Successful Mediation of Franchise Disputes: Factors That Influence the Outcome

Thu, Oct 17th, 2024 | by Miles Mediation and Arbitration | Article | Social Share

Franchising as a legal relationship has embraced mediation as a pre-filing requirement to a lawsuit or arbitration in most franchise agreements. So, how has it gone?

While we have roughly a 25-year history since the earliest mediations in franchise matters, we have very few empirical records of how mediation has performed, especially those mediations that are contractually required as a pre-condition of formal legal claim prosecution. Lots of anecdotal information but nothing empirical. I can remember when mediation was unaccepted by the franchise trial bar, particularly franchisor-side, and when franchisee lawyers were equally unwilling to suggest mediation to their adversaries for fear of appearing weak.

Today, we have a track record of mediation of franchise disputes, and less reluctance to engage in mediation, especially when it’s contractually required as the first step in dispute resolution by so many franchise agreements.  The question is, has anything really changed?

I’ve mediated more than 250 franchise disputes in the past 7 years. Here’s what I’ve seen, and what you should consider if you’re preparing to mediate a franchise case.

1. Results vary directly with preparation. No surprise there. Perfunctory performances by either side (“I’m here because my franchise agreement says I have to be here.”) don’t advance resolution. It’s a waste of time and money and would be a waste of effort if there were any effort, which, in a disturbing number of cases, there isn’t. Colleagues—mediation is an opportunity. Take it. Don’t blow it off.
2. Results vary with decibels in counsels’ openings. The louder you get, the more the other side wants nothing to do with you. Maybe not forever, but certainly not on the day of mediation. This is not to say that ultimately an overly aggressive opening may not contribute to a resolution but rule it out on the day of mediation and factor in additional fees and time for your client until you get to the promised land of resolution.
3. Results vary with your objective. Do you want to settle? Do you want war? As you ask yourself those questions, please don’t forget to ask your client. You may be surprised that your answers to that question are different from your client’s, especially when you explain war’s effect on time, fees and client distress.
4. Results may vary with extent of private equity ownership. Whoa, that’s strong, you say. And you are right; it is strong, and likely wrong as often it is right in specific situations. But what I do see is an eroding of what was once called “the franchise relationship” which is attributable to a host of factors. One factor may be that when you buy a franchise system with the express intention of selling it in five years, it may change your timetable for patience for slower performers. Sooner rather than later. Less interest in helping resolve the long-term growth problems of the franchise system because you don’t plan on being around then. And less willingness to let a franchisee, even a failing one who has already lost all its money and represents no viable competition, leave the system without pushing for liquidated damages as hard as you can — because all revenue is equally green.
5. Results vary with age of franchise system. Really? I like to think that the more established the franchisor is, the less it must prove to anyone and, here’s the key, the more it knows how harmful long-term discord is. Being “right” has little to do with resolution. At a point in my mediations, usually when we are struggling over the last barriers to resolution, I tell my mediation participants that there’s no independent value in being right (unless we’re talking about human rights like voting and freedom of religion, which we are not). It’s a hard pill to swallow for many. In franchise disputes, where money is almost always at issue, in most cases finality is much more important than prevailing. Put fighting your dispute behind you and move on with what your real business is.
6. Seize the day! Better yet, get started working long before the day of mediation. There is no bigger waste of time than setting a mediation date 60 days out and then doing next to nothing over the next 60 days to resolve your dispute. Learn about early dispute resolution. Start the process immediately upon engagement of mediator; get lawyers to commit to early production of key documents; meet long before your mediation day to explore common interests; forget about “winning” and think about “resolving.” Aim for no drama (or as little as possible) and strive for a durable solution. Maybe the day of mediation will be an afterthought because you will have reached resolution by then. This is not a pipe dream. It happens. And everyone is glad for it, except perhaps for the hourly-rate lawyers who revel in endless discovery and deep motion practice. Hey, I was once one of those, so I know of what I speak. The important thing is that I am not anymore — I am a champion of resolution, and you should be too!

Whether a franchise case will settle at mediation is subject to a variety of factors. Preparing for the mediation and treating it as an opportunity can help improve the odds of resolution — and a better result for your client.