Summary Judgment: A Tool in Franchise Arbitrations

Franchisors have come to rely on arbitration as an inexpensive and quick avenue to resolve disputes with franchisees. However, arbitrations have expanded in scope and complexity over the years such that many arbitrations now closely resemble a court or jury trial. In response, franchise counsel should incorporate language in the arbitration provision in the franchise agreement that gives the parties the express right to employ litigation tools typically used by plaintiffs and defendants to resolve issues before incurring the time and expense associated with full-blown trials. Those litigation tools include dispositive motions, such as a motion for summary judgment. Because very few franchise arbitration provisions deal with this subject, arbitrators today are often left to address this issue on their own, and some of them are unwilling to consider such dispositive motions, and instead require a full trial, including witness testimony, thereby imposing increased burdens and expenses on the parties.

As the record of arbitration decisions ' especially pre-hearing decisions on whether summary judgment motions should even be considered ' is extremely limited, it is difficult to accurately determine how many parties in an arbitration have been denied the opportunity to present a summary judgment motion. Most of the commercial arbitrations in the United States are governed by the Federal Arbitration Act (“FAA”). The FAA neither expressly permits nor expressly precludes the use of summary judgment or dispositive motions in the arbitration process ' it simply does not address this issue. Similarly, most arbitration associations do not specifically address in their rules the use of summary judgment motions in an arbitration. An argument certainly can be made that the language of the commercial rules for the American Arbitration Association (“AAA”) at least implies that the arbitrator has the flexibility or authority to hear and decide summary judgment motions in an arbitration. However, without express language permitting such motions, a party runs the risk of an arbitrator interpreting the rules differently.

Various courts over the past several years have attempted to address this issue and have recognized the right of a party to bring dispositive motions in the arbitration context. Schlessinger v. Rosenfeld, Meyer & Susman, 47 Cal. Rptr. 2d 650, 655-58 (Cal. Ct. App. 1995) (indicating that the use of dispositive motions helps increase the speed and efficiency of the arbitration, thereby furthering the guiding principle of arbitration); Campbell v. Am. Family Life Assurance Co. of Columbus, Inc., 613 F. Supp.2d 1114, 1119-20 (D. Minn. 2009) (upholding grant of summary judgment under AAA rules); Louisiana D. Brown 1992 Irrevocable Trust v. Peabody Coal Co., 205 F.3d 1340 (6th Cir. 2000) (affirming determination that summary judgment was appropriate in arbitration); Sherrock Bros. v. DaimlerChrysler Motors Co., 260 F.App'x 497, 501-02 (3d Cir. 2008) (confirming that the AAA rules give arbitrators the flexibility to employ summary judgment procedures).

Notwithstanding the foregoing, some courts continue to believe that summary-judgment-type motions are inappropriate in the arbitration context. The U.S. District Court for the District of Columbia in The Chem-Met Co. v. Metaland Int'l, Inc., No. Civ. A. 96-2548, 1998 WL 35272368 (D.D.C. Mar. 25, 1998), held that the AAA rules support the position that the parties in an arbitration are entitled to an evidentiary hearing and that arbitrators exceed their powers by deciding cases based on summary judgment motions. In Chem-Met, the arbitration panel, which was proceeding under the rules of the AAA, heard oral argument on the motion but did not hear live witness testimony and did not admit any documents into evidence before granting summary judgment. The district court stated “a full opportunity to present [a] case at a hearing on the evidence” is a “bedrock principle” of arbitration. As such, the court held that the arbitrators had failed to hear material evidence, and the court vacated the arbitration award.

While the cases in which courts have refused to allow an arbitrator to decide a case by summary judgment are limited, they do illustrate an important point. Some arbitrators continue to have the same or similar viewpoint as the court in Chem-Met and will not hear summary judgment motions. If a case is assigned to an arbitrator who holds this viewpoint, the parties likely will be forced to incur the costs and expenses of a full-blown arbitration hearing, regardless of the undisputed facts and applicable law.

Benefits of Being Able to File Summary Judgment Motions

There are numerous potential benefits to a franchisor if it can assert motions for summary judgment in an arbitration. A few examples can help illustrate.

