Recently in Dispute Resolution Category

Many restaurants are technically insovlent.

Some estimates are as high as 12%.

They will want to know about bankruptcy, and their own remedies.

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Times are difficult right now, for both franchisors and franchisees. What with an economic lockdown which may last for 4 or 5 months.

Some franchisors are trying offer some inducements to their franchisees to hang in there.

But, Carmen Caruso warns that you might want to look this gift horse in the mouth.

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As most people know, in the US, jurisdiction over franchising is at both the State and Federal level.

A well-known franchise lawyer, Rochelle Spandorff, has proposed a radical change:

1. The end of independent state jurisdiction over registration;
2. A private cause of action for the violation of the FTC Franchise Rule.

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Whatever the nature of any agreement, it is a device to obtain expected value. The parties have usually anticipated the ranges of that value over the life of the agreement.

These are goals.

They are not achieved realities.

Is Someone At Fault?

They sometimes don't work out the way you intended and sometimes there is an element of "fault" associated with its not reaching fruition. What usually happens then? In modern America the first reactions include blaming others (often without knowledge of the true entire situation); self justification (also known as covering one's ass); and reactions in furtherance of those first impulses.

Of course it is upsetting. Being upset is a symptom here, not the problem itself. Upset just comes with this territory.

Usually before calling in the lawyers there is some repositioning, gamesmanship so that when the lawyers arrive they are presented with what is hoped/believed will be the basis to enable them to obtain vindication of your interests through enforcement of terms of the agreement.

Should You Make a Demand?

The emphasis now shifts from sorting out the relationship's remaining useful potential to redressing grievances. The launching missile for this is the "demand" letter, essentially a letter insisted upon by your lawyers putting the other side on notice that you claim a breach by them that caused injury to you resulting in damages.

The other side, aware of the rift, sets roughly the same process in motion for the same motivation. The rationale, according to most lawyers, is that without this initial accusatory letter you risk waiving some important right. Now both sides are adversaries. Wasn't that quick and easy now?

It was quick and easy and most of the time about the worst mistake that you could have made in terms of your ever realizing anything worthwhile out of this situation. You can preserve your rights without this approach.

A Different Approach

Another approach is more positively calculated to produce less injury and damage; a shorter path to amicable resolution of everything present; preserve the most that can be preserved out of this bad situation; and save enforcement costs that today often run into hundreds of thousands and even millions of dollars.

If you want to salvage the most from a deal gone bad, in the shortest time, at the lowest cost, you owe it to yourself to consider the other approach as the first thing you do, not as some afterthought alternative when the well has already been poisoned by following bad legal advice. The legal advice was technically correct but not the best advice and rather immature in almost every instance.

With the better approach you have preserved all your rights and can always go back to warfare if the other side fails to see the potential and reciprocate in kind. The odds are that they will reciprocate, especially if you have not already followed your lawyers into confrontation in which only they end up winners most of the time.

There are usually forces working on you that want to propel you into conflict. They are normal human forces and instincts, but they have to be resisted in favor of a more rational parsing of the values as they now are rather than what you hoped they might be when you entered into the agreement.

Consider, for example, that while the deal may well have been thought out to the point of very high positive probabilities, all deals include risks, many of which are not controllable. No deal entry stage valuations are solid. They are theoretical.

In the best mode you would often have come out with substantially less than expected. Market conditions change.

Globalization expanded the ranges and sources of risks far beyond what they were ten years ago. If you applied formulae that were effective ten years ago to the entry stage evaluation of this deal, and did not adjust for the enhanced risks, the valuations were never realistic in the first instance.

Don't go immediately to war over expectations! Since the value of expectations is now changed due to the pending break up there is now an element of your doing little more than chasing after sunk costs. Chasing sunk costs is usually considered to be a terrible decision. Reassessment of valuations associated with the deal at the time of its impending collapse ought to provide you with serious attitude revision concerning how aggressively you want to pursue vindication of interests that in retrospect may not have been what you thought and hoped. The present tense value of the deal is now far less, and far less should be expended in cash and other resources trying to resurrect those expectations.

Find lawyers who can live outside contract language and "rights and wrongs". While contract language is very important, how you use it when trouble appears can be more important. Call it finesse if you will, but it usually provides much better, swifter, less expensive resolution.

I believe, based upon 50 years in formal dispute resolution practice, that the way businesses usually go about dealing with major problems is wasteful and unnecessary. I have tried the approach of which I speak in this article in several instances in the past few years and it resulted in extremely satisfied clients every time.

It won't always work. Some situations are inherently more difficult to work in due to perceived leverage advantages and ego issues. Those can sometimes be turned around and sometimes not. But with rights reserved in the interim this value preservation approach to dispute resolution will always be worth trying.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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The Americans with Disabilities Act (ADA) is most frequently cited in reference to the employer-employee relationship; however, Title III of the ADA contains accessibility requirements for public buildings and facilities, including regulations related to signage, parking spaces, curbs, height of service counters, and size of restrooms. These regulations apply to anyone who owns, leases, or operates a place of public accommodation, which includes almost all businesses that serve the public.

Any public facility that is not ADA compliant is in violation of the law, and contrary to popular belief, there are no grandfather provisions in Title III of the ADA. Essentially, if you have an architectural barrier that prevents a disabled person from using your premises then you have to remove that barrier if removal is "readily achievable." Readily achievable means the removal may be accomplished without undue cost or effort.

The problem for franchisors and franchisees is that they may not know if they are ADA compliant until a lawsuit is filed.

With astounding frequency, lawsuits are being filed against businesses, restaurants, bars, and hotels that allege violations of Title III of the ADA. The rise in these lawsuits is attributed to the fact that Title III of the ADA permits a prevailing plaintiff to recover attorney fees.

Certain plaintiff's attorneys do little else other than filing Title III lawsuits. Some have even taken out advertisements seeking local attorneys to partner with them in jurisdictions in which they do not practice. Typically, the plaintiff's attorney will enlist the help of a disabled individual. In fact, some of these individuals file so many suits that when another attorney in our office advised me his client had been sued for an ADA violation, I immediately correctly guessed the identity of the plaintiff and his counsel.

The standard operating procedure is that the disabled individual, upon his own initiative or at counsel's direction, will travel to a business and assess whether or not it is ADA compliant. If the business is not in compliance, the disabled individual will report back to his or her attorney who will then file a lawsuit. In most cases, the business will not receive any advance warning, such as a demand letter, because the plaintiff's attorney does not receive any fees if the business voluntarily agrees to remedy any violations. The lawsuit will name either the business or the landowner -- the plaintiff's attorney really does not care which one he or she names because both may be liable for any violations.

The defense of these lawsuits can entail significant costs. As mentioned, a prevailing plaintiff generally is awarded attorney fees. Second, the determination of whether a business is ADA compliant and/or whether the removal of architectural barriers is "readily achievable" requires the testimony of an expert witness.

The best defense is to ensure your business is ADA compliant. Attorneys, consultants, and architects can assist in auditing your business for compliance. Additionally, determining whether any applicable insurance policies cover ADA violations can save a business owner from having to fight any claims itself. Likewise, reviewing lease provisions can assist a business owner in determining exactly who is liable for ADA violations as many lease agreements contain indemnification provisions.

If a lawsuit is filed, attacking the plaintiff's standing is also a viable defense. In order to have standing to bring a claim, an individual must be disabled and they must intend to return to the business. In some instances, lawsuits have been brought by individuals who live hundreds of miles away from the business. A little background research on the particular plaintiff can go a long way toward establishing a defense. In instances where the plaintiff does not reside in close proximity to the business, you can attack standing on the basis the individual does not legitimately intend to return to the business.

The volume of these lawsuits certainly has not gone unnoticed by the courts, nor has the fact that the same disabled individual may be the plaintiff in numerous lawsuits. Accordingly, another defense is to argue that attorney fees should not be available to the plaintiff as the business could have and would have remedied any violations without the filing of a lawsuit.

