Franchisors and franchisees who engage in early mediation of franchise disputes are often able to resolve their dispute and avoid expensive, time-consuming arbitration or litigation. They also find that mediated settlements can produce creative, win/win results that could never be achieved by having an arbitrator, judge or jury declare a winner and loser.

Unfortunately, some franchisors and franchisees, and/or their attorneys, participate in mediation only because the franchise agreement requires them to do so, and they need to “check the box” before starting the war. They often enter mediation with a chip on their shoulder and do things that can sabotage the mediation process – whether intentionally or not. As a frequent mediator I have seen how mediations can get derailed. By understanding the ways this happens, you can avoid these pitfalls and achieve more successful results from mediation.

Choose the right mediator.

Before you retain a mediator, think about your case and what you need from the mediator. If you are just “checking the box,” then select the least expensive mediator you can find, so that your wasted day will at least cost less. However, if you are looking to resolve a dispute, you want a mediator both parties will trust. This means finding a mediator whose opinion you value – and that your adversary will value. You also want a mediator who is not so busy that he/she will not have the time to review pre-mediation submissions, start thinking about ways to bring the parties together, and stick with the mediation, whether through a single long day or in follow-up communications with the parties. If the case is complicated, choose a mediator with a franchise background who can help you evaluate and formulate settlement offers that can work for both parties. It should not matter whether that person has a franchisee or franchisor background, because they are not making decisions for you. However, a person who knows how franchising works, the typical responsibilities of each party in the relationship, and limitations imposed by the franchise model, will understand issues unique to franchising that often need to be addressed.

Avoid coming into the mediation with a fixed bottom line.

Deciding on a bottom line before starting mediation sets you up for failure. It can box you into one avenue for settlement, when there may be other paths meeting your needs. Moreover, once you draw a line in the sand, even internally, it becomes harder psychologically to go beyond that point; the franchisor or franchisee (and their attorney if they have one) feels that if they go beyond that point, they have “lost.”

Consider this in the context of buying a house. You decide you want to pay about $900,000 and absolutely will not pay more than $1,000,000. You picked those numbers because you know that at current mortgage rates, this is what you can afford. You look at dozens of houses in this price range, and they do not have the features you want. If I told you I had the perfect house for you for $1,300,000, you likely would not even consider it. However, you should have asked me if I was willing to finance it, because if I was willing to finance it with interest at 3% a year over 30 years, you actually would have paid less for that house than if you had gotten 30-year fixed rate financing at today’s rates for a $900,000 house!  The point here is that in any transaction, price is only one factor to consider. This is especially true in the franchise context where you not only have money involved, but precedence, other terms that can get people what they want in the relationship, the risk of suffering a total loss if you do not resolve the problem, and the time and cost of an adversary proceeding.  Thus, while you should certainly consider what you want before embarking on mediation, keep an open mind as to tradeoffs that can be made, and other avenues you can take to reach an agreement you can live with.

Do not start the mediation with an unreasonable offer/demand, hoping to split the middle or show how reasonable you can be.

Mediation involves compromise but it is not about reaching a middle ground. It is about trying to find a better resolution to a dispute than the lose/lose result that often follows a long, drawn-out dispute. Early impasses in mediation often occur because one party starts at such an extreme that the other side never seriously engages. You may think starting at one extreme gives you more room to compromise, but what often happens is the other side thinks you are so far apart that they do not even try to make a reasonable counteroffer. Think about this again in terms of buying or selling a house or business; if as a seller you list it too high, you will never have a chance to negotiate with many serious buyers, and if as a buyer you make an unreasonably low offer to purchase, you will never get a counteroffer.

Let the mediator in on your discussion.

In a mediation, you have someone who is in both rooms, hearing what is important to each side, who can, without disclosing any confidences, help each side get what they need out of a settlement. This is a critical component of mediation, and if you kick the mediator out of your room whenever you talk, you lose the value the mediator can provide as you consider offers. All too often in a negotiation, the parties “talk around” each other; with each offering what they think is a reasonable proposal, but without fully understanding what the other side may need in order to reach an agreement. As a result, they may give away too much on one point (which becomes difficult to backtrack on), while offering too little to get a deal done. If the mediator participates in your internal discussions, he/she can help you fashion a proposal that gives away no more than you need to give away, while addressing the needs of the other side.

Avoid setting fixed timelines for the ending of the mediation.

Too often, parties come into a mediation with a fixed deadline for completion – say “5:00 tonight,” after which they have other commitments. It is fine to have a “target” stopping time, but with a fixed deadline, people tend to stop making offers as they approach the deadline, either deciding they cannot reach an agreement or hoping the other side will cave to their demands by the stopping time. In addition, when people approach deadlines, they are less inclined to try and be creative, figuring it is hopeless or focusing on their watches. Mediation is a process, and it takes time to help each side see the merits of the other side’s position, the weaknesses of their own position, and/or the benefit of resolving the dispute. Keep an open mind and a flexible schedule as you work with the mediator to resolve your differences.

Chuck has been a franchise attorney at Larkin Hoffman for more than 45 years. He was an early advocate of mediation of franchise disputes. Since 2020, a significant focus of his practice has been mediating franchise disputes.

Published in the January, 2025 in California Lawyers Association: https://calawyers.org/international-law/ils-news-january-2025/