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Mediating franchise disputes: an alternative to litigation or arbitration.

Many franchisors and franchisees are recognizing the benefits of mediation as a way to minimize legal costs and risk and preserve valued business relationships. The benefits of mediation far outweigh any disadvantages. First, mediation is much less expensive than arbitration. Mediations are typically one or two day events. There are no witnesses, no discovery, no expert fees and none of the other costs associated with litigation. The CPR Institute for Dispute Resolution estimates that its member companies save $25 million per year through mediation.

Mediation can also yield much quicker results. Although arbitration is a popular form of alternative dispute resolution, arbitration is a much slower process. In the securities industry, it can take months to obtain a hearing decision in NASD arbitrations. Litigation can last much longer. In the District Court of New Jersey, the average time to trial is now approximately 3.5 years. The average time to resolution is approximately 18 months ("resolution" being defined as judgment or settlement prior to trial). This particular federal court is among the most efficient in the country. In contrast, mediations can be scheduled quickly, and the entire process can be completed in a single day.

Flexible, No Adjudication

Mediation is also a more flexible process than arbitration or litigation. There is no adjudication of the merits, and the parties can either settle, choose to litigate or arbitrate or choose to do nothing. In binding arbitration, the appeal rights are extremely limited. Moreover, the enforcement of arbitration provisions is occasionally the subject of litigation, which can lead to additional cost and expense. Moreover, the type and scope of the claims that are contemplated by the arbitration provision has been the subject of litigation in consumer class action cases. Conversely, since there is no adjudication of the dispute in a typical mediation, mediation provisions are less frequently the subject of litigation.

Perhaps the most important benefit of mediation is that it helps franchisors and franchisees preserve valued business relationships with minimal risk. Since there is no "loser" in mediation, the parties have a rare opportunity to discuss their disputes in a privileged setting without fear or concern that their discussions will yield a bad result. For instance, many clients who become deposition or trial witnesses are fearful that their testimony will result in a negative result before a judge or jury. In many instances, the mediation process gives franchisees the desired opportunity to vent their frustrations with the franchisor. The mediation provides a proverbial "day in court." In short, there is everything to gain in mediation and nothing to lose.

If mediation fails and the parties choose to litigate or arbitrate, the mediation has minimally provided each party with a peak at the opposing case. Although the exchange of information is confidential, the process also affords the parties an opportunity to make an early evaluation of the strengths and weaknesses of their own case. In this manner, the parties can obtain some useful information about the dispute without the added expense of obtaining that information through formal discovery in litigation or arbitration.

High Success Rate

Another important benefit to mediation is its high success rate. The CPR Institute for Dispute Resolution has in the past reported success rates in excess of 80 percent for its mediations. In order to corroborate the success of mediation in the franchise industry, the National Franchise Mediation Program, is conducting a case study on mediation activity among franchisors and franchisees. NFMP is a non-profit organization composed of franchisors including Cendant, Burger King and McDonald's; trade associations including the International Franchise Association; and franchisee-based organizations including the Asian American Hotel Owners Association, which are committed to using mediation to resolve disputes between franchisors and franchisees. NFMP and AAHOA have joined forces to create a "private-label, hospitality-specific" mediation program that is designed to inspire hotel owners to mediate their disputes with franchisors. The key elements of the program are: the creation of a sub-panel of mediators with significant knowledge or expertise in the area of franchise law or hospitality; AAHOA's commitment to aggressively promote the program to its members; and the franchisor's commitment to bring business representatives to the mediation.

Although the program is in its inaugural year, it is enjoying some early success. AAHOA has been promoting mediation in its monthly member publications. AAHOA also facilitated a meeting between NFMP Steering Committee members and selected AAHOA panel lawyers to discuss the benefits of mediation in order to ensure that lawyers on both sides of the dispute will discuss mediation with their clients whenever it makes sense for the client to consider alternatives to litigation or arbitration. Mediation has also been featured at the AAHOA annual conventions, and the private-label mediation program was recently discussed at length on the television show "Franchise Forum" which appears on TV Asia via the Dish Network. Simply stated, AAHOA is one franchisee organization that has recognized the benefits of using mediation as an alternative to litigation.

Recognizing the benefits of mediation, many state and federal courts now require mediation during the case-management process. For instance, the state courts of New Jersey require "non-binding arbitration" (nearly identical to mediation) for every automobile, personal injury and commercial dispute. The issue of whether the courts have authority to compel non-binding mediation has been litigated in favor of such authority. Moreover, many of the U.S. Circuit Courts of Appeal are requiring mediation as part of the appeal process. Mediation is also being encouraged by industry regulation. The New York Stock Exchange and the National Association of Securities Dealers both encourage mediation.

An Effective Tool

Courts have a vested interest in using mediation to settle lawsuits. With crowded dockets and limited resources, they believe that the more cases that settle through mediation, the better. In fact, mediation has become a cottage industry for retired judges, many of whom recognize that mediation is an effective tool to avoid risky and time-consuming trial activity. The American Bar Association recently issued a case study entitled "Vanishing Civil Trials" in which it was noted that, in 1962, 11 percent of all cases proceeded to trial. In 2002, only 1.8 percent of all cases proceeded to trial. This reduction can be attributed, in part, to the success of mediation and other forms of alternative dispute resolution.

Many franchisors promote mediation by including language in their franchise agreements that encourages but does not require the parties to mediate. There are several reasons for this approach. First, one of the cornerstones of mediation and a significant reason for its success is the voluntary nature of the process. If a party is adamantly opposed to mediation for any reason, the mediation will not likely succeed. In fact, it is often said and worth repeating, that a willingness to compromise is a prerequisite to successful mediation. Some franchisors view the concept of "compulsory" mediation as anathema to the voluntary nature of the mediation process.

Many franchisors and franchisees agree that some franchise disputes are not appropriate for mediation. For instance, disputes that involve minimal dollar amounts or disputes in which an unwavering principal is at stake are not good candidates for mediation. Likewise, disputes in which one party has extremely strong claims or defenses can occasionally be more efficiently resolved with motion practice in a pending litigation. Similarly, if a party desires an opportunity to establish new case precedent or defeat existing adverse case precedent, mediation will not assist in accomplishing that objective.

There are also certain disputes unique to franchising that many franchisors will not mediate. For example, if a terminated franchisee is using the franchisor's trademarks without consent or payment, the franchisor will often refuse to mediate. In this circumstance, the franchisor must seek immediate injunctive relief in state or federal court in order to protect its valuable intellectual property. Additionally, many franchisors prefer not to mediate individual objections to quality assurance scores that are issued to franchisees during the quality assurance inspection process. Many franchisors have an informal dispute process to handle franchisees' minor disputes without submitting them to a full-blown mediation.

It is clear that the concept of mediation is gaining favor in the world of franchising. This form of alternative dispute resolution is recognized by the courts and franchisees and franchisors alike. Perhaps we should heed the advice of one of our most beloved U.S. presidents, Abraham Lincoln, who, as a practicing lawyer, said in 1850: "Discourage litigation; persuade your neighbors to compromise whenever you can."

Scott G. McLester is senior vice president, legal of Cendant Corp. He can be reached at 973-496-7247.
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Article Details
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Title Annotation:franchising and the law
Author:McLester, Scott G.
Publication:Franchising World
Geographic Code:1USA
Date:Jul 1, 2005
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