Another defense, albeit a potentially expensive one, is to argue that removal of architectural barriers is not readily achievable. A determination of what is "readily achievable" requires consideration of the expense of the proposed remedy and the business's overall financial resources. As such, what might be "ready achievable" for one business may not be for another business. Generally, this defense will require expert testimony.

Keep in mind, obtaining building permits and compliance with local zoning laws and ordinances does not mean your building complies with the ADA regulations and does not provide you with a defense to an ADA claim. If you have questions regarding your ADA compliance or provisions in your insurance policies or lease agreements it is recommend you consult with counsel to determine your potential exposure.

Chinese negotiators talk dumb but get rich. Americans in China talk smart, but...

Americans believe that the richest guy in the room is usually the smartest - largely because CEOs view power as a product of intelligence.

In China, however, the smartest guy is rarely the richest guy - and the richest often takes pains to appear a bit dim. (You can trace this back to Sun Tzu and the value that Chinese negotiators place on misdirection.Or maybe they are simply playing to the massive egos of certain American CEOs and decision-makers. Whatever the cause, it is something that Western negotiators have to build into their strategy when doing business in China. )

It's particularly important when you have someone else representing you in China - and also when you have local partners- to know who is smart and who is rich.

Remember that the definition of partnership in China is a lot broader than in the West, and for the purpose of negotiating it generally includes suppliers, distributors and employees.

If you come into a Chinese negotiation with the goal of being right, you may very well win.

But, if you want to be the richest guy in the room, though, you may have to take a page from the Chinese negotiating book - looking dumb but getting what you want from the deal.

Americans like to look like the smartest guy in the room - but end up giving up IP, assets and opportunity to the "idiots" who grabbed value.

I still hear Americans cursing the incompetent, ignorant, backwards Chinese counterparty - whose stupidity resulted in him getting 99% of the value of a deal gone wrong. Well, maybe the Chinese counterparty wasn't the dumb one.

1. Did he have an interest in you succeeding?
2. Was your deal structured in such a way that he had a financial incentive for figuring out a way to make the business work?
3. Were you a short term partner but a long term competitor?

This is one of those issues that may pop up in a variety of negotiating cultures and situations, but is sure to be an issue in China - so be prepared.

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If you follow my blog, you know that one of the issues I've been writing about for a couple of years now is the problem that certain franchisors have faced in being deemed "employers" of their franchisees.

The most well-publicized of the "franchisees are really employees" cases is Awuah v. Coverall, a case I blogged about here,here, and here.

The trend that has seen franchisees filing lawsuits seeking a determination that they are actually employees of their franchisors has continued to grow.

The case discussed below, Roosevelt Kairy, v. Supershuttle International, Inc., Bus. Franchise Guide (CCH) (N.D. Cal. Sept. 20, 2012), is a good example of what these cases typically look like. The decision I report on does not deal directly with the "franchisees as employees" issue, which will likely be decided upon by an arbitrator (for the reasons discussed below). This decision in particular deals with a challenge by the franchisees to the arbitration clause that was in their respective franchise agreements, which they claimed were unconscionable.

Plaintiffs, individuals who drive passenger vehicles for SuperShuttle, were franchisees of the company. Plaintiffs sued to challenge SuperShuttle's "unlawful misclassification of its airport shuttle drivers as 'franchisees' and independent contractors," alleging that they had not been paid minimum wages and overtime compensation pursuant to the Fair Labor Standards Act ("FLSA") and under California law.

Each franchisee signed a franchise agreement with SuperShuttle that contained a mandatory arbitration clause." Most of the franchise agreements also provided that "[a]ny arbitration, suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff or similar basis."

Supershuttle moved to compel arbitration and to stay the action pursuant to Section 3 of the Federal Arbitration Act. The only issue was whether the arbitration agreements were valid and enforceable. Plaintiffs made three challenges to arbitrability: (1) that Supershuttle waived arbitration by pursuing litigation; (2) that the arbitration agreements were unconscionable and therefore invalid; and (3) that Plaintiffs should not be compelled to arbitrate their statutory claims.

The Court began its analysis by discussing the Supreme Court's decision in AT&T v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011). Under Concepcion, the Court stated, agreements to arbitrate may be "invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue." (quotingConcepcion, 131 S. Ct. at 1742-43.

The Court first considered the waiver argument. In essence, the plaintiffs claimed that SuperShuttle waived its right to enforce arbitration because it did not seek to compel that process after plaintiffs first filed suit (which occurred prior to the ruling in Concepcion). In disposing of that argument, the Court found that it would have been futile for SuperShuttle to attempt to compel arbitration because, prior to Concepcion, California and Ninth Circuit law held that similar arbitration agreements with class action waivers were unconscionable and unenforceable.[1]

Because SuperShuttle had no right to waive prior to Concepcion, the Court held that no such waiver occurred. The Court also found that the plaintiffs had not been prejudiced by SuperShuttle's delay in seeking to compel arbitration.

The Court then turned to plaintiffs' argument that they should not be compelled to arbitrate their statutory claims. The Court observed the rule that, where statutory claims are involved and an arbitration agreement exists, the agreement should be enforced if the litigant can "effectively vindicate his or her statutory claim for relief in arbitration, unless Congress itself has evinced an intention to preclude waiver of judicial remedies for the statutory rights at issue." (internal citation omitted).

Finding that plaintiffs had not shown any such intention by Congress to preclude arbitration of claims under the FLSA, the Court disposed on plaintiffs' argument on statutory grounds as well.

Finally, the Court considered plaintiffs' argument that the arbitration provision was unconscionable. To demonstrate procedural unconscionability, the plaintiffs claimed that the arbitration provision was "hidden in a prolix of printed matter," and that SuperShuttle had failed to provide them with copies of the AAA's commercial arbitration rules before the plaintiffs signed the franchise agreement.

The Court found that there was no procedural unconscionability because the plaintiffs: (1) were given franchise disclosure documents that described the arbitration provisions; (2) had a fourteen-day period to review the franchise agreements and disclosure documents; and (3) were given copies of the franchise agreement with a table of contents that clearly identified the arbitration provision.

Interestingly, the Court did agree with plaintiffs that the fee-splitting provisions (providing that the parties would equally share the arbitrator's fees and costs) were substantively unconscionable.

In this regard, the Court observed that "fee splitting can be unconscionable where fees and costs are so prohibitively expensive as to deter arbitration" and that the Court should consider "whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation."

The Court reasoned that, based on the plaintiffs' cost projections, it appeared that the individual plaintiffs would not be able to afford arbitration.

Instead of refusing to enforce the arbitration provision, however, the Court severed the fee-splitting provisions of the arbitration agreements as unenforceable.

[1] The Court observed Concepcion specifically found that the FAA preempts the rule announced by the California Supreme Court in Discover Bank v. Superior Court, 36 Cal. 4th 148, 1b62 (2005), aff'd Discover Bank, Laster v. AT&T Mobility LLC, 584 F.3d 849, 855 (2009), which found class action waivers in arbitration clauses to be unconscionable.

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The answer is 'yes' in at least one case. The case is Allegra Network, LLC v. In re Michael G. Ruth. Michael G. Ruth and Elnoria J. Ruth, collectively the "Ruths" entered into a franchise agreement initially in 1984. The franchise agreement was renewed in 2006. The franchise agreement stated that the laws of the state of Michigan governed the franchise agreement.

In 2008, the then franchisor, Allegra Network, LLC, terminated the Ruths' franchise agreement for failure to pay royalties. Allegra Network sued the Ruths for payment of unpaid royalties and enforcement of the post franchise agreement non-compete. The Ruths filed for bankruptcy.

