What Revised Federal Civil Procedure Rules Mean for Litigation Between Franchisors and Franchisees

Recent changes in federal rules may affect franchise dispute resolution and push some systems to revise their agreements.

By Scott McIntosh, CFE

The Federal Rules of Civil Procedure, which govern the procedures of litigation in federal courts, have a significant role in many franchise disputes. First, most franchise disputes that are taken to court proceed in federal court. This is because most franchise disputes involve claims under federal law, including primarily the Lanham Act which applies to trademark claims, or involve a sufficiently large dispute between parties from different states, which allows them to be brought in federal court. Second, many franchise agreements that contain arbitration provisions state that discovery in arbitration will be governed by the Federal Rules.

On Dec. 1, 2015, the most significant revisions to the rules in several years took effect. Particularly as parties and courts gain experience with the revised rules, these revisions may have an impact on the resolution of franchise disputes and may lead some franchisors to evaluate the dispute resolution provisions in their franchise agreements.

Impact on Litigation of Franchise Disputes

A New Emphasis on Proportionality. The revision to the Federal Rules that has received the most attention, and is likely to have the greatest impact, is the new emphasis on “proportionality” in discovery. Anyone who has been involved in litigation understands that discovery, including production of documents, electronically stored information, and depositions, involves significant costs and burdens.

In litigation, parties have often sought every scrap of paper or byte of data that might have some bearing on the issues in the litigation, invoking the language in the rules regarding discovery that “appears reasonably calculated to lead to the discovery of admissible evidence.” That phrase has been removed from the revised rules. Instead, they now require that discovery must be both relevant “and proportional to the needs of the case.”

In determining proportionality, the Federal Rules require consideration of the following factors: “the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.”

This emphasis on proportionality should lead parties to more thoughtfully consider the scope of discovery they seek, as well as the likely burdens associated with requests that take a shotgun approach to discovery or seek tangential information. Failure to apply such considerations will likely be met with proportionality objections.

A Shift to Earlier Discovery. Previously, parties generally were not permitted to seek any discovery prior to holding a discovery conference, which might occur several months after a case is initiated. Under the revised Federal Rules, 21 days after a party is served with a summons and complaint, document requests may be served to that party by any other party, or by that party to any other party. While such document requests will not be deemed to be served until the date of the parties’ first discovery conference, early service of document requests will help focus the parties and the court on the scope of discovery sought and potential discovery disputes. Courts may also be more reluctant to grant lengthy extensions for discovery responses to parties who received requests several months before their responses were technically due.

Practice under the prior rules was for parties to provide responses and objections to document requests within 30 days, but to not produce documents until several months later. The revised Federal Rules require that documents be produced “no later than the time for inspection specified in the request or another reasonable time specified in the response.” Additionally, the revised rules require parties, in their responses to document requests, to identify any categories of documents they are withholding based upon their objections, which must be stated with specificity. In order to comply with these rule changes, parties will need to gather and review responsive documents more quickly and earlier in the case.

More Compressed Case Schedules. Multiple deadlines under the Federal Rules have been shortened, particularly those at the beginning of a case. The time to serve a summons and complaint has been shortened from 120 days to 90 days. Scheduling orders now must issue within 90 days of service (formerly 120 days) or 60 days of first appearance (formerly 90 days) absent “good cause for delay.” Combined with the shift to earlier discovery, parties are likely to encounter greater costs and expend more resources earlier in a case.

National Standard for Failure to Adequately Preserve ESI is More Forgiving. Several courts issued decisions over the past decade where a party was heavily penalized for failing to preserve potentially relevant electronically stored information. However, different standards were emerging across the country, and similar situations often resulted in disparate penalties. Under the revised Federal Rules, there is now a uniform rule applicable to ESI preservation. Sanctions are only available where the ESI should have been preserved, a party failed to take reasonable steps to preserve it, and the information cannot be restored or replaced through additional discovery. Upon a finding of prejudice to the party seeking the ESI, a court may order measures no greater than necessary to cure the prejudice. The revised rules state that harsher sanctions are only available “upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation.”

Bottom Line. Many of the revisions to the Federal Rules are intended to foster resolutions that are faster, fairer, and less expensive. In order to achieve this goal, the rules were revised to add that they should be “employed by the court and the parties” to achieve the existing goal of “secur[ing] the just, speedy, and inexpensive determination of the proceedings.” Where the Federal Rules apply, franchisors, franchisees, and their counsel will need to be prepared to be more engaged in litigation at the outset and to incur more of the expense of litigation earlier in the proceedings. This may have the collateral benefit of encouraging parties to seek earlier negotiated resolutions to their disputes in appropriate circumstances.

Potential Impact on Dispute Resolution Provisions

Arbitration arose as a more informal, less expensive means for parties to resolve their disputes. Given the expense and the disruption to business that litigation frequently entails, many franchise systems have incorporated arbitration provisions in their franchise agreements. However, over time, arbitration has frequently become more time-consuming, more costly, and less efficient.

If the revised Federal Rules achieve their intended goal of streamlining federal court litigation to make the resolution of disputes less costly and more efficient, parties will need to add that factor to the variety of issues considered in selecting the means of dispute resolution in their agreements. Additionally, parties whose agreements contain arbitration provisions providing for discovery to be governed by the Federal Rules will need to determine whether the revised rules are consistent with the level of discovery they desire in arbitration, while those whose agreements merely incorporate the rules of a specified arbitration administrator may want to consider whether to incorporate aspects of the revised Federal Rules that they find desirable.

Scott McIntosh, CFE, is a partner in Quarles & Brady’s Washington, D.C. office. Find him at fransocial.franchise.org.