Lawyers have argued for decades as to which is the preferable way to resolve disputes, litigation or arbitration.  The better question is which is worse – because neither of these is the best way for businesspeople to resolve disputes.  Enter mediation.

What is Mediation?

Mediation is a procedure that brings two parties together, with the assistance of a neutral third party, to work out their differences.  Attorneys frequently attend, but they are not required.  The mediator may give his or her opinions to the parties, but the mediator does not make any decisions for them.  Mediation works because, through the mediator, you can suggest settlement options you may be uncomfortable making on your own for fear they would become a floor or ceiling for future negotiations.  And it forces people to talk about their disputes before “going to war.”

Franchisees are not always excited about mediating disputes.  For one reason, mediation adds some initial cost to addressing the dispute.  More on that later.  Sometimes this reluctance is because the mediation provision in the franchise agreement stacks the deck against the franchisee.  However, there is no reason for a franchisor to include a one-sided mediation provision in its agreements.  In fact, doing so sets the wrong tone for a mediation that is intended to help the parties find a mutually acceptable resolution of their dispute.  Enter the neutral, compulsory mediation clause.

What is Neutral, Compulsory Mediation?

A compulsory mediation clause in a franchise agreement typically provides that neither the franchisor nor the franchisee can file a lawsuit against the other until they have offered to mediate.  (This article assumes litigation is the dispute resolution method provided for in the franchise agreement, but the same comments apply when arbitration is required.)  The provision typically applies to both parties, but since there are certain disputes that cannot wait for mediation to be scheduled, a carve-out usually allows both parties to seek injunctive relief to prevent irreparable harm.

The idea of early compulsory mediation is to find a business solution to a business dispute – before the dispute has escalated through litigation.  In the provisions I have drafted, the franchisor does not select the mediator.  Rather, when one party requests mediation, the party receiving the request then selects a mediation organization (not someone’s best friend) that provides mediation services for resolving franchise disputes.  The mediation organization selects the actual mediator to conduct the mediation – though the parties will often agree on a mediator.  The mediator should be familiar with franchising, so that they can provide educated, third-party analysis to both the franchisor and franchisee as to the merits of their positions and help them fashion a creative resolution to what is often a complicated dispute.  Thus, I require that the mediator have at least 10 years of experience as a franchisor, as a franchisee, or in franchise law.  Franchisors may wonder whether this might result in selection of a “franchisee-friendly” mediator.  I generally hope that it does; if our franchisor client’s position is supported by the law and the contract, who better to convince a franchisee that its position lacks merit than someone well versed in franchise law, who is sympathetic to the franchisee’s position?  The same goes for a franchisee who feels they are in the right; who better to convince your franchisor to come to your rescue than a franchisor lawyer who realizes the franchisor has a significant legal problem?

Some mediation provisions require the mediation to be held at the office of the franchisor.  There may be good reasons for a franchisor to want a local venue for its litigation, but requiring the franchisee to travel to the franchisor’s office for mediation sends the message that this is not intended as a neutral negotiation.  These days, mediation can often be conducted virtually.  For in-person mediations, I have found that if all parties are “invested” in the process, then when negotiations stall in the first hour or two, as they often do, everyone works harder to find a resolution than if we are sitting in the office of one of the parties who can simply go back to their desk.  A neutral provision leaves the decision of the mediation venue to the mediator, though I typically provide that absent the agreement of both parties, the mediation must take place at least 100 miles from the office of either party.  This assures that both parties will incur some expense to get to the mediation.

With a neutral mediation provision, neither party should feel threatened by the procedure, and both can work cooperatively to find a business solution to their dispute.  Again, a far better alternative to going to court, spending years in battle, risking the future of one or both businesses – franchisor and franchisee – and paying to send lawyers’ children (and grandchildren) to college!

Conclusion

Arbitration and litigation both have their pitfalls.  The best advice any attorney can give their client about disputes is to avoid them.  Unfortunately, disputes do occur.  Sending those disputes to mediation does not guarantee they will be resolved.  However, statistics show that most mediated disputes are settled, either through the mediation, or within a short time thereafter.  Any statistics major, or gambler, will tell you that if you have a better than 50/50 chance of getting a result through the expenditure of several thousand dollars in mediation, which will probably save 10 to 50 times that amount in litigation, this is a good bet.  And that is why franchisees should not be deterred from investing in mediation before jumping into what can often be a war of attrition with their franchisor.

Mr. Modell is an attorney at Larkin Hoffman law firm in Minneapolis, Minnesota.  He has worked in the franchise area for more than 45 years and was an early advocate of mediation of franchise disputes.

Published in the October, 2024 in California Lawyers Association: https://calawyers.org/international-law/ils-news-october-2024/