Mediating Franchise Disputes and Maintaining Relations

At the 2009 ABA Forum on Franchising held in Toronto, mediators Peter Klarfeld, Michael K. Lewis, and Peter Silverman "KLS",discussed the advantages, disadvantages and benefits of mediating instead of litigating a franchise dispute.

By popular vote, their program was selected as one of the best programs from the recently completed 32nd Annual Forum on Franchising.

Their program covered some of the most interesting aspects of mediating franchise disputes.

Topics covered included:

• Benefits of mediation, when it is effective and when it is not;

• Use and drafting of mandatory mediation clauses and controlling the mediation process;

• Dispute versus Deal mediation;

• Strategies and tactics used by mediation participants, including the mediator, and;

• Ethical issues that arise in mediation, and evolving trends in collaborative law.

There is a general feeling of dissatisfaction with both litigation and arbitration in the franchise community.

Rubert Barkoff, one of the Deans of Franchising, puts it this way:

Litigation is a lousy way to resolve disputes, and arbitration is, in my opinion, not much better. We can try to give meaning to phrases like "good faith" and "unconscionability," but in the end all we accomplish is to create more legal battle fields on which the parties can feud.

Michael K. Lewis is an Adjunct Faculty member for the Harvard Program of Instruction for Lawyers Mediation Workshop and his colleague, Robert H. Mnookin, in his book "Beyond Winning" has an explanation for why litigation is lousy, costly and unsatisfactory:

"In litigation it can sometimes seem as if each side is frantically preparing for a trial that will never take place.

One side drafts a complaint, files motions, takes depositions, goes through document production, prepares for trial --all with the knowledge that it will probably settle the case.

And each side knows this.

It is like an arms race: each side builds up an arsenal, hoping never to use it.

Each needs the arsenal to signal a readiness for battle. But each would also benefit if both sides could agree to reduce the weapons stockpile.

The problem is that neither side wants to disarm first."

How can we move beyond the limitations of litigation or arbitration as the sole method of solving franchise disputes? KLS's ABA program on mediating franchise disputes discussed a number of useful topics.

MEDIATION PROCESS AND TERMS

No mediation process is constructed from thin air. People don't simply show up at the mediator's location and sit around the table trading offers back and forth.

KLS have a thoughtful list of issues to consider when drafting a mediation agreement for the franchise system.

1. Should the mediation be mandatory or not? Peter Silverman points out one advantage for the franchisor to mandatory mediation: settlements reached through mediation need not be disclosed under the new Section 3 of the FDD. Even confidential settlements reached as the result of litigation or arbitration have to have material terms disclosed. This disclosure is not required for mediated settlements. This is a benefit also for franchisees as they are not obliged, even in a mandatory mediation process, to agree to a settlement.

2. How wide should the mediation clause be? Should a specific mediation service provider be selected before hand? One difficult question is whether the mediator should have any specific franchise or industry experience. Extensive franchise experience can be seen as a bias by either party and may result in the mediator simply substituting his or her judgment for the group's collective judgment.

3. Time, limitation period tolling, and costs should be dealt with in the mediation provision.

KLS raise other issues to consider, but one that they don't talk about is the possible effect of the Fair Arbitration Act on the availability and use of mediation. Is franchising moving away from both litigation and arbitration? Will the passage of the Fair Arbitration Act make mediation a more attractive option for franchisors?

DISPUTE VERSUS DEAL MEDIATION

Peter Silverman in his wonderful book A Client's Guide to Mediation and Arbitration made a useful distinction between dispute mediation and deal mediation. Most attorneys when they think of mediation think of it as version of alternative dispute resolution - an alternative to litigation.

However, mediation is a useful tool to help a party with negotiating a deal. Most franchisors engage informally in deal negotiation with their franchisees, attempting to get either compliance on the existing standards or compliance with a new standard. The standard franchise agreement allows for the termination of a franchisee who is not in compliance, but this is usually the last step that is taken.

Unfortunately, in my opinion, not enough time was taken in the ABA Forum to flesh out how deal mediation might help franchisors engage with their franchisees to enact structural changes for the benefit of the franchise network.

