Mediation Before Litigation: Delaware Court's Expanded Jurisdiction Offers Remedy in Franchise Disputes

On May 29, 2003, the Governor of Delaware, Ruth Ann Minner, signed into law new legislation that may signal the willingness of courts to facilitate the resolution of disputes before the parties have passed the 'point of no return' and resorted to litigation. If the new model proposed in Delaware meets with success and is broadened and adopted by other courts, the development could be meaningful for both franchisors and franchisees, given that disputes frequently arise in franchise systems. Both would benefit from early resolution that would preserve the strength of the system and maintain the important relationships between the franchisor and the franchisee during the balance of the term of the franchise agreement.

Prior to the new legislation, the Delaware Court of Chancery was essentially limited to equity jurisdiction. See 10 Del. C. 1953, ' 341. The Court of Chancery's jurisdiction was further limited when a party had an adequate remedy in other courts. See 10 Del. C. 1953, ' 342 ('The Court of Chancery shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law, or statute, before any other court or jurisdiction of this State.'). The new legislation expanded the jurisdiction of the Court of Chancery in two significant areas: technology disputes and mediation of business disputes.

Minimal Direct Impact

Neither of these areas of expanded jurisdiction are likely to have a direct, immediate impact on dispute resolution between franchisors and franchisees in light of: 1) the high minimum jurisdictional amount; and 2) the relatively narrow scope, which is yet to be fully defined, of the types of disputes covered. First, under both new jurisdictional areas, the dispute must involve at least $1 million or such higher amount as the Court of Chancery determines by rule. Second, while the term 'technology dispute' is supposed to be interpreted liberally to effectuate the purposes of the new grant of jurisdiction, the specific types of agreements referenced demonstrate that most franchisor-franchisee relationships will not satisfy the narrow definition of 'technology disputes' under Delaware law. See 10 Del. C. ' 346(c)(1). The Court of Chancery is permitted to establish rules defining the types of disputes eligible for business dispute mediation and is specifically encouraged to include complex corporate and commercial disputes.

The primary purpose of the expanded jurisdiction is to enhance the areas of expertise in the Court of Chancery and to enhance the incentive for parties to resolve their disputes in that venue. Because relatively few franchise disputes will likely satisfy the newly added jurisdictional bases, the Court of Chancery likely will not encounter the volume of franchise disputes that would facilitate the development of a 'franchise court' that would have special expertise in handling such disputes.

Significance May Lie in Precedent

However, the mediation aspects of the new legislation, if successful, may be broadened and adopted by other court systems in a manner that could have substantial implications for franchisor-franchisee disputes. Historically, mediation served as a tool to facilitate settlement in an already-pending lawsuit where both parties were motivated to settle, but where a broken business relationship, distrust, or other factors impaired settlement negotiations. A variety of private mediation services have been formed to facilitate this process.

Some courts have also entered the mediation process. For example, under Rule 16-14.4 of the Local Rules of the Central District of California, in addition to selecting private mediation, parties to a case may agree to have the assigned district judge or magistrate mediate the case or they may request the court to randomly appoint another district judge or magistrate to conduct the mediation. However, a unique aspect of the new mediation jurisdiction of the Delaware Court of Chancery is that it is authorized to mediate a dispute where no case has been filed.

If the Court of Chancery proves successful over time in enabling the disputants to avoid the costs and other burdens associated with litigation, it is reasonable to assume that other courts will explore methods for incorporating pre-litigation mediation as an alternative service. Because of the relatively long-term, multifaceted nature of franchisor-franchisee relationships, a number of disputes are likely to arise where both parties would benefit from a less adversarial option for resolving their dispute that may preserve the existing relationship and allow the parties to focus on the successful aspects of the relationship.

However, because the Court of Chancery has yet to adopt its relevant rules and because it will take some period of time before parties will encounter disputes in connection with agreements containing provisions selecting the Delaware Court of Chancery as the venue for resolution of their disputes, the impact of the expanded jurisdiction and the concept of pre-litigation mediation by the court will probably remain unknown for some time.

Scott McIntosh is an associate in the Washington, D.C. office of Piper Rudnick, LLP.

