Dispute Resolution: Mediation for Franchisees and Franchisors

Mediation is a useful approach for franchisees and franchisors looking to settle disputes without the time, financial and emotional costs of more traditional litigation.

By Morgan Wood1851 Franchise Contributor

8:08AM • 08/10/24

In many cases, the franchise model offers entrepreneurs a great opportunity to begin building something for themselves while serving their communities. Still, there are cases in which the well-thought-out model fails, agreements are broken or disagreements come to a head between the franchisee and the franchisor. Each individual franchise agreement should outline the procedures required to settle any disputes, but often, pursuing a mediation process prior to taking more serious steps is a good place to start.

“There are so many reasons why a situation might go to mediation. A franchisee may feel that they’ve been wrongfully treated; a franchisor may be bringing suit because of violations, often related to payments or maybe continuing operations after termination of the agreement; or there may be an action that violates a specific franchise law,” said Jessica Rosen, franchise attorney and shareholder at Lewitt Hackman. “For franchisees in particular — and I’ve experienced this on both sides of efforts to attend mediation before anything goes full-blown — we need to keep in mind that disclosure and litigation is costly, even if it’s arbitration. To the extent that the parties can sit for mediation before things get really heavy and there’s a demand letter going out, we really try to push for it.”

In addition to the financial strain associated with litigation, Rosen said counsel will often push for mediation to avoid additional emotional stress. While a dispute, on its face, is about a business agreement, people feel wronged. Mediation can create a safer, more structured place to come to a true resolution without escalation.

Benefits of Mediation

Mediation is a preferred method to resolve disputes for multiple reasons. Both parties must be participating voluntarily, but if they agree to it, the process opens the door to more flexible, creative solutions, a more affordable process and higher confidentiality.

A mediator does not serve as a judge in the situation, so the parties are able to work together to reach a solution that best meets all needs. This also opens the doors for more creative solutions that may not be available through traditional legal channels.

“Ultimately, it’s far more beneficial to get everyone in the same room, figuratively — if you do a neutral mediation, you’re in separate rooms — and see if there’s a way to get it done,” Rosen said.

The Mediation Model

While the specific steps taken in a legal mediation process can vary based on the specific situation, there is a general structure that most mediation processes follow.

Initiation

Mediation is initiated either by agreement of the parties involved, by a contract clause requiring mediation or by a court order. At this stage, or even before it, Rosen recommends that each party treads lightly and follows the instructions of an attorney.

“At a minimum, you should probably pause communication with the other party if it feels like something is really brewing,” she said. “Your attorney can help you to navigate communications, but even if you send a casual joking email to one person in your office, that’s discoverable. With representation, they can help you get any communication in line so you’re not hurting your case before it even starts.”

Selection of Mediator

The parties choose a mediator who is neutral and has the necessary expertise to handle the dispute.

“You’re only as good as your mediator, so it’s important to get an effective mediator who will try to get both sides to recognize the benefits of coming to an early resolution,” Rosen said. “Don’t hesitate or think that if opposing counsel is identifying a certain mediator or suggesting them that it’s somehow to their advantage. It’s in everyone’s best interest to come to a shared resolution, and if you’re hitting upon real franchise issues, you want someone with an understanding of the intricacies.”

Preparation

The mediator may meet with parties separately prior to the joint conversation to understand issues and gather necessary information.

Opening Session

The mediator explains the mediation process, establishes ground rules and sets an agenda. Each party can make an opening statement to present their perspective.

Joint Discussions

The mediator facilities ongoing discussions between the parties, focusing on the exchange of information, identifying issues and exploring potential solutions.

Negotiation

The mediator helps parties negotiate and narrow down their differences to find common ground and identify a mutually acceptable agreement.

Agreement

Once a solution is identified, the terms are put in writing. A mediator may help draft the agreement. This solution typically is not all-or-nothing, and both parties will likely have to compromise.

“The first time I ever mediated, the mediator there said, ’Everyone comes to determination that they can live with the solution, but they’re not happy about it,’” Rosen said.

Due to the ongoing nature of the franchisee-franchisor relationship, there is a need for continued cooperation and communication between parties. Because of this, legal mediation is a very favorable option when disputes arise in the industry. Resolving disputes through mediation saves time and money, and it also allows both parties to find mutually beneficial solutions with the opportunity to maintain the business relationship.

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