This is where it gets complicated. The court goes on a tangent. Under Michigan law, if a non-compete is violated, the remedy is monetary damages. The violator of the non-compete agreement must pay money damages.

Now remember we are in bankruptcy. Under Chapter 13 bankruptcy all monetary obligations are discharged or erased. So, it only follows that the money damages for violation of the non-compete are erased. A little bit of circular reasoning.

In essence, the former franchisee can compete against the franchisor -without any liability. The obligation to pay damages for violations of the non-compete are erased by the bankruptcy. The franchisor has no remedy.

In a side note, the court makes an interesting statement. This decision is not the outcome in all jurisdictions. The court states that if the case were in Minnesota or Texas, bankruptcy would not render the non-compete unenforceable.

Business Take Away: Bankruptcy changes the typical rules and not all states have the same laws.

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The best evidence that franchisors are really human beings is that they do the same things that any normal person does when confronted with a panic-inducing situation.

The first response -- which hopefully, but not always, occurs in private -- is just about always to observe the eleventh guard order, 'When in danger or in doubt, run in circles, scream and shout.' Control during those first moments of spontaneous potentiality is a priceless attribute. 'If you can keep your head when all about you are losing theirs' (Kipling) should be on a plaque somewhere conspicuous in the executive suite of your mind.

There are several almost universally practiced actions that are always mistakes and that should never happen.

There are mistakes because they tend to make the achievement of a positive result more difficult to attain.

There are mistakes because they are always obvious emotional statements to which little or no competent thought has been given.

There are always mistakes for the additional reason that they are either totally or in important part, quite untrue. They are untrue because of what is affirmatively stated that is false and because of what is omitted that is true but that may not make your company seem perfect.

There are mistakes because the ploy is so overused by so many people who are really scoundrels, that when you use the same approach, you may seem like a scoundrel also.

Do you want that? Of course not. Can you avoid that? Certainly. Here's how.

In that all companies are simply groups of quite fallible, normal, humans, mistakes happen. Some of the mistakes are of little consequence; some are rather huge; some are the product of over reaching and taking unfair advantage; some are stupid and some are intentional. The important fact is that mistakes, small and large, few and many, will occur.

Those who accuse your company, and sometimes you personally, of wrongdoing are sometimes wrong and sometimes right and sometimes somewhere in between, part right and part wrong. The accusations may be made in good faith, or in bad faith, or may be the product of misunderstanding. At the moment you first hear of an accusation of wrongdoing, you really are not certain of all the facts that may relate to it.

It is simply the worst possible moment to make any response about the merit or lack of merit of the accusations. But, at this precise moment, such statements are usually made.

What should be said in response to the first information that accusations have been made against you or your company is that you are just now hearing about it and have not had an opportunity to investigate the matter fully -- and that when you have made a diligent inquiry you may have a statement to make.

That is such a responsible thing to say that one wonders why people don't say that. Instead they say stupid things like 'That is totally false and we will be shown to have been correct.' -- or some such nonsense. Sometimes -- quite often -- the statement is even worse than that, for it may include a statement that the accusations are frivolously made. Even stupider!

It is important that your company have a protocol that everyone is made very aware of requiring any contact concerning negative information be passed to a designated person without comment to the inquiring party. I ll pass this information along to the appropriate person -- that is the only response to be made. The answer to the question 'Who is the appropriate person?' is always 'No comment!' It is also important that everyone knows that public statements that are not specifically authorized are considered a firing offense. People find it hard to resist being 'interviewed'. They have to be frightened for their employment in order to shut them up. Do it.

Next, the company should call together the most involved person(s) and their legal counsel, gather all files that may relate to the dispute or complaint, promptly evaluate the information, including interviews of everyone who may have been involved, and make a decision about how to respond properly. A proper response may not be a total disclosure of the whole truth, but it will not include statements that are untrue in and of themselves. If you have to lie, you need to rethink! That is a bad mistake. No matter what your PR person or your lawyer or anyone else may say, you need to make only responsible statements that instill confidence in your obvious good faith. People expect you sometimes to be wrong. You don t have to say that you screwed up, but do not insist in this early phase upon your rectitude.

Now, if you are dealing in a forthright manner with the issues presented by the accusations, you will not go to the mat in a losing fight. You settle. You adjust. You correct the mistake as best you can. Losing a trial or arbitration does not enhance your stature. An appeal is most likely to result in affirmation of the trial result, so you would only be reinforcing a negative consequence by insisting that facts are found in your favor when the true facts are really not in your favor.

People incorrectly believe that lawyers, if they are good, can manufacture or change facts. That is practically never true. Sometimes that happens, but the odds are so heavily against it that only fools think they can pay a lawyer and get a result to which they are not entitled.

Sometimes your opponent is represented by a moron and you win by default -- but usually that is also not the case. You should assume in your internal deliberations that you will be dealing with competent opposition.

In fact you should hope you are dealing with competent opposition. A competent opponent will understand when a reasonable settlement is being offered. A moron may not. If you have not called your opponent a scoundrel and his lawyer a shyster who brings frivolous lawsuits, a reasonable settlement may be obtainable and serious mistakes corrected without excessive difficulty and expense. A reasonable result is the best result. Insisting upon total vindication is usually a very bad decision, as no one is perfect and in most instances your opponent may be at least partially justified in taking the position he took. Sometimes, even though you were right in what you did, some dolt in your company mishandled the people involved and a conflict resulted that should never have happened. Such ineptitude should be recognized for what it is and dealt with appropriately.

If he gets away with this everyone will do it is sometimes not a proper rationale for a decision to make a fight of it. Maybe, even if your contract says the opposite, someone could be deserving of an exemption if you screwed up. Owning up to a screw up and making amends to the injured people does not usually cause your whole system to fall apart.

Enforcement of covenants not to compete is the most frequent situation in which stupid decisions are made to fight when the real problem is that your company created the problem and should be dealing with it in a more appropriate manner. Handling such instances with grace instead of bombast will do you far more good than fighting. Your long-term credibility as a fair organization that handles its affairs in an equitable manner may be worth more to you than insisting upon your rights in an unworthy situation.

This approach to what not to do and to what you should do when bad things happen will be the best approach, no matter what the right and wrong of the situation turn out to be. You lose nothing by appearing to be an organization that refrains from making irresponsible statements and taking irresponsible positions. If you really are respectable, then you might as well appear to be respectable. And if you are not, well, let's not go there.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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Background

Billy Baxters is a coffee shop franchise system.

The case of Trans-It Freight Pty Ltd v Billy Baxters (Franchise) Pty Ltd [2012] VCA 71 involves the Billy Baxters' franchisor and its former Glenelg franchisee. The franchisee had terminated their franchise agreement after the business made losses and it was unable to pay the franchise fees. The franchisor sued the franchisee, seeking recovery of unpaid royalties and advertising fees under the franchise agreement.

In the first instance, the Supreme Court of Victoria found against the franchisee who had admitted that $250,000 worth of fees were unpaid. However, the franchisee had also issued a counter-claim, seeking compensation for its losses suggesting that the franchisor's representative had made misleading and deceptive statements before the franchisee signed up to the lease and franchise agreement.

The question to the Court was whether the statements of projected turnover and reasonableness of rent made by the franchisor's representative were misleading and deceptive under the Trade Practices Act 1974. The franchisee stated that the franchisor's representative had told it the anticipated turnover for the business was $1.3 million and that this would allow the franchisee to pay the rent and return a profit.

In finding against the franchisee, the Court found that the franchisor's representative had in fact provided a spread sheet template to the franchisees which allowed the franchisee to play around with figures for the business and determine viability themselves. The franchisee (who was an experienced franchisee itself) was also advised to enter its own information into the spread sheet and seek independent advice. The franchisee ignored this advice.

The Court found that the $1.3 million turnover claim was false. However, it was made on reasonable grounds so there had not been a breach by the franchisor.