And as Silverman points out, this is an "exciting new field for managing franchise relations."

STRATEGIES AND TACTICS

KLS outlined the basic mechanics of mediation and had some thoughts on the strategy and tactics to use at the mediation table.

This is a very large field and many of the participants wanted Mr. Michael Lewis, who is decidedly less evaluative than many former judges, to justify his lack of evaluation. Lewis argues that many times in the rush to judgment about which story is to be preferred, former judges miss the important nuances that may result in a settlement.

KLS did put to rest a number of mediation myths. First, asking for mediation is not a sign of weakness or a signal of willingness to compromise. Second, the common method of selecting a mediator by each side developing a list of candidates from 1-5 in ranking may result in a choice of the less objectionable as opposed to the most qualified mediator. KLS suggest that one party develop a list, and if the other party is satisfied with the credentials of the mediators, simply say "choose one" on the theory the mediator chosen is likely to be persuasive.

How much information should be disclosed before the mediation? This depends upon where parties are in the dispute, but the goal of mediation is to reach a settlement before significant costs of discovery are incurred by both parties. Trial lawyers will feel uneasy about this, but their clients may thank them.

In developing the negotiation strategy, KLS rely upon the well known devices of BATNA and WATNA, best alternative to a negotiated agreement and worst alternative to a negotiated agreement, in their analytic framework.

My own sense, confirmed in conversation afterwards with Michael Lewis, is that attorneys are not very good in general at employing these analytic devices. Indeed, I have had franchise attorneys tell me that their client's business interest in this dispute was the enforcement of their contractual rights! This is an analytical area in which some attorneys ought to specialize in, in my opinion.

KLS highlighted other important strategic issues: whether to disclose to the mediator "any personality quirks, or irrational thinking" on the part of any party; the goal of your opening statement, if any; understanding that the goal of mediation is not arrive at the truth, but at a settlement which allows the parties to go forward; and the usefulness of mediator proposals.

A mediator proposal is one made by the mediator of the form: would you concede X if I can get the other party to drop Y? A mediator proposal is different but related to the mediator's device of bracketing, which transforms a dispute with a potential loss of $X and gain of $Y to something like a potential loss of less than $X, but a gain of less than $Y.

It was Lewis' opinion that mediator proposals are antithetical to the spirit of mediation as it interjects the mediator's evaluation into the process which should be owned by the parties.

Finally, literally at the end of the day, the parties should sign a term sheet, if not an actual settlement agreement. "Seeing one's signature at the bottom of a clear term sheet tends to reduce next day second guessing", avoiding post settlement regret at not getting better terms.

ETHICAL ISSUES AND EVOLVING TRENDS IN COLLABORATIVE LAW

The most relevant ethical requirement binding an attorney in a mediation is the extent to which during the negotiation the attorney can bluff, mislead or deceive. Most rules of attorney conduct, in the ABA's Model Rules of Professional Conduct, prohibit tactics like lying, puffing, or bluffing in a mediation.

There is a distinction between lying about material fact, and not giving the other party the truth about a fact that they have no right to. Most attorneys are careful about treading this line, but clients may feel that they have greater leeway to stretch their demands at a mediation.

It may be permissible for an attorney to state that the "Board of Directors does not wish to settle this dispute for more than $100,000", signaling an acceptable upper range, but impermissible for the attorney not to correct his client who lies at the mediation and says that the Board had formally rejected any offer for less than $100,000.

Finally, KLS pointed the franchise legal community to developments in another legal field intimately connected with maintaining relationships - collaborative family law. "The key to the process is that parties hire attorneys who have subscribed to collaborative law process and are training in the principles of cooperative negotiating."

In collaborative law, the parties and their attorneys agree to resolve their differences using cooperative measures, and should that fail the attorneys agree that they will not be able to represent their clients in litigation or arbitration process.

Another important development is the use of settlement counsel, who work with the trial lawyer but are hired specifically to pursue settlement during the litigation process.