Contributed by Patrick Abramowich

Arbitration clauses can offer many advantages to franchisors. Most notably, they provide for resolution of disputes without a jury and pose obstacles to franchisee class actions. However, trying to extend those benefits too far can result in the clauses being unenforceable. 

The federal appellate court that covers Pennsylvania, New Jersey, and Delaware recently refused to enforce an arbitration clause in an employment contract because it was unconscionable, and because the employer had waived its right to seek arbitration. Nino v. Jewelry Exchange, Inc., 609 F.3d 191 (3d Cir. 2010). The Court found that very short response time periods, an arbitrator selection process that effectively allowed the entity who wrote the clause to choose the arbitrator, and a delay in demanding arbitration rendered the clause unconscionable. Although Nino was decided under Virgin Islands law, it relied upon general principles that a court would likely apply in future cases.

The lessons of Nino are clear – if you require all franchisees to agree to an arbitration provision, you should draft the provision in an even-handed manner and make a timely demand for arbitration once a case has been filed in court if you expect the provision to be enforced.

More details on the Nino decision can be found after the jump.Continue Reading Lopsided Arbritration Clauses Can Become Your Foe