New Arbitration Appellate Procedures Change Playing Field

Franchisors have historically struggled with whether to include provisions calling for mandatory arbitration of all franchise disputes in their franchise agreements. One of the main complaints about arbitration from franchisors and franchisees alike ' and a reason many franchisors opt not to include arbitration provisions in their franchise agreements ' has been the lack of an effective appeal process. Until recently, arbitration awards obtained under the American Arbitration Association (AAA) Arbitration Rules could only be appealed through the courts, and only for very limited and uncommon reasons ' generally, arbitrator bias or an arbitrator's refusal to allow a party to submit appropriate evidence. If the arbitrator blatantly ignored the law or facts, there was little a party could do.

The rules have now changed for franchisors attuned to the recent amendment of the AAA's Arbitration Rules. Under the AAA's new Optional Appellate Arbitration Rules (New Rules), which became effective on Nov. 1, 2013, parties can now appeal arbitration awards for errors of law made by the arbitrator that are material and prejudicial, and for determinations of fact by an arbitrator that are clearly erroneous.

The Processes

The New Rules allow a party to initiate an appeal of an arbitrator's underlying award to the AAA within 30 days from the date that award is submitted to the parties. Any party that does not file an appeal has seven days after receiving notice of an appeal to file a cross-appeal. Once a Notice of Appeal is filed under the New Rules, the underlying award rendered by the arbitrator is not considered final and the time for commencement of judicial enforcement proceedings is tolled during the pendency of the appeal.

The filing fee for an appeal is not insignificant and thus may discourage the filing of spurious appeals. The party initiating the appeal must pay a $6,000 fee, and any party filing a cross-appeal must also pay a $6,000 fee; the parties are also responsible for any other fees and costs of the appeal tribunal. Moreover, at the discretion of the appellate panel, the losing party to the appeal may be assessed fees and costs.

Under the New Rules, the appeal stays within the arbitration system. A tribunal of three arbitrators will hear the appeal. The appeal tribunal does not include the original arbitrator(s). The AAA sends a list of 10 prospective arbitrators from a special “Appellate Panel” to the parties. If the parties cannot agree on the appeal tribunal, each party has 14 days to strike names to which it objects and to number the remaining names in order of preference. The AAA then selects the tribunal from the lists returned to it.

The parties also have the right to request an appellate arbitrator with specific qualifications (such as panelists with franchise experience). The appellant must do so in its Notice of Appeal, and the other parties have three days after receipt of that notice to submit their request.

Once the tribunal is selected, the New Rules provide for a briefing schedule that spans the course of three to four months. The tribunal does not conduct a hearing, but is to issue a ruling on the briefs within 30 days of the filing of the last brief. They can adopt the underlying award, they can substitute their own award, or they can request additional information and extend the period for another 30 days; however, the tribunal cannot order a new arbitration hearing or send the case back to the original arbitrator(s) for corrections or further review. While parties who expect arbitration to provide an expedited procedure may be frustrated by this additional delay, the delay is certainly shorter than would be experienced if a judicial determination were appealed. Moreover, the cost of the delay may be much less than the cost of an arbitrary adverse decision.

Opting In

One drawback of the New Rules is that they specifically require the parties to opt into the appeal process. They can do so at any point in the arbitration procedure, but more importantly, they can do so in the initial agreement that establishes an arbitration procedure. While the AAA included in the New Rules some model language, the language could be as simple as one sentence:

Franchisor and Franchisee agree that any award from the arbitrator may be appealed under the Optional Appellate Arbitration Rules of the American Arbitration Association.

For existing franchise agreements that do not contain an opt-in provision, franchisors and franchisees should both consider agreeing to adopt the New Rules soon after the initiation of the arbitration process. If both parties truly believe their position is correct in the facts and law, then both of them should want to assure the arbitrator does not make an erroneous determination of fact, or a ruling that is not based on existing law.

Once a dispute arises, not every party truly believes their position to be supported by the facts and law, and it will be difficult to obtain an agreement to adopt the New Rules in those circumstances. For that reason, franchisors who decide to include arbitration provisions in their franchise agreements should seriously consider adding an appeal right to their form arbitration provision.

Conclusion

A complete discussion of the advantages and disadvantages of arbitration versus litigation is beyond the scope of this article. For franchisors that have been on the fence in the past as to the adoption of an arbitration clause, the availability of an appeal right may turn the tide in favor of including an arbitration provision in their franchise agreements. However, for franchisors who already favor arbitration, the New Rules should give them significantly more comfort that decisions will be decided based on the facts and law, and their franchise agreements enforced. Moreover, the fact that an arbitrator knows his or her award can be appealed may encourage the arbitrator to more carefully consider the facts and the law before rendering an award.

For our franchise clients who have arbitration provisions in their franchise agreements, we will be inserting an appeal right in their agreements effective with their annual renewal this year. If you are a franchisor with an arbitration provision in your franchise agreement (or in supplier or other agreements), or have considered adopting an arbitration provision in your agreements, you should contact your attorney regarding the New Rules and the wisdom of including such a provision in your agreements.

Charles S. Modell and Sawan S. Patel are attorneys with Larkin Hoffman Daly & Lindgren Ltd., a Minneapolis-based law firm that represents franchisors in drafting franchise agreements and in arbitration and litigation matters. They can be reached at 952-835-3800.

