Arbitrate? Litigate? Avoid Both Through Mediation

In the September 2010 issue of FBLA, Rupert Barkoff wrote a thought-provoking article on the merits of arbitration versus litigation of franchise disputes. His article reminded me of what I tell all prospective franchisors who are trying to decide between arbitration and litigation: “I hate them both, but duels are unlawful.”

Unfortunately, our judicial system really does not provide any good alternative to either arbitration or litigation, both of which can be time consuming, costly, and uncertain. For that reason, a dozen years ago, we began recommending to our franchisor clients that they include a compulsory mediation provision in their franchise agreements. After more than 10 years of experience with these clauses, we find that while some people are disappointed by mediations that do not magically produce settlements, more often than not, they do produce resolutions that are preferable for both franchisee and franchisor (though maybe not for their lawyers) than results obtained in either litigation or arbitration.

Defining Mediation

Mediation is simply a procedure whereby two parties get together, with the assistance of a neutral third party, to work out their differences. Attorneys frequently attend, but they are not required to attend when no litigation has been initiated. The mediator may give his or her opinions to the parties, but the mediator does not make any decisions for them. Compulsory mediation requires the parties to meet, but nobody can force them to reach an agreement.

Franchisees are not always excited about mediating disputes. In some cases, that is because the mediation provision is one-sided and stacks the deck against the franchisee. Franchisees (and their lawyers) should be reluctant in this situation. There is no reason for a franchisor to try to control the mediation or otherwise stack the deck. In fact, doing so sets the wrong tone for the mediation. The purpose of mediation is not for one side to “beat down the other,” but for the parties to find a mutually beneficial solution. (A cynic might argue that a “successful” mediation more often helps the parties cut their losses and find the least distasteful resolution. Either way, mediation can be beneficial for both parties.)

Drafting a Neutral Mediation Provision

A compulsory mediation provision typically provides that neither party can initiate litigation until it has offered to mediate. The provision should apply to both franchisor and franchisee. (While this article assumes that litigation is the dispute resolution method provided for in the franchise agreement, the same comments apply when arbitration is required.) Since there are certain circumstances that cannot wait for a mediation to be scheduled, a carve-out should allow both parties to redress situations that require injunctive relief to prevent irreparable harm.

In the provisions we draft, the franchisor does not select the mediator. Rather, if one party initiates a mediation request (thus letting the other party know that it refuses to accept the invitation to mediate, the next communication will be service of a complaint), the party receiving the letter then selects a mediation organization. It must be an organization (not their brother-in-law), and it must be one that provides mediation services to franchisors and franchisees.

In our clauses, we leave the selection of the actual mediator to the mediation organization. However, it is critical, particularly for mediations that occur before the parties have gone through the pain of litigation, that the mediator be familiar with franchising, so that he or she can provide an educated, third-party analysis to both the franchisor and franchisee as to the merits of their positions. Thus, we require that the mediator have a certain minimum number of years of experience as a franchisor, as a franchisee, or in franchise law. Our franchisor clients often ask whether this might result in selection of a “franchisee-friendly” mediator. In many situations, we hope that it does; if our client's position is supported by the law and the contract, what better way to convince a franchisee that its position has little merit than by having someone well versed in franchise law, who is probably sympathetic to the franchisee's position, provide the franchisee a candid, confidential, and independent analysis of its position?

Many mediation provisions provide that the site of the mediation will be 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 an even-handed negotiation. In fact, we have found that if all parties are “invested” in the process, when negotiations are stalled in the first hour or two, as they inevitably are, everyone works harder to find a resolution than if we were sitting in the offices of one of the parties who could simply go back to their desk. Thus, we recommend leaving the decision of the venue of the mediation to the mediator, but with the proviso that absent the agreement of both parties, the mediation must take place at least 100 miles from the offices of either party. This assures that both parties will incur some expense to get to the mediation. Once again, the goal is not to have one party browbeat the other, but to reach a reasoned resolution of a dispute.

Convincing Everyone Not to Ignore the Mediation Provision

We quickly found that one party or the other, sometimes our own client, would often decide that mediation would be a waste of time, and would want to proceed directly to litigation. When courts were confronted with a complaint filed by a party that indicated that mediation would be fruitless because it would not settle under any circumstances, the courts were holding that there was no damage caused by the breach of the obligation to mediate. As a result, compulsory mediation clauses were not being upheld.

We had to address this problem. We began including a provision stating that if either party initiates litigation without complying with its obligation to mediate (other than if the other party fails to timely respond to a mediation demand), then upon petition of the party against whom the litigation was initiated, “the court will dismiss the litigation without prejudice, and award attorneys' fees and costs to the party seeking dismissal in an amount equal to the attorneys' fees and costs the party seeking dismissal incurred in the litigation.”