The Appeal

On Appeal, a critical consideration for the Court was the set rent for the premises of $160,000 per annum which had been agreed between the franchisor and the landlord. The Court of Appeal found that the franchisor's representative would have told the franchisees that the ideal maximum rental was 15% of the turnover for the business.

The Court also found that the figure of $1.3 million was provided without reasonable grounds and that the turnover figure's only connection to the rent figure was that the business would need to make that amount of turnover as a minimum to make the rent affordable. The Court held that franchisor's representative had no foundation on which to base the representation that the franchisee could expect the turnover of the business would be $1.3 million and there was no evidence of any analysis that could back up that projection.

In a unanimous decision, the Court of Appeal agreed that the franchisor's representative's comments were not made on reasonable grounds and the decision of the Supreme Court was overturned with the franchisor ordered to pay the franchisees damages of $1.22 million.

Lessons for Franchisors

1. Franchisors should make sure that they closely monitor and oversee the actions of their representatives in dealing with prospective franchisees. It is important that representatives are educated on the kinds of statements that should not be made to prospective franchisees and to be clear at all times that franchisees should conduct their own due diligence and draw their own conclusion from their research. Any statements made about turnover and profitability when franchisees are considering the business are likely to become an issue if the business subsequently fails.
2. Franchisors should also review their documents and procedures surrounding site selection.
3. Prospective franchisees should also be required to seek independent legal and financial advice before proceeding to enter into a franchise agreement.
4. Prospective franchisees should also be encouraged to undertake their own demographic, analysis and feasibility studies for the site they are considering.
5. Careful attention should also be paid to the information provided in the disclosure document. However, the greatest risk lies in the statements made by representatives of a franchisor in their attempt to make the business seem more attractive to prospective franchisees. Discussions around figures and potential or expected income for a particular site need to be approached very carefully to ensure franchisees are not entering into franchise agreements on any false or misleading information.

For more information contact:

Ed Browne

Chris Verebes

Carla Sibbison

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There are countless grounds for termination of a franchise agreement. Failure to pay royalties is most assuredly grounds of termination of the franchise agreement. Abandonment of the franchise business is another sure bet for termination of the franchise agreement. Not operating franchise business in compliance with franchise standards, transferring franchise assets without franchisor approval, under reporting gross revenues; these are all common grounds for terminating the franchise agreement.

What about not having enough money in the bank? Well that is what happened in one case. The case is 7-Eleven, Inc.et. al. v. Brinderjit Dhaliwal. Brinderjit Dhaliwal ("Dhaliwal") is a 7-Eleven franchisee. He owned and operated a successful 7-Eleven franchise from 1997 to 2010, more than a dozen years. The lease on his location expires. He is forced to close the location.

7-Eleven gives him the option to take over a number of available locations free of an initial franchise fee or transfer fee. The locations available, which do not carry a waiver of the initial franchise fee, don't work for Dhaliwal. He ends up buying a location in Rocklin, California. The initial franchise fee is $219,000.

Dhaliwal thinks it is going to be a great location! But, it does not work out that way. Projected sales don't hit the mark. Under the 7-Eleven franchise agreement, Dhaliwal is required to maintain a net worth of $15,000. The profits are just not what were expected. The net worth of the franchise business repeatedly falls below the $15,000 threshold. 7-Elven sends Dhaliwal repeated default notices and ultimately terminates Dhaliwal's Rocklin, California, franchise.

Why would a franchisor put a net worth requirement on the franchisees?

And make it a terminable offense. I can think of several reasons:

1. The franchisor is worried about creditors taking over the franchise assets.

2. Insufficient cash flow may impede inventory levels, advertising expenditures, and staffing levels.

That is not what the franchisor goes with. Get this. The franchisor argues: it has good cause to terminate a franchise if they fail to maintain a net worth of less than $15,000.

This is a quote from the court's decision: The reason for the net worth requirement, as clarified at hearing, was to ensure that the franchisee was fully invested in the operation of the store."

Guess what? The court goes for it. The court grants a preliminary injunction in favor of 7-Eleven, ordering Dhaliwal to surrender the franchise premise and cease using the 7-Eleven name.

Lesson from the Court: Always have a reason. It does not have to be a good reason. It does have to be the best one, the logical one, but you must have one.

Grounds for termination of the franchise must be disclosed in the franchise disclosure document and agreement, and there may be 7, 8 or more. Read your contract - together with an experienced franchise attorney.

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The Begging Franchise

I think of franchising as potentially useful for everything on earth that involves either commerce or religion. All religious organizations are constructed on the franchise model, with set operating rules and payments upstream by those downstream. Every religion also claims to be unique just as every franchise, good or bad, claims to have a unique selling proposition.

Like religions, commercial franchising requires its own flag. Flag saluters are called upon to subscribe to the "code" of the concept. They face condemnation should they defect. (There is a franchising hell, but for some it begins before you leave the system. Think of Quiznos and Cold Stone Creameries to mention a few.)

Here in Houston, I believe I have identified a new form of franchising directed to the homeless, destitute, drug enslaved, just out of jail/prison, or high school dropout. I noticed it slowly, over time. Its seasonality is not that of spring, summer, fall or winter, but rather day of the week and hours of the day. When traffic density is high, the franchisee at a traffic light controlled intersection has -for a moment- a captive audience of people in cars and trucks waiting for the light to change.

For that moment, the homeless, destitute, and dropouts are transformed into the begging or panhandling franchisees.

The Somali Pirates

Every Saturday afternoon around four o'clock, for instance, at the intersection of the Beltway and Highway 288, there is a small group (always the same folks) who I call "The Somali Pirates" who aggressively operate a panhandling enterprise targeting folks returning from the beach. This is a multi-lane divided highway intersection and they assign about twenty people -all very threatening- to go up and down the line at every red light accosting drivers and passengers with various messages about why they ought to "contribute" to the pirates. Sometimes they are selling some crap or other but usually they are just "begging".

The same market exists at every urban freeway exit onto a main street, because the traffic is heavier there and each change of traffic light provides a new dozen or so cars in more than one lane, stopped waiting for the next light change. To a similar degree the same venue opportunity is presented on any busy street at any traffic controlled intersection.

The franchisees, with custom but homemade looking signs, go up and down these lines of cars soliciting, sometimes with squeegees washing windshields whether or not solicited by the driver to do so and holding out a hand or bucket or basket into which the driver is asked/intimidated to make a cash deposit/contribution.

On more than one occasion, I have noticed that these small groups of beggar franchisees came together in a common vehicle and that they have several signs with different messages. A local marketing co-op, if you will.

These range from solicitations to finance school band or team trips, church projects like choir competitions in other cities, to claims that the beggar franchisee is homeless and jobless, a disabled military service veteran, just lost his family in some catastrophe, is hungry or needs money for medical attention of some sort.

There is an endless array of "Can you please help me" signage, sometimes revealed by some careless beggar franchisee who failed to remember to put the spare signs away out of sight of passing drivers.

Sometimes the "pitch" is flavored by its being done by a suggestively clad girl with the look of someone that your average man would feel like he might like to help/save/"adopt" (if you catch my meaning). These are more likely to be seen at male dense venues like athletic events just after the game is over and everyone is coming out of the parking lots, again traffic light controlled so as to provide that momentary refreshed inventory of about a dozen or so stopped cars. The signs say different things slanted to pathetic situations in which a young woman might find herself and be in need of a "hero" to help bail her out.

Cripples make excellent beggar franchisees, but they do have to be sufficiently mobile to enable them to get up and down each row of momentarily stopped cars with their signs claiming to be disabled veterans unable to find work and homeless as well as otherwise in need of assistance - the list of "reasons why you should help me" seems endless. Drivers face the dilemma of asking themselves whether this person really is a homeless disabled veteran to whom some help would be appropriate or just another bum with a sign.