On May 29, 2003, the Governor of Delaware, Ruth Ann Minner, signed into law new legislation that may signal the willingness of courts to facilitate the resolution of disputes before the parties have passed the 'point of no return' and resorted to litigation. If the new model proposed in Delaware meets with success and is broadened and adopted by other courts, the development could be meaningful for both franchisors and franchisees, given that disputes frequently arise in franchise systems. Both would benefit from early resolution that would preserve the strength of the system and maintain the important relationships between the franchisor and the franchisee during the balance of the term of the franchise agreement.

Prior to the new legislation, the Delaware Court of Chancery was essentially limited to equity jurisdiction. See 10 Del. C. 1953, ' 341. The Court of Chancery's jurisdiction was further limited when a party had an adequate remedy in other courts. See 10 Del. C. 1953, ' 342 ('The Court of Chancery shall not have jurisdiction to determine any matter wherein sufficient remedy may be had by common law, or statute, before any other court or jurisdiction of this State.'). The new legislation expanded the jurisdiction of the Court of Chancery in two significant areas: technology disputes and mediation of business disputes.

Minimal Direct Impact

Neither of these areas of expanded jurisdiction are likely to have a direct, immediate impact on dispute resolution between franchisors and franchisees in light of: 1) the high minimum jurisdictional amount; and 2) the relatively narrow scope, which is yet to be fully defined, of the types of disputes covered. First, under both new jurisdictional areas, the dispute must involve at least $1 million or such higher amount as the Court of Chancery determines by rule. Second, while the term 'technology dispute' is supposed to be interpreted liberally to effectuate the purposes of the new grant of jurisdiction, the specific types of agreements referenced demonstrate that most franchisor-franchisee relationships will not satisfy the narrow definition of 'technology disputes' under Delaware law. See 10 Del. C. ' 346(c)(1). The Court of Chancery is permitted to establish rules defining the types of disputes eligible for business dispute mediation and is specifically encouraged to include complex corporate and commercial disputes.

The primary purpose of the expanded jurisdiction is to enhance the areas of expertise in the Court of Chancery and to enhance the incentive for parties to resolve their disputes in that venue. Because relatively few franchise disputes will likely satisfy the newly added jurisdictional bases, the Court of Chancery likely will not encounter the volume of franchise disputes that would facilitate the development of a 'franchise court' that would have special expertise in handling such disputes.

Significance May Lie in Precedent

However, the mediation aspects of the new legislation, if successful, may be broadened and adopted by other court systems in a manner that could have substantial implications for franchisor-franchisee disputes. Historically, mediation served as a tool to facilitate settlement in an already-pending lawsuit where both parties were motivated to settle, but where a broken business relationship, distrust, or other factors impaired settlement negotiations. A variety of private mediation services have been formed to facilitate this process.

Some courts have also entered the mediation process. For example, under Rule 16-14.4 of the Local Rules of the Central District of California, in addition to selecting private mediation, parties to a case may agree to have the assigned district judge or magistrate mediate the case or they may request the court to randomly appoint another district judge or magistrate to conduct the mediation. However, a unique aspect of the new mediation jurisdiction of the Delaware Court of Chancery is that it is authorized to mediate a dispute where no case has been filed.

If the Court of Chancery proves successful over time in enabling the disputants to avoid the costs and other burdens associated with litigation, it is reasonable to assume that other courts will explore methods for incorporating pre-litigation mediation as an alternative service. Because of the relatively long-term, multifaceted nature of franchisor-franchisee relationships, a number of disputes are likely to arise where both parties would benefit from a less adversarial option for resolving their dispute that may preserve the existing relationship and allow the parties to focus on the successful aspects of the relationship.

However, because the Court of Chancery has yet to adopt its relevant rules and because it will take some period of time before parties will encounter disputes in connection with agreements containing provisions selecting the Delaware Court of Chancery as the venue for resolution of their disputes, the impact of the expanded jurisdiction and the concept of pre-litigation mediation by the court will probably remain unknown for some time.

Scott McIntosh is an associate in the Washington, D.C. office of Piper Rudnick, LLP.