Protecting A Franchisor Against The Risk Of System-Wide Class Actions

Lexology:

Successful franchisors have long faced the threat that a few disgruntled franchisees, organized and led by a plaintiff’s contingent fee law firm, will commence a class action based on some perceived grievance common among all franchisees. In a class action scenario, damages allegedly owed by the franchisor to potentially all of the franchisees throughout a franchisor’s entire system are aggregated and decided at once. Even a small chance of a devastating loss frequently drives the franchisor to incur enormous legal fees and costs to defend the class claim. When the stakes are so high, the risk of an error by a jury or court will often become unacceptable and pressures the franchisor to settle questionable claims by paying large sums and agreeing to other business concessions that the franchisor would normally reject.

A recent U.S. Supreme Court decision provides an extraordinary opportunity for franchisors to minimize risks of a class action by its franchisees and customers though use of mandatory arbitration in franchise relationship agreements. In April, 2011, the Supreme Court published its decision in AT&T Mobility LLC v. Concepcion et ux. , finding that an arbitration clause in AT&T’s cellular service contract that precluded classwide arbitrations was valid and enforceable. Full article.

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