The Real Jobs People Do

I live in a thriving big city where no matter what the labor statistics might say no one is really jobless. The grey market here provides more than enough work for those not on some corporate payroll. Lawns get tended. Curbs in front of homes get street numbers painted on them. Cars get detailed in vacant gas station or similar empty commercial locations. Vacated buildings get cleaned out for another tenant. Rent a cop security guards pretend to protect small businesses from anything that isn't dangerous in the first place. Chipped windshields get patched. Vehicles containing all sorts of contraband get driven from here to there. People who thought it wasn't cool to do homework and stay in high school stand in medians of busy streets holding signs proclaiming that you should patronize such and such store located in the strip center right there where the sign holder is standing.

All this is cash fueled with no record keeping and no taxes or other ancillary payments or reports made.

The signs held by the drop outs adverting gold buyer and seller jewelry shops are the funniest. They proclaim that this particular shylock will pay you more for your gold than the filthy shylock just down the street, or that this schmuck will give you a big discount if you buy gold from him. The funniest is the one where you not only get discounted gold but also some free silver if you buy from the adverted establishment. Meanwhile the sign holding dummy is roasting his bloody ass off in the heat of the street, usually drinking some sugar drink and eating something sweet like a Twinkie, Ho Ho or Ding Dong.

There is also a major industry in petty crime just below the level at which enforcement resources might be brought into play. Petty crime in Texas is defined as crime of insufficient seriousness to make the evening local news.

Panhandling Franchises and its Enforcement -Buttercup

The panhandling business, however, in a city like Houston, is well organized, and each intersection where the prospects of favorable demographics, as I have explained, is a micro business locale. Each locale has value expressible as a function of the panhandling revenue obtainable.

This has occurred to the more entrepreneurial amongst the beggars. Why stand in the hot sun for hours when they can take control of worthwhile intersections through threat and force and "license" others to do the begging and pay them the vigorish/royalties attributable to that cash flow?

The most successful of the street intersection franchisors is a person who goes by the name of Buttercup.

I asked around about Buttercup and actually was able to arrange to meet and interview him at a local dive where he hangs out while he enjoyed eats and drinks on my tab, eating slowly but drinking more aggressively as we visited. Buttercup is an ex teamsters union organizer from Detroit with hands that have come into violent contact with many things and many people. He has the look of someone who has left more than several people dying from assault in some cold wet dark alley and his eyes are dead. His speech is slurred but understandable as he goes from communicative grunt to communicative grunt, the real meaning being conveyed by his face as well as by the inflection of each grunt and hand gestures.

He certainly carries weapons of various sorts, but a knife and a gun are the most obvious. He has no concealed carry permit, nor for that matter any license or permit of any kind.

The government may not even know he exists, although I suspect the police know about him and leave him alone for any of various reasons. One does not ask such a person where he lives or how his family might be, or any other personal question that a paranoiac might feel is intrusive.

Payment is by the day and in advance in cash. The price is whatever Buttercup says it is. I know that the price has not been worked out on any break even or other formula. You can decline but you can't argue, complain, whine or criticize.

You get the "right" to pan handle at that intersection on that day until midnight. You buy a full day. You can buy one corner or up to all four corners of the intersection. If someone else comes along and tries to pan handle in your intersection during your tenure, he or she will be instructed by you to leave on pain of serious injury or worse. Few fail to get the message as it is well known throughout the potential pan handler community how this business works and that if Buttercup needs to be summoned to deal with you your Medicaid coverage will probably not see you all the way through to useful recovery.

But, I suspect that Buttercup probably has another identity that is well financed by his franchise operations. He has money "out on the street" as Tony Soprano would say. The loan shark business fits right in with everything else about Buttercup. Between the franchise business and the loan sharking operations, I have a feeling that Buttercup is rather comfortable by just about any standard. However, when he is seen driving it is in a car that looks as though it probably would not make it to the next corner. God only knows how many aliases he has. I am rather certain that he is better off than most lawyers.

Where does Buttercup fit in the world of franchising? I strongly believe that his franchisees attain a higher return on invested capital than those of most franchise companies in America today. Their executives may dress and talk in a more sophisticated manner but the contracts they use are the high tone legal equivalent of the Buttercup approach to system governance.

In fact, Buttercup probably offers gentler terms because you don't have to wake up the next morning and go back to work as a Buttercup franchisee if you don't like it.

Before you look down your nose at Buttercup consider that he probably - at his level of micro franchising - does a lot better for his franchisees than most so called franchise companies in America today. Any Cold Stone Creamery or Quiznos franchisee would envy the ability to walk away free and clear after any day on which he decided that the investment was not paying off satisfactorily.

Looking to exit your system and their Buttercup, talk to with an experienced franchise attorney who can deal with Buttercup.

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In Spina v. Shoppers Drug Mart Inc., 2012 ONSC 5563, Justice Perell for the Ontario Superior Court has given judgment in the first stage of a class action certification motion brought on behalf of franchisees of Shoppers Drug Mart. The decision addressed the threshold requirement for certification, namely whether the claim disclosed reasonable causes of action.

In the process, the Court reviewed and determined the legal validity of the varied and interrelated causes of action asserted by the representative plaintiffs.

While only a pleadings motion, Spina provides useful guidance to franchisors and franchisees in Ontario. Although the decision addressed numerous issues, this comment focuses on the following three lessons:

Franchisors should review their standard form franchise agreements to ensure that the key financial terms are absolutely clear and leave no doubt regarding the scope of the franchisor's rights to earn profits from the franchise system.

In Spina, the Court allowed the Franchisees' claim to proceed on the allegation that the Franchisor had improperly profited from certain services provided to the Franchisees. While the franchise agreement contained detailed provisions on these issues, it was not plain and obvious that the Franchisor could earn a profit on these services provided to the Franchisees.

The duty of good faith and fair dealing does not provide franchisees with the right to receive ongoing disclosure throughout the term of the franchise relationship. The Court struck the Franchisees' claim in this respect, rejecting the argument that such ongoing disclosure was necessary for the Franchisees to verify that the Franchisor was complying with its obligations under the franchise agreement. The Court held that imposing an ongoing disclosure obligation of this nature would be impossible to meet, would turn management of the franchise relationship over to the franchisees, and would encourage litigious fishing expeditions.

The Ontario Courts are demonstrating an increasing willingness to dispose of weak contractual arguments at the pleadings stage, even in class action proceedings. In Spina, the Franchisees -- ignoring an explicit clause that provided the Franchisor with the right to retain rebates earned from suppliers of merchandise -- asserted a contractual right to such rebates. The Franchisees relied on a general clause in the agreement that suggested they would benefit from the franchise system's use of "bulk purchasing". The Court struck the Franchisees' claim for rebates upholding the express language of the agreement over what Justice Perell deemed a "tortured interpretation of the contract".

The Franchisor's Ability to Profit on Fees Charged to Franchisees

The Plaintiffs in this case claimed that, contrary to the terms of the franchise agreement, the Franchisor had improperly earned profits in respect of certain services that it provided to the Franchisees.

The franchise agreement contained several, interrelated provisions that addressed the financial aspects of the franchisor-franchisee relationship. These included a profit-sharing provision, under which the Franchisor was entitled to receive a percentage of all of the Franchisees' gross sales. This, according to the Franchisees, was the sole mechanism through which the Franchisor was permitted to earn a profit from the Franchisees. In addition to this profit-sharing provision, there were additional clauses that obligated the Franchisees to contribute to a national advertising fund and marketing in initiatives, as well as additional fees for ancillary services provided by the Franchisor. The additional fees provision in the franchise agreement explicitly stated that the quantum of fees was to be set by the Franchisor "in the good faith exercise of its judgment".

The Franchisees claimed that the Franchisor had improperly earned a profit from the additional fees that it charged to Franchisees, and that this was a breach of the franchise agreement and contrary to the statutory and common law duties of good faith and fair dealing.