First, many franchisors put a great deal of time into their pre-sale and post-sale processes. Much of this work protects the franchisor against potential claims by franchisees, including claims of fraud, misrepresentation, violations of state franchise statutes, and/or breach of contract. For example, some franchisors require franchisees to execute general releases. Similarly, most franchise agreements have integration clauses and/or additional language that attempts to preclude a franchisee from later asserting that there were other agreements, promises, or representations that it relied on in deciding to enter into the franchise agreement. Some franchisors use franchisee certifications or questionnaires that require a franchisee to expressly acknowledge that it has not received, and is not relying on, any representations or promises other than those in the franchise agreement and the disclosure documents.

All of these devices can be effective tools to protect a franchisor when it is faced with claims in the future. However, these provisions may be less effective if the arbitration provision in the franchise agreement does not expressly permit an arbitrator to hear and decide summary judgment motions. Such language will allow the arbitrator to hear, for example, a motion to enforce a release and dismiss all claims or a motion to dismiss fraud claims when a franchisee has previously indicated that it was not relying on any of the alleged representations. If the arbitration provision does not expressly allow for the use of summary judgment motions and the arbitrator is of the belief that summary judgment is inappropriate in the arbitration context, then a franchisor may be forced to spend a significant amount of time and resources defending a claim that should have been dismissed with minimal effort based on the protections the franchisor put in place during its pre-sale and post-sale process.

A second potential benefit pertains to the use of partial summary judgment motions. While a partial summary judgment motion will not get rid of the entire case, it can be very beneficial to franchisors. For example, a franchisor can use a partial summary judgment motion to decide claims against a franchisee for past-due royalties. Often, there is no dispute about the fact that the fees were not paid and the amount that remains outstanding. By obtaining an award for even part of the case through partial summary judgment, the franchisor can significantly reduce the scope of the final arbitration trial, thereby reducing the potential number of witnesses and the time and cost associated with preparing for and presenting the final arbitration trial. Moreover, eliminating a key defense or claim, or obtaining a partial award on a key claim can help a party gain leverage that may lead to settlement. However, if the arbitration provision does not expressly permit an arbitrator to hear and decide partial summary judgment motions, the franchisor may never get the opportunity.

Drafting a Comprehensive Arbitration Provision

The primary purpose of the FAA is to ensure that arbitration agreements, like any other contract, are enforced as written. In Volt Information Sciences, Inc. v. Board of Trustees Of the Leland Stanford Junior University, 489 U.S. 468, 479 (1989), the U.S. Supreme Court held that under the FAA, courts should “rigorously enforce” the terms of the agreement as written and that “parties are free to structure their arbitration agreements as they see fit.” Franchisors can help eliminate some of the “risks,” and enjoy some of the benefits, discussed above, by following the lead of the Court and drafting a comprehensive arbitration provision that will be enforced by the courts as written.

Franchisors should review the current version of the arbitration provision to determine if the provision contains express language to allow them to conduct the arbitration in a manner consistent with their desires. In conducting the review, check for the following:

• Does the arbitration provision permit the arbitrator to hear and decide summary-judgment-type motions?
• Does the arbitration provision permit the arbitrator to hear and decide partial summary judgment motions?
• Does the arbitration provision set forth the burden or standard of proof required in connection with such motions?
• Does the arbitration provision set forth the manner in which summary judgment motions can be presented ' i.e., through memoranda and affidavits only, through oral arguments of counsel, through live witness testimony?

If an arbitration subsequently occurs and the arbitration provision expressly addresses these issues, the arbitrator can be comfortable that if he or she allows a dispositive motion in accordance with the language of the arbitration provision, the decision will likely be upheld in court because the arbitrator simply enforced and followed the express written agreement of the parties. The key is to take the time to develop and draft an arbitration provision that addresses in detail the specific items through which the parties will control the arbitration. If a franchisor waits until after the arbitration is commenced, it may be too late. When it comes to franchisor/franchisee arbitrations, as with most things in life, preparation is the key to success.

Jay W. Schlosser is a partner in the Minneapolis office of Briggs and Morgan, P.A. He is the current chair of the Trade Regulation Practice Group at Briggs and provides counseling and litigation services to various franchise entities. He can be reached via e-mail at [email protected] or via telephone at 612-977-8539.

