Long term success should be one goal of any franchisee. Likewise, franchisors hope they have successful operators. Sometimes, however, the relationship just doesn’t work.

Failure is a realistic outcome and there are many reasons that a franchise relationship fails. Sometimes the franchisee may be at fault, other times the franchisor. Regardless, it is imperative that prospective franchisees understand the "rules of engagement" that are set out in the franchise agreement if a dispute arises.

Although most optimistic and enthusiastic franchisees may not want to focus on these provisions at the start of the franchise relationship, it is imperative that they thoroughly address this before they invest.

Virtually every franchise agreement provides for termination on some or all of the following grounds: failing to pay royalties or other fees; providing false information to the franchisor; selling unauthorized products or services; abandoning the business for more than a week; attempting an unauthorized assignment; misusing the trademarks of the franchisor; and violating any law, statute or regulation, or being convicted of a felony.

With this in mind, the franchisee must acknowledge that a dispute may arise over the course of the relationship, especially considering that many agreements provide for a 10-year term or even longer.

With dispute resolution clauses a regular part of most franchise agreements today, we will examine certain select provisions commonly used by franchisors. Prospective franchisees should evaluate the impact any of these clauses will have on their decision to purchase a franchise.

Although many legal theorists and social scientists have challenged the notion that jurors are biased against business, several studies have purportedly led to three conclusions relevant to franchise litigation: (1) juries regard the profit motive, and its effect on human behavior, with suspicion; (2) juries hold corporations to higher standards than they apply to individual litigants; and (3) plaintiffs win a strikingly high percentage of jury verdicts in business cases, including disputes between franchisees and franchisors.

In addition, franchisors fear that jurors will ignore a judge’s instructions about the applicable law and legal significance of contract terms if they believe justice will be served by doing so. As a result, the franchisor and its counsel seek to avoid the "unpredictable" aspects of the courtroom and insert jury-avoidance mechanisms.

In addition to trying to avoid a jury entirely, a franchisor will try and get before a jury in a forum perceived to be more hospitable to the franchisor or dramatically limit the relief that a jury can award by including arbitration clauses, forum selection clauses, damage caps and punitive damages waivers.

Over twenty years ago, the U.S. Supreme Court stated that the Federal Arbitration Act (FAA) embodies "a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary."

Furthermore, the Court opined that in resolving challenges to an arbitration clause, "the FAA establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability."

Despite this broad language, certain judges sometimes find ways to invalidate arbitration agreements, stating that arbitration is an inherently unfair and inferior method of resolving disputes. Other judges find overreaching by big business against the little guy. Therefore, franchisors draft clauses in a way to maximize the likelihood of successful enforcement of these clauses and make them broad enough to cover claims that involve the franchise relationship.

Out of these claims involving the franchise relationship, some franchisors choose to exclude certain disputes from arbitration in their franchise agreements. These excluded items may cover: disputes and controversies arising from the Sherman Act, the Clayton Act or any other federal or state antitrust law; disputes and controversies based upon or arising under the Lanham Act, relating to the ownership or validity of the franchisor’s trademark; disputes and controversies relating to actions to obtain possession of a location under lease or sublease; immediate termination of the franchise agreement; recovery of money due; and equitable relief, i.e., remedies such as attachment, preliminary injunctions and temporary restraining orders that seek to preserve some aspect of the status quo pending resolution of the dispute.

In addition to recognizing which disputes franchisors may choose to exclude from arbitration, franchisees should review any limitations or mandates set forth in the arbitration clause, as this may be the forum in which a dispute will be resolved. For example, many clauses will include a time limit for filing claims, often one or two years.

Other clauses may set certain rules on how the arbitrator will be selected. In addition, the franchisee should be aware that the arbitration clause may: prohibit the consolidation of other franchisees’ similar disputes and proceedings; limit discovery; specify the location of the arbitration hearing; and limit the arbitrator’s power to award punitive damages. Furthermore, unlike court proceedings, the parties pay the costs of the process, including arbitrators’ fees and any fees charged by an administering institution, which can be very high.

Despite these negative attributes, many have argued that the characteristics of arbitration may increase the value of a franchisee’s settlement position once a dispute arises. Some argue that arbitration gives franchisees the following advantages: the franchisor is unable to overburden the franchisee with onerous discovery demands; the governing law and rules of evidence play a smaller role in arbitration; and if the franchisor loses, it will be stuck with the result because courts "rubber stamp" arbitration awards due to the highly deferential standard of review of the arbitrator’s decision.

In addition to the aforementioned provisions, a franchisee must be wary of the implications of the following provisions:

Choice of Law: In many agreements, the franchisor will designate the law of its home state to govern the franchise agreement. Because some states have more advantageous laws and protections than others, the franchisee should consult with his or her attorney or an attorney licensed in that home state to discuss the ramifications of this provision.

Venue Clauses: Many franchisors may designate that a dispute can only be brought in the state or federal courts of its home state. This may prove very costly to a franchisee. Once again, the franchisee should consult with an attorney to discuss this provision.

No-Implied Waiver Clauses: Many agreements provide that the failure to enforce a contract provision will not constitute a waiver of the right to enforce it at a later date.

Severability Clause: This provides that if one clause is invalidated, the remainder of the contact remains enforceable. This provision may also be found in an arbitration clause because a decision invalidating, for instance, the venue provision, would not invalidate the arbitration clause in its entirety.

Undoubtedly, the dispute resolution provisions discussed above markedly favor the franchisor. Taken in conjunction with other provisions in the franchise agreements, these can work to deprive franchisees of certain legal rights and remedies, heightening the importance of prospective franchisees’ consideration of these provisions when evaluating a franchise investment.

When disputes arise, franchisees should be prepared to adhere to the "rules of engagement" or to be mindful of any variations to those rules that specific state or federal laws may provide for.