The Franchisor countered that it was perfectly entitled to include margin and return-on-investment in the additional fees it charged to its Franchisees, and that such fees were subject only to the obligation that it exercise good faith judgment.

Unlike other claims of improper profits raised by the Plaintiffs the Court was not prepared to strike this claim, holding that it had "sufficient traction" under the franchise agreement. As it was ambiguous whether the Franchisor's obligation to exercise good faith judgment permitted it to establish the fees at such a level that would allow it to derive a profit, it was not plain and obvious whether such claims would fail.

Although we do not know whether the Franchisees' claims will ultimately prevail, this holding should serve as a cautionary tale to franchisors. These financial aspects of the franchise relationship are foundational and lie at the heart of the business model. As such, financial clauses that address profit sharing should be explicit and drafted with clarity. Where they are absent or ambiguously crafted, franchisors may be vulnerable to the argument that their ability to make profits from certain aspects of the franchise system are limited by more general clauses in the franchise agreement or the duties of good faith and fair dealing.

The Right to Share in Rebates

Another element of the Franchisees' claim relied on a provision in the franchise agreement which obligated the Franchisor to provide each Franchisee with the "advantages of bulk purchasing". The Franchisees asserted that, pursuant to this provision, the Franchisor was obliged to provide them with any rebates that were received from product suppliers.

The Court held that it was plain and obvious that this claim would fail. The franchise agreement at issue contained a specific provision that expressly held that the Franchisor was "entitled to the benefit of any and all discounts, rebates, advertising or other allowances, concessions, or other similar advantages" received from a supplier of merchandise. Given this clear, specific provision, it was plain and obvious that the principles of contractual interpretation did not support the Franchisees' position. The Court also held that it was plain and obvious that the statutory and common law duty of good faith and fair dealing did not modify the contract by establishing a right for the Franchisees to share in the rebates.

By contrast, the Court was not willing to strike out a related claim by the Franchisees for "professional allowances" provided by pharmaceutical suppliers to pharmacists under the Ontario Drug Benefit Act. The Court held that it was ambiguous whether "professional allowances" fell within the definition of "rebate" in the franchise agreement and thus would not determine whether they were governed by this clause.

The Right to Continuous Disclosure Throughout the Franchise Relationship

In part related to their two previous claims regarding profit-sharing and access to rebates, the Franchisees also asserted that the common law and statutory duties of good faith and fair dealing obligated the Franchisor to provide ongoing disclosure of information that would permit the Franchisees to verify whether the Franchisor was complying with its financial obligations. For example, the Franchisees claimed that they had a right to disclosure of the costs that the Franchisor incurs for the programs it provides to Franchisees, in order for the Franchisees to know whether the Franchisee was improperly profiting from those programs.

The Court rejected this argument and held that it was plain and obvious that the duties of good faith and fair dealing did not impose an obligation for intra-term disclosure in this circumstance. Justice Perell distinguished the circumstances of this case from the situation where a Franchisor is in possession of material information that could reasonably influence a Franchisee's decision with regard to the franchise. The Court emphasized that imposing this obligation would effectively "turn over design, supervision, and management of the franchise system to each franchisee, who gets to fish for grounds to sue the franchisor".

1. Western negotiating tactics can have unforeseen - and unfortunate - results when employed with Chinese counterparties.

China's macro-economy is certainly slowing, but the frequency of Chinese-Western negotiation has been on the upswing as more and more Mainlanders with Money (MWMs) start investing, spending and relocating to North America and Europe. Western negotiators may be eager to transact with a new set of potential buyers and partners from China, but American and European sellers have to be aware of cultural barriers that can drive away business before they even know there is a problem.

Good Cop- Bad Cop (GCBC) is a common bargaining tactic that can drive an otherwise promising international deal off the rails. GCBC can be a very effective technique both for buyers and sellers, and is a standard part of the American business repertoire (it shows up often in the UK as "Mutt and Jeff").

For those unfamiliar with the tactic, a negotiating team takes on opposing roles - one person is the aggressive, irrational and vaguely threatening "bad cop" while the partner takes on the role of reasonable and rationale "good cop". The problem is that the tactic is loaded with social and cultural meanings that don't translate well - particularly when the counterparty is from China.

2. "Good Cop - Bad Cop" is Not Universal

The general pattern of GCBC is to split the negotiating team and deploy the bad cop - Terrible Ted in our case - against Bud the Buyer. A typical scenario is for the GCBC team to make their initial contact together and then for Nice Ned (good cop) to excuse himself or be called away.

Once Terrible Ted is alone with Bud the Buyer, the bad cop's aggressive and menacing nature surfaces. Nice Ned's role is to provide relief - and he returns to the negotiation just in time to rescue Bud and act as the voice of calm rationality. In many instances, Ned will physically restrain or block Ted and send him away. In the Western scenario, Good Cops are the savior, the protector, the rescuer in times of distress - and the tactic often conjures up at least vague notions of verbal threats or even physical harm.

Bud the Buyer is expected to team up with Nice Ned to neutralize and escape the attack of Terrible Ted. Bud gets relief and protection from a recurrence or continuation assault of bad cop Ted - who has already attacked once and behaves irrationally and threating. Bud is relieved and forms a bond of trust and gratitude with Ned - and the two friends quickly agree to deal terms.

3. Chinese Don't Find "Bad Cop" Amusing

Chinese negotiators don't use Good Cop - Bad Cop. The threat of violence (even if it is verbal) deployed directly against counterparty outside the organization isn't considered funny or light-hearted. If a Chinese person is menaced or intimidated it tends to trigger cultural responses different from those in the West.

At the mild end of the spectrum, Chinese will feel embarrassed or disturbed (loss of face or mianzi) but the specter of institutional force can have far greater repercussions in China - where "Bad Cop" has a much deeper and more sinister meaning. A Chinese negotiator who is confronted by an aggressive and menacing counterparty is likely to withdraw from the negotiation completely and cut off all future contact with the organization that employs the bad cop.

Good organizations don't deploy Bad Cops in China - where harmony and surface appearances are valued highly.

4. Henpecked Husband and Tough Lihai Wife

But, China does have its own version of a negotiating team, but the function is completely different from Western versions. Anyone who has ever spent time shopping in Chinese family businesses is familiar with the henpecked husband and the tough (lihai) wife. Poor Paul and Lee Hai the Tai Tai (the tough wife) seem to mirror the Western Good Cop - Bad Cop, but there is a significant difference.

In China, the violent, aggressive behavior is not directed at the counterparty, but rather gets directed within the team or organization. Lee Hai terrorizes Poor Paul - and Bud the Buyer has the role of savior and rescuer who must protect Paul from mistreatment within his own house. Lee Hai is only a threat to Poor Paul - and Bud is expected to make concessions and compromise on deal terms in his role as benevolent, powerful buyer.

The Chinese side is elevating Bud's stature, giving face - and appealing to his sense of noblesse oblige to persuade him to buy more, faster or at higher prices. Poor Paul is an object of pity whom Bud has the power - and duty - to protect.

Larger Chinese corporations have co-opted the Henpecked Husband - Lihai Wife dynamic by substituting the absentee owner or overscheduled boss as the internal threat. The Chinese salesman or purchasing agent will blanch at your offer, shaking his head and confiding that his boss would punish him mercilessly if he even takes that offer back to the office.

Once again, you are given face and status - but are being pressured to make concessions due to your position of power and security.

5. Chinese Negotiators React to GCBC Well

Not only do the tactics have different goals, but the impact on the counterparty is completely different.

In CGBC the outside counterparty is facing the high pressure, aggressive actor right away. To Americans with experience and relatively high tolerance to pressure tactics, the entry of the Good Cop is a relief and a return to balance. We view the Good Cop as "normal" and equal to us in terms of temperament, power and outlook, while Bad Cop is the aberration and outlier. We are accustomed to institutional give and take. We view organizations as manageable, malleable to some degree, and transparent. Otherwise we have the choice of walking way.

