The pandemic will certainly end. It is equally certain that it will leave the franchise world in rough shape. Rougher than even the 2008 Great Recession.
So, how will you, Franchisees and Franchisors, work your way back to stability and prosperity? Will you choose to litigate your way back to profitability?
No. Most franchise parties will collaborate on work-outs of the terms of their respective franchise agreements, which, in a perfect world, is as it should be.
Nevertheless, there will be difficult work-outs that require the assistance of a trained, franchise-oriented, mediator. For example, the need may arise in a situation where festering pre-COVID-19 issues deteriorate and conflict ensues. In this instance, the parties may find it very difficult to navigate negotiations without assistance. Often when contracting parties become frustrated, they pull the litigation trigger hoping this tactic will alter the dynamics and give them an advantage. However, litigation is always expensive and rarely satisfying, and usually does not make good business sense to pursue.
Litigation carries many risks aside from the unknown (and frankly, unknowable) costs of the process (including not only cash, but the diversion of time away from the business). For example, on one side Franchisees will very likely have to defend the Franchisor’s enforcement of a forum selection clause, which prescribes that all disputes be arbitrated in Franchisor’s chosen forum. The courts will more often than not enforce these clauses, which puts the Franchisee at a disadvantage.
Yet, on the other side, the Franchisor sometimes miscalculates by overplaying the strength of the forum selection and alternative dispute resolution (mediation/arbitration) clauses. Here, the common scenario is where the Franchisor insists on resolving a dispute on its turf and demands that the Franchisee arbitrate or litigate in far-off Kalamazoo. This course, however, is sometimes frustrated by the Franchisee’s home state laws, which often protect the in-state Franchisee. Therefore, state courts may hold such clauses unenforceable. In the end, the Franchisor will spend thousands of dollars and weeks seeking to dismiss a pleading and force the Franchisee to appear in the Franchisor’s forum; and further, hope that its substantial fees and costs will be reimbursed by the court (not always a given outcome).
Therefore, both sides have exposure which should be avoided through mediation.
The Franchisor should also consider the discontent that one unhappy Franchisee may spread to other Franchisees in the system. Will you chance the Franchisees forming a litigation coalition to pool their resources and disrupt the entire system?
To Both Parties: Your common goal should always be to resolve the dispute quickly through mediation. Franchise Agreements almost universally require mediation as the first step in resolving disputes, which is a healthy recognition that talking in good faith can avoid disastrous lawsuits. Unfortunately, the opportunity to resolve the dispute in this manner is often wasted.
Consider: How effective will the mediation process be when the parties have struggled over the disputed issues for months and have likely dug-in their heels? How effective will the mediation be if the principal/officer chosen by the Franchisor to take the lead has already exhausted his/her patience with the Franchisee, or been influenced by staff against the Franchisee? In fact, both parties may already be worn-down by fatigue and bitterness over constant conflict. In this situation the negotiations are not likely to be successful. Therefore, a change in the dynamics of the franchise relationship is needed.
Take mediation seriously. Do not waste this important opportunity. The courts learned long ago that experienced mediators can often be the solution to resolving a dispute. In summary, the dynamics of the negotiation change with a mediator’s involvement. The essence of a successful mediation involves the mediator gaining the trust of both sides by studying the respective legal obligations, together with the specifics of the dispute, and then taking the time to understand (often in strict confidence by one or both parties) all aspects of the dispute. The goal is to discover both parties’ concerns and goals and guide them toward a solution which is workable for both sides and results in everyone going back to the business of the franchise.
The best practice in a franchise dispute is to hire a trained mediator with a thorough understanding of franchising. For a fraction of the cost and the time to litigate, the Franchisor and Franchisee should employ someone who understands their franchise agreement, learns the mechanics of the system, grasps the relevant facts and, most importantly, gives sound guidance to each side in a manner which they both understand and trust.
And, as luck would have it…
I was first trained as a mediator while a Superior Court judicial clerk fresh out of law school. The State’s Office of Public Advocate trained all the law clerks in the courthouse in preparation for assisting as mediators. We clerks were then regularly assigned to the small claims court to mediate disputes and reduced the case load on the calendar. During my clerkship, I spent many hours cutting my teeth on negotiating skills.
Subsequently, I devoted many years of practice to family law and negotiated the settlement of countless cases without the need to litigate, thus saving families money and unnecessary pain. I became certified in mediation upon completing forty hours of formal training. For several years, I volunteered for the Superior Court’s Family Division mediating settlements. Lastly, I was active in the collaborative law movement, where our laudable goal was to convince divorcing couples to commit to collaborating on their settlements and resist damaging litigation.
For the last fifteen years I have been immersed in franchise law and represent both Franchisor and Franchisees. I have drafted and reviewed scores of Franchise Disclosure Documents, Franchise Agreements and Area Development Agreements, as well as litigated franchise disputes. My skills and experience are tailored to resolve disputes where the franchise relationship has broken-down, and help to restore the parties to a sound working relationship.
Franchisors often consider their Franchisees as an extended family. Moreover, I have often heard Franchisees speak very respectfully, if not admiringly, of their franchise founders. Often there is a very strong bond between the founding entrepreneur and his/her initial investors (Franchisees).
So, when the inevitable franchise “family” dispute breaks-down this unique relationship, kindly consider hiring me to mediate a resolution and return both parties to the business of the franchise system you have worked so hard to make a success.
Consider Kilcommons Law’s assistance in mediating your disputes and avoiding costly litigation.
This article is not intended to be relied upon as advice for your particular circumstances. Therefore, consult with a qualified FRANCHISE ATTORNEY before offering or signing a franchise agreement.
© Kilcommons Law, P.C. 2020