Since initially including this attorneys' fee provision in our clients' agreements, we have had two experiences with franchisees, both in California, who brought litigation without first going through the mediation process, each having a different reason for not complying with the mediation clause. In Brosnan v. Dry Cleaning Station, Inc., No. C-08-02028EDL, 2008 WL 2388392 (N. D. Cal. June 6, 2008), the plaintiff argued that mediation would be a “hollow exercise,” but that if the court disagreed, it should simply stay the action while the parties completed mediation. Instead, the court dismissed the action and granted leave to the franchisor to file its petition for attorneys' fees.

Earlier this year, in Delamater v. Anytime Fitness, Inc., No. 1:09-CV-2025 AWI-SMS (E. D. Cal. June 28, 2010), the plaintiff franchisee argued that it should not be required to attend mediation because the mediation would require the plaintiff to travel outside California, and that such a requirement was contrary to California law. He also argued that the provision was invalid for public policy reasons. The court disagreed with both positions, found that the mediation clause was enforceable, and dismissed the plaintiff's lawsuit “without prejudice because it is premature.” Further, the court ruled that “Anytime Fitness is entitled to seek attorneys' fees for having to defend against Delamater's [claims] because Delamater violated the mediation provision.” Id. at 16.

Similar rulings in Kansas and in Florida have enforced differing compulsory mediation clauses. However, because my law firm was involved in the two cited California actions, we know the end of those stories. In both situations, mediations were held within three months of the issuance of the court's ruling. In the first one, after a frustrating 10-hour mediation, the parties left mediation without a settlement, but two weeks later, a settlement was negotiated based on the last offer the franchisor made at the mediation. In the second one, a settlement was reached and signed at the end of the mediation. Thus, in both instances mediation was successful in saving the parties the expense and burden of a trial.

Conclusion

Arbitration and litigation both have their pitfalls. The best advice any attorney can give his or her clients about dealing with disputes is to avoid them. Unfortunately, disputes cannot always be avoided. Sending those disputes to mediation does not guarantee they will be resolved. When they are not, both parties will complain about the additional cost of mediation. However, statistics show that the majority of mediated disputes are settled, either through the mediation, or within a few weeks thereafter. Any statistics major, or gambler, would 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 save probably 10 times that amount in litigation, this is a good bet. Perhaps not for the lawyers, but certainly for their clients.

Charles S. Modell is a shareholder in Larkin Hoffman Daly & Lindgren, Ltd., in Minneapolis, and he chairs that firm's franchise practice. He was the first practicing attorney in the Midwest to receive the designation of Certified Franchise Executive from the International Franchise Association. He can be reached at [email protected] or 952-896-3341.

In the September 2010 issue of FBLA, Rupert Barkoff wrote a thought-provoking article on the merits of arbitration versus litigation of franchise disputes. His article reminded me of what I tell all prospective franchisors who are trying to decide between arbitration and litigation: “I hate them both, but duels are unlawful.”

Unfortunately, our judicial system really does not provide any good alternative to either arbitration or litigation, both of which can be time consuming, costly, and uncertain. For that reason, a dozen years ago, we began recommending to our franchisor clients that they include a compulsory mediation provision in their franchise agreements. After more than 10 years of experience with these clauses, we find that while some people are disappointed by mediations that do not magically produce settlements, more often than not, they do produce resolutions that are preferable for both franchisee and franchisor (though maybe not for their lawyers) than results obtained in either litigation or arbitration.

Defining Mediation

Mediation is simply a procedure whereby two parties get together, with the assistance of a neutral third party, to work out their differences. Attorneys frequently attend, but they are not required to attend when no litigation has been initiated. The mediator may give his or her opinions to the parties, but the mediator does not make any decisions for them. Compulsory mediation requires the parties to meet, but nobody can force them to reach an agreement.

Franchisees are not always excited about mediating disputes. In some cases, that is because the mediation provision is one-sided and stacks the deck against the franchisee. Franchisees (and their lawyers) should be reluctant in this situation. There is no reason for a franchisor to try to control the mediation or otherwise stack the deck. In fact, doing so sets the wrong tone for the mediation. The purpose of mediation is not for one side to “beat down the other,” but for the parties to find a mutually beneficial solution. (A cynic might argue that a “successful” mediation more often helps the parties cut their losses and find the least distasteful resolution. Either way, mediation can be beneficial for both parties.)

Drafting a Neutral Mediation Provision

A compulsory mediation provision typically provides that neither party can initiate litigation until it has offered to mediate. The provision should apply to both franchisor and franchisee. (While this article assumes that litigation is the dispute resolution method provided for in the franchise agreement, the same comments apply when arbitration is required.) Since there are certain circumstances that cannot wait for a mediation to be scheduled, a carve-out should allow both parties to redress situations that require injunctive relief to prevent irreparable harm.

In the provisions we draft, the franchisor does not select the mediator. Rather, if one party initiates a mediation request (thus letting the other party know that it refuses to accept the invitation to mediate, the next communication will be service of a complaint), the party receiving the letter then selects a mediation organization. It must be an organization (not their brother-in-law), and it must be one that provides mediation services to franchisors and franchisees.