If the counterparty is Chinese, then once the Bad Cop makes his appearance the damage is permanent and the game is over. In China, face and guanxi undermine the whole GCBC scenario. Aggressive, irrational behavior is not a cultural norm among harmony-conscious Chinese, and once the Bad Cop starts making threats the negotiation is lost and withdrawal is the only reasonable option.

Chinese institutions are a law unto themselves, opaque and ultimately unmanageable.

Those with power and connections never encounter the Bad Cop. Successful negotiation in China is not about relief or being saved - it's about avoidance. Once Bad Cop starts shouting and threatening, the Chinese side has already lost face and been humiliated.

Poor Paul instead appeals to the Bud the Buyer to rescue HIM from Lee Hai - the Tough Wife / Bad Cop. It's a passive aggressive manipulation - Poor Paul is giving face and placing himself in a subordinate role. This pressures you to make concessions in your role as the high-power actor. You gain face - but lose deal points. As a result you are speared any contact with Lee Hai.

6. Western Negotiating Tactics: Too Muscle-Bound for Chinese?

Westerners believe that strength and success go hand in hand when negotiating, but Chinese are adept at negotiating from positions of weakness . As more Chinese buyers and partners start knocking on American and European doors, Western negotiators might want to re-think some of their tried & true tactics. Bluffing, posturing, and positioning work well with local counterparties, but may have unintended consequences with Chinese negotiators.

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Franchise laws in California and several other states seek to protect both franchisors and franchisees in their investment in a new franchise business.

Franchisees are protected under these laws because franchisors must:

▪ Register with the state each year,

▪ Present a disclosure document about the investment, and

▪ Allow a cooling-off period before the new franchisee signs any agreement or pays any money to the franchisor.

These laws permit franchisees to bring a legal claim if the franchisor violates the law, such as by making a misrepresentation in offering or selling the franchise.

For the franchisor, the laws limit the time when franchisees can bring claims.

A franchisee's claim alleging violation of California's Franchise Investment Law, is barred if not brought within the earliest to occur, of:

▪ Four years from the act or transaction claimed to have violated the law, or

▪ One year after the franchisee discovers facts constituting the claimed violation.

Moreover, under an old California law (from the 1800s), anyone, including a franchisee, who knows circumstances that should cause him or her to investigate, is deemed to know the facts the investigation would have revealed. This rule can make the one year time limit start and end quickly.

Time limits differ in the various states that have franchise laws. Here are some of them:

Some Effects of Franchise Law Time Limits

▪ Sometimes they encourage litigation. They force franchisees to bring claims sooner, to reduce or avoid the risk of a claim being lost due to the statute of limitations.

▪ They also give franchisors a strong tool to defend and defeat some claims, because the franchisee waited too long to sue.

▪ These statutes also lead to some compromises and settlements, due to the complaining franchisee being uncertain if a statute of limitations may apply.

▪ In some cases, by the time a franchisee becomes suspicious of a problem, dissatisfied enough to consult a franchise lawyer, and then certain enough to make a claim, more time has passed than the statute of limitations allows.

▪ Sometimes, a franchisee knew the facts more than one year before bringing a claim.

As a business owner, actual or potential franchisor or franchisee, you should keep in mind the statutes of limitations under state franchise laws.

Franchisees should be aware to avoid losing or giving up a claim, by failing to bring it until after the time limit has passed.

Franchisors should be aware of statutes of limitations as a tool to bar or defeat an untimely claim, sometimes after only a relatively short time.

David Gurnick is the author of Distribution Law of the United States and Franchise Depositions (Juris Publishing) and is Certified by the State Bar of California as a Specialist in Franchise and Distribution Law.

Please reach him by calling 818.990.2120 or by e-mail: [email protected].

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While most negotiators are aware of how quickly combat can threaten the success of a deal, few are aware of how concessions, the opposite of combat, can just as quickly ruin a negotiation.

In order to be a truly skillful negotiator, it's important to recognize the value of compromise. Choose your battles wisely- you will be amazed by how smoothly a negotiation progresses when both parties are willing push combativeness aside for compromise.

A key component of compromise is concession. Before you begin any negotiation, it's important to identify which components of the deal are non-negotiable, and which components you are willing to compromise on. While this step admittedly creates additional work for you, it will prove to be invaluable in the grand scheme of the negotiation.

What happens if you choose to skip this step and plunge headfirst into a deal? You're putting yourself (and your delegates) at risk. Lack of preparedness in a negotiation leads many negotiators to commit one of the cardinal negotiation sins: the unilateral concession.

Imagine that you are the main negotiator of a deal that has the potential to make your company a tremendous amount of money.

In your eagerness to begin the negotiation, you fail to identify which parts of the negotiation are open to compromise and which parts are ironclad. In a meeting with a representative from the opposing delegation, the following dialogue occurs:

Buyer: I'm sorry, but we've ultimately decided that we can't use you as our supplier. You're just too expensive.

You: There isn't a lot I can do about the price. Are you looking for a discount?

Buyer: Well...that's a good place to start. What can you give me?

You: Um...I can let you have... maybe 3%?

Buyer: Three percent? I'm afraid that's not enough.

You: I'm not authorized to go beyond 5%.

The entire deal has been threatened.

Blinded by panic, you've committed a major blunder: you've made a unilateral concession. The unilateral concession offers a solution that demands nothing in return.

The buyer recognized the fact that you had not considered the possibility of a discount, and he took full advantage of your unpreparedness. In an effort to save the deal, you cracked under pressure and offered a solution that will yield nothing for your delegation. While you've temporarily stopped the negotiation from crumbling, you've also made some costly mistakes:

1. You made no effort to find out what the buyer meant by saying that the price was too expensive. Too expensive compared to what? How much should it be? Has the buyer produced a cost calculation?

2. You negotiated the price instead of discussing total costs. In your panic, you made up your mind about the price without knowing what the buyer thought about the delivery time, volume, quality, warranties, performances, or other conditions.

3. By emphasizing the fact that you weren't authorized to go beyond 5% , you signaled that there was a greater discount that your boss could potentially approve.

Don't dwell on your mistakes- even the most skillful negotiators slip up. The most effective way to recover from your mistakes is to learn something from them. In next week's installment, we'll explore how you can recover from unilateral concession-making and get the negotiation back on track.

In the meantime, please feel free to share your own stories about your experience with concessions in the comments section.

Have you ever had a similar conversation? How did you recover?

This post is excerpted from Keld Jensen's book Power Bargaining: Adding Value to Commercial Negotiations.

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Business people and corporate counsel often seem not to pay much attention to their choice of dispute resolution mechanism when negotiating a contract. They often seem treat dispute resolution as just part of the contractual "boilerplate". If they give much thought to it at all, they probably plug in a choice of litigation jurisdiction or arbitration provision from a previous contract.

More likely, they don't consider the issue at all.

So the contract ends up saying nothing about dispute resolution. That leads to any disputes which arise under it being resolved by litigation.

As we'll see, that's likely the worst possible alternative.

This article reviews the basic characteristics of the most common dispute resolution mechanisms, so that business people and corporate counsel can make better informed choices on this issue.

It is helpful to consider negotiation, mediation, arbitration and litigation as lying along a continuum. The "negotiation" end of the continuum is characterized by values like acceptable results, flexibility and efficiency; the "litigation" end by values like risk of unacceptable results, expense and delay, and publicity.

Looked at that way, it's not hard to see which end of the continuum most businesses would prefer be on.

Negotiation

Let's start with negotiation. There is no mystery about what negotiation is: the parties compromise toward an agreed resolution of their dispute.

Negotiation has several advantages over other dispute resolution mechanisms. By definition, it produces an acceptable result. If both parties don't agree, there's no resolution.

