Most franchise agreements include provisions requiring franchisees to pursue mediation or arbitration (or both) rather than taking their franchisors to court. As a franchisee, understanding your legal options is important. So, if you need to hold your franchisor accountable, what do you need to know? Here are some key insights from national franchise lawyer Jeffrey M. Goldstein.
What Franchisees Need to Know About Franchise Mediation
If your franchise agreement requires mediation, this is essentially a form of guided settlement negotiations. The mediator does not serve as a decision-maker, but instead facilitates negotiations between the parties. As a result, there is no guarantee that mediation will lead to a final resolution, which is why franchise agreements that require mediation often also include arbitration.
Mediation can take place in a single session or over the course of several days. While franchise agreements often require both parties to participate in mediation in good faith, they often do not specify how long they must commit to trying to come to terms. In cases involving contentious disputes, even agreeing on how long to pursue mediation can be a sticking point, and, when this is the case, this typically will not bode well for the remainder of the process.
With that said, mediation can be an effective tool for resolving even highly contentious franchise-related disputes. Selecting a skilled mediator can be key (and can also be a sticking point), as they can quickly help both parties see the benefits of working toward an amicable resolution. A skilled mediator will also be able to provide practical recommendations and help keep the parties’ negotiations focused on dispute resolution rather than devolving into unproductive blaming and personal attacks.
If mediation is successful, the parties will sign a binding settlement agreement. Whether this agreement preserves the parties’ franchise relationship or allows them to go their separate ways will depend on the circumstances involved. If mediation is unsuccessful, the parties will need to consider their next steps, which typically involve either pursuing arbitration or filing a lawsuit in court.
Benefits of Franchise Mediation
- A flexible process that gives the parties full control over the outcome
- Facilitated negotiations and settlement recommendations from an experienced mediator
- Relatively minimal costs compared to arbitration or litigation
Drawbacks of Franchise Mediation
- Requires both parties to come to the table in good faith
- Limited ability to compel franchisors to provide information or act reasonably
- No guarantee that the process will produce a final resolution
What Franchisees Need to Know About Franchise Arbitration
If your franchise agreement requires arbitration, this is a very different situation. While mediation involves working with a neutral third party to seek an amicable resolution, arbitration is a dispute resolution process that culminates in a binding decision, subject to appeal only on limited grounds.
As a result, while mediation and arbitration are both forms of alternative dispute resolution (ADR), in many ways, arbitration is more similar to litigation than to mediation. While mediation is largely unstructured, arbitration involves pleadings, discovery, motions, evidence, witnesses, hearings, and a final arbitration award.
The formality of arbitration can be beneficial in some cases. Once a franchisee files a demand for arbitration, the franchisor must respond and comply with the rules governing the arbitration process. If a franchisor does not comply, the arbitrator (or arbitration panel) can issue a binding decision in the franchisee’s favor.
However, the formality of the arbitration process also comes at a cost. While arbitration is almost always far less costly than litigation, the costs of arbitrating a franchisor-franchisee dispute can be high. As a result, franchisees will often need to make practical decisions about what makes sense given their financial resources and the likely outcomes of pursuing formal ADR.
Benefits of Franchise Arbitration
- Franchisors can be compelled to participate (and can face consequences if they do not)
- The process ends with a binding decision issued by the arbitrator (or arbitration panel)
- The parties remain free to engage in settlement negotiations throughout the arbitration process
Drawbacks of Franchise Arbitration
- The costs involved are greater than the costs of mediation
- The timeline of the process is longer than the timeline of mediation
- The process could end with an arbitration award in the franchisor’s favor
Facing a Dispute with Your Franchisor: What Should You Do?
With all of this in mind, if you are facing a dispute with your franchisor, what can (and should) you do?
In this scenario, the first step is to look at your franchise agreement. If your franchise agreement requires mediation or arbitration (or both), you will need to take this into account as you weigh your legal options. You will also want to see if your franchise agreement contains any exceptions. While exceptions to mandatory ADR clauses tend to favor franchisors, if you take legal action against your franchisor, you will need to know if you are at risk of facing any counterclaims in court.
It will also be worth considering whether to negotiate with your franchisor without pursuing ADR. If you hire a franchise lawyer to represent you, your lawyer may be able to engage with your franchisor’s lawyers to seek an amicable resolution. By engaging with your franchisor’s lawyers instead of engaging with your franchisor directly, your lawyer may be able to bypass any issues related to your franchisor misunderstanding or misinterpreting its statutory or contractual obligations. If an informal resolution is not on the table, engaging with your franchisor’s lawyers proactively will also help facilitate the next steps in the dispute resolution process—whatever those steps might be.
Discuss Your Legal Options with National Franchise Lawyer Jeffrey M. Goldstein
Are you facing a dispute with your franchisor? If so, we can help; please contact us promptly for a free consultation. To discuss your legal options with national franchise lawyer Jeffrey M. Goldstein in confidence, please call 202-293-3947 or contact us online today.
