USA Trends and Developments Contributed by: Carmen D. Caruso, Carmen D. Caruso Law Firm
Levelling the Playing Field With Expert Testimony When individual franchisees fight major national brands, the “David versus Goliath” imbalance cre - ates risks for both sides. Franchisors risk sympathy for the little guy, which is why they usually insist on jury trial waivers. Franchisees risk the myth of fran - chisor omniscience, that whatever the franchisor says in explaining its business practices must be right. Both sides, therefore, must consider the presentation of competent expert testimony to prove or refute the reasonableness of the conduct at issue. The need to level the playing field with superior expert witnesses usually lands harder on the franchisee. Looking Ahead: Where Do We Go From Here? The pressures described above reflect continuing tensions over control, cost, risk and the allocation of value within franchise systems. Practitioners who counsel franchisors and draft FDDs and franchise agreements must strive to create systems that are anti-fragile – able to adapt as conditions change – and must counsel their clients to balance the protection of franchisee equity against the pressure to increase value to shareholders. Savvy franchisors should strive to align day-to-day operations with contractual and regulatory requirements, keeping a close eye on avoiding joint-employer liability, and should embrace governance structures that welcome franchisee inputs and resolve grievances efficiently. On the other side of the table, counsel for franchisees and their associations will do best for their clients when they advocate positions that are in the best interests of the brand long-term and, to the extent possible, adhere to the Hippocratic Oath (“Do No Harm”) in partnering with the franchisor to protect and enhance the brand. However, as history is our guide, franchising dis - putes will continue to generate substantial litigation and arbitration despite best efforts at diplomacy, and unfortunately the continuing imbalance of power in franchising relationships creates the temptations for abuse that can cause litigation and damage brands. Trials of franchising and dealership cases present complex factual and legal issues that demand the highest levels of advocacy.
Franchisees and Dealers, which continues to welcome new chapters. Most franchisors still reflexively oppose independ - ent associations, and many franchisees reasonably continue to fear retaliation for their organising efforts; however, most franchisee advocates continue to view independent associations as preferable to purely fran - chisor-controlled advisory councils. The associations provide collective voice, shared information, and a counterweight to information asymmetry and discre - tionary power. Mediation, Early Dispute Resolution, and Dispute Resolution Clauses There is no clear overall uptick or decline in court or arbitration filings. Mandatory pre-suit mediation claus - es have become increasingly common and, when suc - cessful, allow parties to avoid Item 3 disclosure of the dispute – creating a strong practical incentive for early compromise. Early dispute resolution (EDR) is gaining traction. In formal EDR processes (including frameworks devel - oped by the EDR Institute and offered through pan - els such as the American Arbitration Association’s), a trained mediator supervises limited, targeted informa - tion exchange and risk analysis designed to enable informed settlement discussions within 30 days. The incentive to avoid public Item 3 disclosures makes franchising especially fertile ground for EDR. Mandatory arbitration, jury-trial waivers, and prohi - bitions on joining other franchisees as co-plaintiffs (coupled with class-action bans) remain the norm. Anecdotally, arbitration cases are more likely to reach a final evidentiary hearing, in contrast to court cases, which most often resolve before trial. This undercuts the frequent claim that arbitration inherently reduces cost and risk. Arbitration awards are not inherently confidential and can support res judicata or estoppel arguments. However, media access is limited com - pared with open court, which some franchisors value for secrecy.
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