Mediation has become a favorite tool of many enlightened business to help both the franchisor, and their franchisees, avoid the debilitating costs of litigating disputes. Studies show that a vast majority of all business disputes submitted to mediation are settled without the need for protracted adversarial proceedings. Thus, mediation can be particularly helpful to a small business owner who cannot afford the time away from their business, or the legal fees, involved in protracted litigation.

One of the challenges in having franchise disputes resolved through mediation is simply getting both parties to the tables. The franchise group at Larkin Hoffman Daly & Lindgren Ltd. tried to solve this problem by inserting compulsory mediation clauses in the franchise agreements of many of their franchisor clients. Unfortunately, some franchisees would still ignore the clause, and submit their disputes directly to state or federal court. Larkin Hoffman tried to short circuit these tactics by inserting additional provisions into the franchise agreement, calling for the court to dismiss any litigation that was commenced prior to completion of at least four hours of mediation in accordance with the terms of the contract, and to award attorneys’ fees against the party submitting the matter to litigation.

In spite of these provisions, Dry Cleaning Station, a Minnesota-based company that has expanded through franchising throughout the United States, was dragged into court in California earlier this year by one of its franchisees who chose to ignore his obligation to mediate. The franchisee claimed that mediation would be useless in resolving the dispute. The Larkin Hoffman franchise litigation team, led by James Susag, brought a motion before the court to dismiss the mediation. At this point, the franchisee recognized that it may have a problem, and asked the court to simply leave the lawsuit in place while the parties mediated their dispute.

In a recently issued order, the court upheld the enforceability of the mandatory mediation provision, and dismissed the litigation. In doing so, the court also found that the franchisor may be entitled to recover attorneys’ fees and costs incurred in defending the lawsuit pursuant to the additional provision included in the contract that awards attorneys’ fees against any party commencing litigation without completing mediation. As a result, the case is now moving toward mediation, where, once again, statistics show there is a significant chance the matter can be resolved without the need for further adversarial proceedings.

For further information concerning this case, or the firm’s franchise or mediation practice, contact Jim Susag, 952-896-1572, jsusag@larkinhoffman.com, or the Chair of the franchise practice group, Chuck Modell, 952-896-3341, cmodell@larkinhoffman.com.