August 9, 2017
Wouldn’t it be great if we took a page out of Disney’s book and everything finished with a happy ending? Unfortunately, real life doesn’t include fairy godmothers, genies, and an endless stream of happy endings. In the franchising world, disputes happen. When they can’t be resolved in-house, the two parties end up in litigation.
In fact, I recently highlighted the five most litigated issues in the Franchise Disclosure Document (FDD).
Luckily, the process for dispute resolution is outlined at length in the FDD. The key is to understand the basics, which are fairly standard in frachise agreements.
The majority of disputes will go to mediation first. This informal process brings in a mediator to help the disputing parties come to an agreement. A franchisor can outline specific requirements for the mediator, such as being a retired judge or attorney with experience in franchise law. Once assembled, the mediator begins the challenging work of finding a common ground.
This route costs far less than arbitration. Personally, I’ve had tremendous success with clients going the mediation route first. One of the reasons mediation succeeds is the parties can candidly discuss settlement terms knowing that what is negotiated can never be raised in a future arbitration or civil action. For starters, should the mediation be successful, the final details are put into a settlement agreement that the parties sign. Once signed, this settlement agreement is binding on the parties. Additionally, the state of California bars parties from ever litigating the disputed issues resolved in the signed agreement. That also extends to prohibiting parties from ever referencing the mediation negotiations in any type of future legal action.
Typically, franchise agreements will build in financial motivations to encourage parties to come to an agreement in mediation. One example is to link the requirement of mediation to the payment of attorney fees and costs. If a party fails to mediate the dispute, and they prevail at trial or arbitration, they will be denied the ability to recover their attorney fees and costs.
If mediation fails, then the parties move onto arbitration. Here an arbiter (or arbiters) determine the final say in the matter. This decision is binding, with no appeal rights. Regardless of if you feel the arbitrator relied on the wrong law and facts in the matter, you’re stuck with the decision of the arbitrator.
Similar to mediation, arbitration is private. Unlike civil actions, there will not be a paper trail outlining the final rulings or what the parties brought to the table. The franchise agreemnt will set forth how many arbiters are involved, as well as outline their qualifications, much like mediation.
When I work with franchisors to draft the FDD, I advise them to assert federal arbitration laws. This gives the franchisor home turf advantage, requiring the franchisee to travel to them to dispute the matter. Invoking state law can give the franchisee a geographic advantage. For example, the state of California works in favor of franchisees in the state by requiring the franchisor to travel to them. Asserting the supremacy of federal law negates state law, giving franchisors the home turf advantage.
When diving into the world of franchise litigation, or any aspect of franchise law for that matter, it’s essential to work with a lawyer who knows the ins and outs of the industry. As both a part owner of a franchise and an experienced franchise lawyer, I bring a wealth of industry-specific knowledge to help clients navigate this complex industry. If you are currently looking into diving into the franchising world, wanting to create your FDD or are facing franchise litigation, contact me today.