Franchisors have come to rely on arbitration as an inexpensive and quick avenue to resolve disputes with franchisees. However, arbitrations have expanded in scope and complexity over the years such that many arbitrations now closely resemble a court or jury trial. In response, franchise counsel should incorporate language in the arbitration provision in the franchise agreement that gives the parties the express right to employ litigation tools typically used by plaintiffs and defendants to resolve issues before incurring the time and expense associated with full-blown trials. Those litigation tools include dispositive motions, such as a motion for summary judgment. Because very few franchise arbitration provisions deal with this subject, arbitrators today are often left to address this issue on their own, and some of them are unwilling to consider such dispositive motions, and instead require a full trial, including witness testimony, thereby imposing increased burdens and expenses on the parties.

As the record of arbitration decisions ' especially pre-hearing decisions on whether summary judgment motions should even be considered ' is extremely limited, it is difficult to accurately determine how many parties in an arbitration have been denied the opportunity to present a summary judgment motion. Most of the commercial arbitrations in the United States are governed by the Federal Arbitration Act (“FAA”). The FAA neither expressly permits nor expressly precludes the use of summary judgment or dispositive motions in the arbitration process ' it simply does not address this issue. Similarly, most arbitration associations do not specifically address in their rules the use of summary judgment motions in an arbitration. An argument certainly can be made that the language of the commercial rules for the American Arbitration Association (“AAA”) at least implies that the arbitrator has the flexibility or authority to hear and decide summary judgment motions in an arbitration. However, without express language permitting such motions, a party runs the risk of an arbitrator interpreting the rules differently.

Various courts over the past several years have attempted to address this issue and have recognized the right of a party to bring dispositive motions in the arbitration context. Schlessinger v. Rosenfeld, Meyer & Susman , 47 Cal. Rptr. 2d 650, 655-58 (Cal. Ct. App. 1995) (indicating that the use of dispositive motions helps increase the speed and efficiency of the arbitration, thereby furthering the guiding principle of arbitration); Campbell v. Am. Family Life Assurance Co. of Columbus, Inc. , 613 F. Supp.2d 1114, 1119-20 (D. Minn. 2009) (upholding grant of summary judgment under AAA rules); Louisiana D. Brown 1992 Irrevocable Trust v. Peabody Coal Co. , 205 F.3d 1340 (6th Cir. 2000) (affirming determination that summary judgment was appropriate in arbitration); Sherrock Bros. v. DaimlerChrysler Motors Co. , 260 F.App'x 497, 501-02 (3d Cir. 2008) (confirming that the AAA rules give arbitrators the flexibility to employ summary judgment procedures).

Notwithstanding the foregoing, some courts continue to believe that summary-judgment-type motions are inappropriate in the arbitration context. The U.S. District Court for the District of Columbia in The Chem-Met Co. v. Metaland Int'l, Inc., No. Civ. A. 96-2548, 1998 WL 35272368 (D.D.C. Mar. 25, 1998), held that the AAA rules support the position that the parties in an arbitration are entitled to an evidentiary hearing and that arbitrators exceed their powers by deciding cases based on summary judgment motions. In Chem-Met, the arbitration panel, which was proceeding under the rules of the AAA, heard oral argument on the motion but did not hear live witness testimony and did not admit any documents into evidence before granting summary judgment. The district court stated “a full opportunity to present [a] case at a hearing on the evidence” is a “bedrock principle” of arbitration. As such, the court held that the arbitrators had failed to hear material evidence, and the court vacated the arbitration award.

While the cases in which courts have refused to allow an arbitrator to decide a case by summary judgment are limited, they do illustrate an important point. Some arbitrators continue to have the same or similar viewpoint as the court in Chem-Met and will not hear summary judgment motions. If a case is assigned to an arbitrator who holds this viewpoint, the parties likely will be forced to incur the costs and expenses of a full-blown arbitration hearing, regardless of the undisputed facts and applicable law.

Benefits of Being Able to File Summary Judgment Motions

There are numerous potential benefits to a franchisor if it can assert motions for summary judgment in an arbitration. A few examples can help illustrate.