Franchisors have historically struggled with whether to include provisions calling for mandatory arbitration of all franchise disputes in their franchise agreements. One of the main complaints about arbitration from franchisors and franchisees alike ' and a reason many franchisors opt not to include arbitration provisions in their franchise agreements ' has been the lack of an effective appeal process. Until recently, arbitration awards obtained under the American Arbitration Association (AAA) Arbitration Rules could only be appealed through the courts, and only for very limited and uncommon reasons ' generally, arbitrator bias or an arbitrator's refusal to allow a party to submit appropriate evidence. If the arbitrator blatantly ignored the law or facts, there was little a party could do.

The rules have now changed for franchisors attuned to the recent amendment of the AAA's Arbitration Rules. Under the AAA's new Optional Appellate Arbitration Rules (New Rules), which became effective on Nov. 1, 2013, parties can now appeal arbitration awards for errors of law made by the arbitrator that are material and prejudicial, and for determinations of fact by an arbitrator that are clearly erroneous.

The Processes

The New Rules allow a party to initiate an appeal of an arbitrator's underlying award to the AAA within 30 days from the date that award is submitted to the parties. Any party that does not file an appeal has seven days after receiving notice of an appeal to file a cross-appeal. Once a Notice of Appeal is filed under the New Rules, the underlying award rendered by the arbitrator is not considered final and the time for commencement of judicial enforcement proceedings is tolled during the pendency of the appeal.

The filing fee for an appeal is not insignificant and thus may discourage the filing of spurious appeals. The party initiating the appeal must pay a $6,000 fee, and any party filing a cross-appeal must also pay a $6,000 fee; the parties are also responsible for any other fees and costs of the appeal tribunal. Moreover, at the discretion of the appellate panel, the losing party to the appeal may be assessed fees and costs.

Under the New Rules, the appeal stays within the arbitration system. A tribunal of three arbitrators will hear the appeal. The appeal tribunal does not include the original arbitrator(s). The AAA sends a list of 10 prospective arbitrators from a special “Appellate Panel” to the parties. If the parties cannot agree on the appeal tribunal, each party has 14 days to strike names to which it objects and to number the remaining names in order of preference. The AAA then selects the tribunal from the lists returned to it.

The parties also have the right to request an appellate arbitrator with specific qualifications (such as panelists with franchise experience). The appellant must do so in its Notice of Appeal, and the other parties have three days after receipt of that notice to submit their request.

Once the tribunal is selected, the New Rules provide for a briefing schedule that spans the course of three to four months. The tribunal does not conduct a hearing, but is to issue a ruling on the briefs within 30 days of the filing of the last brief. They can adopt the underlying award, they can substitute their own award, or they can request additional information and extend the period for another 30 days; however, the tribunal cannot order a new arbitration hearing or send the case back to the original arbitrator(s) for corrections or further review. While parties who expect arbitration to provide an expedited procedure may be frustrated by this additional delay, the delay is certainly shorter than would be experienced if a judicial determination were appealed. Moreover, the cost of the delay may be much less than the cost of an arbitrary adverse decision.

Opting In

One drawback of the New Rules is that they specifically require the parties to opt into the appeal process. They can do so at any point in the arbitration procedure, but more importantly, they can do so in the initial agreement that establishes an arbitration procedure. While the AAA included in the New Rules some model language, the language could be as simple as one sentence:

Franchisor and Franchisee agree that any award from the arbitrator may be appealed under the Optional Appellate Arbitration Rules of the American Arbitration Association.

For existing franchise agreements that do not contain an opt-in provision, franchisors and franchisees should both consider agreeing to adopt the New Rules soon after the initiation of the arbitration process. If both parties truly believe their position is correct in the facts and law, then both of them should want to assure the arbitrator does not make an erroneous determination of fact, or a ruling that is not based on existing law.

Once a dispute arises, not every party truly believes their position to be supported by the facts and law, and it will be difficult to obtain an agreement to adopt the New Rules in those circumstances. For that reason, franchisors who decide to include arbitration provisions in their franchise agreements should seriously consider adding an appeal right to their form arbitration provision.

Conclusion

A complete discussion of the advantages and disadvantages of arbitration versus litigation is beyond the scope of this article. For franchisors that have been on the fence in the past as to the adoption of an arbitration clause, the availability of an appeal right may turn the tide in favor of including an arbitration provision in their franchise agreements. However, for franchisors who already favor arbitration, the New Rules should give them significantly more comfort that decisions will be decided based on the facts and law, and their franchise agreements enforced. Moreover, the fact that an arbitrator knows his or her award can be appealed may encourage the arbitrator to more carefully consider the facts and the law before rendering an award.

For our franchise clients who have arbitration provisions in their franchise agreements, we will be inserting an appeal right in their agreements effective with their annual renewal this year. If you are a franchisor with an arbitration provision in your franchise agreement (or in supplier or other agreements), or have considered adopting an arbitration provision in your agreements, you should contact your attorney regarding the New Rules and the wisdom of including such a provision in your agreements.

Charles S. Modell and Sawan S. Patel are attorneys with Larkin Hoffman Daly & Lindgren Ltd., a Minneapolis-based law firm that represents franchisors in drafting franchise agreements and in arbitration and litigation matters. They can be reached at 952-835-3800.