This is the first installment of a longer article to be continues in later segments.
Imagine this scenario. Ten years ago, former college roommates, Founder One and Founder Two, go into business selling gluten free cookies on campus using the secret recipe they developed together. After initial success with their dorm sales, they decide to expand to neighboring schools. To borrow money, they need to set up corporate formalities including a limited liability company with an operating agreement. They engage a lawyer to advise them and draw up the papers for their cookie enterprise calling it “G-Free.” In drafting the documents, the lawyer draws from templates they previously used and includes a dispute resolution provision calling for arbitration if any dispute arises between the founding parties. The arbitration agreement is simple and does not specify particulars as to the arbitral forum or procedural rules. Founders trust their lawyer’s judgment and do not ask questions about arbitration or how it might work if needed. They are enthusiastic and do not think they could have different goals in the future. But ten years is a long time and life happens. Their business is a success in College Town headquarters, and in neighboring communities. They are both earning a comfortable income. Eventually, they each find romantic partners, and the partners have their own ideas of how the business should proceed. Founder One is content with the status quo; their life partner is happy with the pace and demands as they exist. Founder Two is also content, but their new life partner has ambitions for the G-Free to franchise nationwide. Founder Two’s life partner starts pushing for change and eventually persuades Founder Two that if Founder One will not agree to this strategy, they should part ways. The problems begin.
When the original Founders cannot agree, Founder Two starts moving forward anyway hiring advisors to set the business up as a Franchisor. Founder Two puts their romantic partner on the payroll as Franchise Strategy Manager at a generous salary without clearing it with Founder One. Founder Two spends considerable business resources on franchising, enlisting employees to set up systems that will support a franchise operation. As these employees divert from their usual work, the quality of their gluten free cookies suffers, customer services flounder, and laid off employees may be sharing company confidential information. G-Free loses some business to newcomers in the market who gained access to G-Free’s secret recipe by hiring former G-Free employees. Founder One asks Founder Two to discuss the situation, but Founder Two wants to avoid a confrontation. Without a response, Founder One sued Founder Two in a state court seeking to stop Founder Two immediately from continuing down this path asserting they are causing irreparable harm to the business’s reputation and for damages, asserting claims for breach of the operating agreement and breach of fiduciary duty. Founder One is taken aback when the court dismisses the case without prejudice because they failed to submit the dispute to arbitration as their operating agreement required.
The key language in the operating agreement reads as follows:
Dispute Resolution and Arbitration Agreement
If a dispute arises between the members of G-Free, the parties are required to attempt in good faith to resolve the dispute within 30 days after either party notifies the other party of the nature of the dispute and the resolution sought. If the parties do not resolve the dispute within 30 days from the first notice of dispute, either party may commence arbitration by filing a Demand for Arbitration with a recognized provider of Alternate Dispute Resolution (“ADR”) services in the city in which the G-Free maintains its principal place of business. The parties shall agree on a mutually acceptable neutral arbitrator within 30 days of filing the Demand for Arbitration, and the arbitration hearing shall commence within 90 days of the initial filing date. The arbitrator shall issue their Award within 30 days of the conclusion of the hearings and no later than 150 days after filing of the Demand.
Before, Founder One has assessed the implications of the dismissal and filed a Demand for Arbitration with ADR provider, Founder Two filed a Demand with “Your Way ADR” a new ADR provider that touts itself as “recognized” for its more informal approach to arbitration. At Your Way ADR, there are no formal rules followed by more traditional arbitration administrative organizations such as the American Arbitration Association, CPR and others. Instead, at Your Way ADR, the parties get “to adapt as the proceedings unfold.” This is far from a structured dispute resolution process that Founder One hoped to invoke here. Although Founder One did not file first, they forced the issue of proper forum by filing their own Demand for Arbitration with the AAA under the Association’s Commercial Rules. Founder Two thwarts Founder One because the court orders the arbitration should proceed before Your Way ADR and not AAA because Founder two filed first. The court rejects Founder One’s argument that Your Way ADR is not a “recognized provider” of ADR. If they cannot agree on the direction of G-Free or the arbitral forum, this does not bode well for smooth arbitration.
The clock is ticking as the parties must agree on a neutral arbitrator within 30 days of Founder two’s filing of the initial Demand so that the hearing can commence within 90 days of that date. Your Way ADR does not have its own established procedures for arbitrator selection. The parties exchange proposed arbitrators back and forth but neither side will agree to someone proposed by the other. In the absence of more elaborate procedures, here where the parties cannot agree, Your Way ADR appoints an arbitrator who provides a declaration that they have no conflicts and are not aware of any facts that would create the impression of bias. Your Way ADR did not require the prospective arbitrator to submit to a more rigorous conflict checking process customarily used by other “recognized” arbitration service providers. The appointed arbitrator has a background in labor arbitrations and is not particularly experienced in commercial disputes involving closely held businesses. Neither side of this dispute had the opportunity to provide criteria for a suitable arbitrator, such as years of experience, industry expertise or otherwise. Absent a basis for challenging the arbitrator’s neutrality, they are stuck with Your Way ADR’s choice, and neither side is happy with the appointed person. Unless, of course, they can agree on another neutral, a different process for selecting the neutral or a different forum or the rules of another forum to follow here.
Before we meet the arbitrator at the initial conference, consider what lawyer drafting the dispute resolution provision could have done to better protect these parties if a dispute arose. First, counsel should have discussed with the parties the benefits and burdens of litigation in court compared to arbitration. Among other things, arbitration can be more economical and efficient, but that is not always the case. As the bases for challenging an arbitration award are more limited than the grounds for appeal from a jury or court decision, arbitration may offer more finality. In contrast, parties in arbitration incur costs for administration and the arbitrator or panel not incurred in court. And if a party disagrees with factual determinations or legal conclusions, it has a better chance of reversing the outcome on appeal as there are more grounds than there are for challenging an arbitral award. Second, an arbitration provision should set forth not only the timing for key deadlines but should specify an administering organization to manage the process and incorporate the rules of a forum that apply to the type of dispute. It is important to have an agreement upfront as to the expertise and qualifications of the arbitrator and the process for arbitrator selection and assuring neutrality. Arbitration agreements often specify that parties may still seek relief in court for certain issues such as when a party is seeking injunctive relief to stop irreparable harm as Founder One was attempting to accomplish here. Although arbitrators may have authority, in an emergency, courts may be able to act faster and enforce their own orders quickly. These are all considerations that parties should evaluate at the outset when parties are optimistic and long before a dispute arises.
In our next installment of this series, we will look at how the initial conference with the arbitrator unfolds and how a word wisely worded arbitration agreement could have spared both sides time and expense. Unfortunately, it is often when parties are on the verge of litigation that they first get advice on how to prepare for and resolve a dispute. By ensuring that counsel drafting agreements consider and appreciate these issues upfront, parties will be better prepared when a disagreement cannot be resolved amicably.
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As always, I welcome suggestions of topics you would like to read about in future columns.
Francine Friedman Griesing, Founder of Griesing Law, LLC, has represented clients as an advocate in alternate dispute resolution for over 40 years and has served as a neutral arbitrator and has served as a neutral for 30 years. She represents public and privately-held companies, nonprofits, higher education and government entities in litigation, employment and ADR issues.
Reprinted with permission from the August 15, 2025 edition of the “Legal Intelligencer” © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.