First, many franchisors put a great deal of time into their pre-sale and post-sale processes. Much of this work protects the franchisor against potential claims by franchisees, including claims of fraud, misrepresentation, violations of state franchise statutes, and/or breach of contract. For example, some franchisors require franchisees to execute general releases. Similarly, most franchise agreements have integration clauses and/or additional language that attempts to preclude a franchisee from later asserting that there were other agreements, promises, or representations that it relied on in deciding to enter into the franchise agreement. Some franchisors use franchisee certifications or questionnaires that require a franchisee to expressly acknowledge that it has not received, and is not relying on, any representations or promises other than those in the franchise agreement and the disclosure documents.

All of these devices can be effective tools to protect a franchisor when it is faced with claims in the future. However, these provisions may be less effective if the arbitration provision in the franchise agreement does not expressly permit an arbitrator to hear and decide summary judgment motions. Such language will allow the arbitrator to hear, for example, a motion to enforce a release and dismiss all claims or a motion to dismiss fraud claims when a franchisee has previously indicated that it was not relying on any of the alleged representations. If the arbitration provision does not expressly allow for the use of summary judgment motions and the arbitrator is of the belief that summary judgment is inappropriate in the arbitration context, then a franchisor may be forced to spend a significant amount of time and resources defending a claim that should have been dismissed with minimal effort based on the protections the franchisor put in place during its pre-sale and post-sale process.

A second potential benefit pertains to the use of partial summary judgment motions. While a partial summary judgment motion will not get rid of the entire case, it can be very beneficial to franchisors. For example, a franchisor can use a partial summary judgment motion to decide claims against a franchisee for past-due royalties. Often, there is no dispute about the fact that the fees were not paid and the amount that remains outstanding. By obtaining an award for even part of the case through partial summary judgment, the franchisor can significantly reduce the scope of the final arbitration trial, thereby reducing the potential number of witnesses and the time and cost associated with preparing for and presenting the final arbitration trial. Moreover, eliminating a key defense or claim, or obtaining a partial award on a key claim can help a party gain leverage that may lead to settlement. However, if the arbitration provision does not expressly permit an arbitrator to hear and decide partial summary judgment motions, the franchisor may never get the opportunity.

Drafting a Comprehensive Arbitration Provision

The primary purpose of the FAA is to ensure that arbitration agreements, like any other contract, are enforced as written. In Volt Information Sciences, Inc. v. Board of Trustees Of the Leland Stanford Junior University , 489 U.S. 468, 479 (1989), the U.S. Supreme Court held that under the FAA, courts should “rigorously enforce” the terms of the agreement as written and that “parties are free to structure their arbitration agreements as they see fit.” Franchisors can help eliminate some of the “risks,” and enjoy some of the benefits, discussed above, by following the lead of the Court and drafting a comprehensive arbitration provision that will be enforced by the courts as written.

Franchisors should review the current version of the arbitration provision to determine if the provision contains express language to allow them to conduct the arbitration in a manner consistent with their desires. In conducting the review, check for the following:

• Does the arbitration provision permit the arbitrator to hear and decide summary-judgment-type motions?
• Does the arbitration provision permit the arbitrator to hear and decide partial summary judgment motions?
• Does the arbitration provision set forth the burden or standard of proof required in connection with such motions?
• Does the arbitration provision set forth the manner in which summary judgment motions can be presented ' i.e., through memoranda and affidavits only, through oral arguments of counsel, through live witness testimony?

If an arbitration subsequently occurs and the arbitration provision expressly addresses these issues, the arbitrator can be comfortable that if he or she allows a dispositive motion in accordance with the language of the arbitration provision, the decision will likely be upheld in court because the arbitrator simply enforced and followed the express written agreement of the parties. The key is to take the time to develop and draft an arbitration provision that addresses in detail the specific items through which the parties will control the arbitration. If a franchisor waits until after the arbitration is commenced, it may be too late. When it comes to franchisor/franchisee arbitrations, as with most things in life, preparation is the key to success.

Jay W. Schlosser is a partner in the Minneapolis office of Briggs and Morgan, P.A. He is the current chair of the Trade Regulation Practice Group at Briggs and provides counseling and litigation services to various franchise entities. He can be reached via e-mail at [email protected] or via telephone at 612-977-8539.