In our clauses, we leave the selection of the actual mediator to the mediation organization. However, it is critical, particularly for mediations that occur before the parties have gone through the pain of litigation, that the mediator be familiar with franchising, so that he or she can provide an educated, third-party analysis to both the franchisor and franchisee as to the merits of their positions. Thus, we require that the mediator have a certain minimum number of years of experience as a franchisor, as a franchisee, or in franchise law. Our franchisor clients often ask whether this might result in selection of a “franchisee-friendly” mediator. In many situations, we hope that it does; if our client's position is supported by the law and the contract, what better way to convince a franchisee that its position has little merit than by having someone well versed in franchise law, who is probably sympathetic to the franchisee's position, provide the franchisee a candid, confidential, and independent analysis of its position?

Many mediation provisions provide that the site of the mediation will be 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 an even-handed negotiation. In fact, we have found that if all parties are “invested” in the process, when negotiations are stalled in the first hour or two, as they inevitably are, everyone works harder to find a resolution than if we were sitting in the offices of one of the parties who could simply go back to their desk. Thus, we recommend leaving the decision of the venue of the mediation to the mediator, but with the proviso that absent the agreement of both parties, the mediation must take place at least 100 miles from the offices of either party. This assures that both parties will incur some expense to get to the mediation. Once again, the goal is not to have one party browbeat the other, but to reach a reasoned resolution of a dispute.

Convincing Everyone Not to Ignore the Mediation Provision

We quickly found that one party or the other, sometimes our own client, would often decide that mediation would be a waste of time, and would want to proceed directly to litigation. When courts were confronted with a complaint filed by a party that indicated that mediation would be fruitless because it would not settle under any circumstances, the courts were holding that there was no damage caused by the breach of the obligation to mediate. As a result, compulsory mediation clauses were not being upheld.

We had to address this problem. We began including a provision stating that if either party initiates litigation without complying with its obligation to mediate (other than if the other party fails to timely respond to a mediation demand), then upon petition of the party against whom the litigation was initiated, “the court will dismiss the litigation without prejudice, and award attorneys' fees and costs to the party seeking dismissal in an amount equal to the attorneys' fees and costs the party seeking dismissal incurred in the litigation.”

Since initially including this attorneys' fee provision in our clients' agreements, we have had two experiences with franchisees, both in California, who brought litigation without first going through the mediation process, each having a different reason for not complying with the mediation clause. In Brosnan v. Dry Cleaning Station, Inc., No. C-08-02028EDL, 2008 WL 2388392 (N. D. Cal. June 6, 2008), the plaintiff argued that mediation would be a “hollow exercise,” but that if the court disagreed, it should simply stay the action while the parties completed mediation. Instead, the court dismissed the action and granted leave to the franchisor to file its petition for attorneys' fees.

Earlier this year, in Delamater v. Anytime Fitness, Inc., No. 1:09-CV-2025 AWI-SMS (E. D. Cal. June 28, 2010), the plaintiff franchisee argued that it should not be required to attend mediation because the mediation would require the plaintiff to travel outside California, and that such a requirement was contrary to California law. He also argued that the provision was invalid for public policy reasons. The court disagreed with both positions, found that the mediation clause was enforceable, and dismissed the plaintiff's lawsuit “without prejudice because it is premature.” Further, the court ruled that “Anytime Fitness is entitled to seek attorneys' fees for having to defend against Delamater's [claims] because Delamater violated the mediation provision.” Id. at 16.

Similar rulings in Kansas and in Florida have enforced differing compulsory mediation clauses. However, because my law firm was involved in the two cited California actions, we know the end of those stories. In both situations, mediations were held within three months of the issuance of the court's ruling. In the first one, after a frustrating 10-hour mediation, the parties left mediation without a settlement, but two weeks later, a settlement was negotiated based on the last offer the franchisor made at the mediation. In the second one, a settlement was reached and signed at the end of the mediation. Thus, in both instances mediation was successful in saving the parties the expense and burden of a trial.

Conclusion

Arbitration and litigation both have their pitfalls. The best advice any attorney can give his or her clients about dealing with disputes is to avoid them. Unfortunately, disputes cannot always be avoided. Sending those disputes to mediation does not guarantee they will be resolved. When they are not, both parties will complain about the additional cost of mediation. However, statistics show that the majority of mediated disputes are settled, either through the mediation, or within a few weeks thereafter. Any statistics major, or gambler, would 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 save probably 10 times that amount in litigation, this is a good bet. Perhaps not for the lawyers, but certainly for their clients.

Charles S. Modell is a shareholder in Larkin Hoffman Daly & Lindgren, Ltd., in Minneapolis, and he chairs that firm's franchise practice. He was the first practicing attorney in the Midwest to receive the designation of Certified Franchise Executive from the International Franchise Association. He can be reached at [email protected] or 952-896-3341.