborn perjury, and not to make arguments that lack a good faith basis in the facts and as to the law.  But lawyers are human beings subject to temptation (as if a reminder is needed).  Sadly enough, a lawyer who believes he or she is arguing in secret may be tempted to twist the truth or stretch the bounds of good faith advocacy much more so than a lawyer arguing in open court.  And the same of witnesses who can be emboldened to stretch the truth if they believe there is little or no risk of negative ramification. 

And this is putting it politely.

Lawyers that try cases for a living know both intrinsically and anecdotally the risk of hearing frivolous arguments and perjury is much higher when the offending lawyers and witnesses believe their words will most likely remain secret.  The deliberately mistaken belief that arguments can be made in secret, often heard from franchisors seeking one-sided advantage from secrecy, inevitably spawns the presentation of arguments that would be sanctionable if made in open court and which sometimes cross the line into moral outrage.   

I will present concrete examples in a follow-up to this Article and welcome hearing examples from others.

As always, it is hard work and takes considerable skill in the art of cross-examination to defeat a determined opponent that will lie to win.  But the more outrageous our opponents the more determined we are to fight back hard, and to do so in the light of day that is always the best antiseptic.


1 Quoting Robert A. Heinlein

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