There are many reasons one can point to in order to explain how over the last several years arbitration has become less and less favored as a dispute resolution mechanism in the franchise arena. One of the mean reasons that the arbitration bubble has burst is due to a lack of a valid and fair appeals process. While it is common knowledge that a losing party in a state or federal court trial is permitted to appeal an unfavorable decision on a multitude of grounds, the same is hardly true in the arbitration process. Rather, it is extremely difficult for most losing parties in an arbitration matter to come close to meeting the rigid criteria for vacating an arbitration award.
For those arbitration matters resolved under the Federal Arbitration Act, the standard of review of an arbitration award under the Federal Arbitration Act provides for only four specific grounds for vacating an arbitration award, as follows: i) where the award was procured by corruption, fraud, or undue means; ii) where there was evident partiality or corruption in the arbitrators, or either of them; iii) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or, iv) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. In addition, most state arbitration statutes mirror the FAA in this area.
As a result of the rigid four categories stated above, it is extremely difficult to overturn an arbitration award except in the most egregious circumstances. A court is prohibited from vacating an arbitration award regardless of how vociferously the court may disagree with the reasoning behind the arbitrator’s decision. Rather, parties that have been successful in appealing an arbitration award have for the most part been able to provide evidence to the court that either the arbitration committed fraud, misconduct or was biased, or the party has been able to prove that a procedural defect was committed thereby severely prejudging a party to the point the party was denied its fundamental rights of due process.
Unless an aggrieved party can show documented evidence in one of these two areas, a court is extremely unlikely to grant a motion to vacate an arbitration award. It is for this reason, and others, that many franchisors in a variety of industries have turned away from arbitration and instead prefer to have their disputes heard by a state or federal court judge.
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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