Negotiation is infinitely flexible - it can accommodate anything the parties can dream up and agree on. In particular, it can accommodate solutions based on the parties' ongoing business interests, rather than just their strict legal rights and obligations.

While negotiation can certainly be complex, and therefore expensive and time consuming, it is usually more cost and time efficient than the alternatives. Negotiations, and their results, are generally confidential. That can be important in sensitive business contexts.

For all those reasons, negotiation is almost always the best dispute resolution mechanism.

There are good reasons most disputes are resolved by negotiated settlements. Businesses should always try to negotiate the resolution of a dispute (whatever their contracts say). They should never close the door on negotiation.

Not that negotiation is the perfect mechanism.

Again, by definition, it requires compromise.

So it's highly unlikely either party will get everything they want. It also involves significant uncertainty. Because both parties must agree on a solution, both have a veto over that solution. There's always the possibility the other side will "just say no" to any
reasonable resolution.

(To answer one client's question: No, the court won't order a party to agree to a resolution.)

In that case, negotiation just won't work. What then?

Mediation

Mediation is "just" negotiation facilitated by an agreed neutral, normally a trained and experienced mediator.

Ideally, if the parties are rational and competently advised, they should be able to negotiate a resolution of their own. But, sometimes that's just not the case.

Other times, something about the situation produces a negotiating impasse. In those situations, mediation can be a very
useful tool to achieve a negotiated resolution.

Mediation has essentially the same advantages (acceptability, flexibility, efficiency, confidentiality) and disadvantages (necessity to compromise, uncertainty) as negotiation. The differences are of degree rather than kind.

Most importantly, there is undoubtedly some kind of "magic" about mediation. It's hard to explain, and the reasons for it may be different in every case, but there is no doubt that the vast majority of commercial disputes which are mediated are
resolved through that process.

There is just something about involving a neutral in the negotiation that greatly facilitates resolution.

So, mediation is more certain to produce an acceptable result than negotiation.

One problem with mediation is that, not only must the parties agree on a resolution, they must also agree to mediate in the first place, and then on a mediator. Sometimes they can't, or just won't.

A practical downside of mediation, compared to negotiation, is that competent, experienced mediators are not cheap, nor readily available.

So mediation can be less cost and time efficient than negotiation. But, if it achieves an acceptable result, that cost and time may be well worth it.

Arbitration

With arbitration we move to a fundamentally different kind of dispute resolution mechanism. (This is why the mediation-arbitration hybrids can be so tricky.)

In arbitration the parties agree to give a neutral the power, not to facilitate an agreed resolution of their dispute, as in mediation,
but to impose a legally binding resolution on them, whether they agree with it or not.

Arbitration is essentially "private litigation." But, in the hands of experienced counsel, it can have important advantages over litigation. Arbitration is usually based on the parties' legal rights and obligations, not their business interests.

Contrary to popular belief, an arbitrator does not (or at least should not) just "cut the baby in half". They find the facts based on the evidence. They apply the relevant law to those facts. They then determine the parties' legal rights and obligations and resolve the dispute as the law requires, based on those facts.

That process presents the opportunity for a party to win the dispute - to "hit a home run." Of course, that necessarily also
presents the risk of losing - of being the pitcher who gives up that home run.

Arbitration has significant potential advantages.

The parties have (at least) input into the choice of their decision maker. That can give comfort that the result will be at least acceptable, if not necessarily ideal.

Arbitration has tremendous procedural flexibility. Experienced counsel can tailor its procedures to focus on exactly what is needed to resolve the particular dispute. That can lead to significant cost and time efficiency compared with litigation.

However, the fundamental nature of arbitration involves one big potential disadvantage: the possibility that the decision imposed on the parties by the arbitrator is unacceptable to one (or both!) of them. There's no avoiding that.

It's inherent in the nature of arbitration (and litigation), as opposed to negotiation or mediation.

In addition, while arbitration procedures are very flexible, and promote efficiency, they are much closer to those of litigation than those of negotiation or mediation. Cost and time efficiency therefore suffer by comparison.

Litigation

Litigation is fundamentally the same kind of process as arbitration: a neutral has the power to impose a legally binding resolution on the parties. But instead of the parties agreeing on that neutral, they're appointed by the state, in the person of a judge.

It is crucial to understand that litigation, warts and all, is our society's default dispute resolution mechanism. If the parties don't agree on another mechanism, their dispute will be resolved by litigation, in any jurisdiction whose courts are willing to take it on.

While litigation has its place, it should be obvious from a consideration of its advantages and disadvantages that it is not usually the best option.

Litigation generally has only one significant advantage: certainty. As with arbitration, the process will almost certainly resolve the parties' dispute. But that's it.

There are generally no other advantages to litigation.

On the other hand, there are a host of disadvantages. The parties have essentially no input into their choice of decision maker.

Their dispute is resolved by whoever the relevant court's bureaucracy assigns to it. In Canada, where (outside Toronto) there is no specialized roster of experienced commercial judges, that can be a real problem in complex commercial cases.

As with arbitration, there is the possibility of an unacceptable decision being imposed.

Litigation procedures, despite some recent tinkering designed to make them more efficient and user-friendly, are relatively inflexible. The mandatory disclosure of relevant documents to the other parties, which is such an essential part of litigation, can be a real burden in the email age.

Litigation is usually the most expensive and time consuming dispute resolution mechanism.

Compared to arbitration, there is a lack of finality. Either party can appeal a trial decision as of right. Then the parties have to do it all over again (not quite) in an appellate court. Enforcement of a judgment around the world is more difficult than enforcement of an arbitral award.

Absent a sealing order, which the courts are reluctant to grant in commercial cases,the parties' dispute will be played out in public, with all the evidence, arguments and results available to anyone who cares to look (and circulate on the internet), including the media.

All in all, not a pretty picture. One to be avoided if possible.

Conclusion

Negotiation and mediation on the one hand, and arbitration and litigation on the other,are fundamentally different kinds of dispute
resolution mechanisms. Each has distinct advantages and disadvantages.

Business people and corporate house counsel should carefully consider the kinds of dispute which are likely to arise under the contracts they negotiate, and chose a dispute resolution mechanism (or combination of mechanisms) which is best suited to resolve those kinds of dispute.

If they don't chose wisely, they may end up being committed to a mechanism which is inappropriate for the disputes which do arise.

If they don't chose at all, then by default they chose litigation. There is usually a better choice.

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I remember, during my mediation training, asking for a clear definition of "bargaining in bad faith" and being disappointed not to receive one.

Having now myself done a little research I can understand why the concept is so hard to define, despite many people's claim to "know it when they see it."

Most of the legal discussions of bad faith bargaining that I have seen come from the area of labour relations. For example, the Alberta Labour Relations Board advises that, "parties must make every reasonable effort" to reach an agreement. They also list some examples of bad faith bargaining techniques, including refusing to meet the other party, refusing to respect the other party's representatives, reactivating proposals that have already been settled, adding new areas of discussion late in the dispute, and "surface bargaining."

I would guess that "surface bargaining" is what most people have in mind when they think of bad faith bargaining. It is basically a form of stalling. In surface bargaining one of the parties "goes through the motions" of bargaining, but has no intention of ever coming to an agreement. The BC Labour Relations Board defines bad faith bargaining somewhat more strictly, saying that it is the "deliberate strategy by either party to prevent reaching an agreement."

Bargaining in bad faith is not the same as "hard" bargaining, but the two can be very difficult to tell apart in practice. Imagine a dispute in which party "A" has made what they consider a reasonable offer to settle. Party "B" refuses to accept it and has not moved very far from their opening position.

Did party B never intend to settle, or are they simply convinced that party A's offer isn't yet good enough? How would a mediator (or anyone else) be able to tell, short of a private confession by party B?

Or imagine a dispute in which party A spends a lot of time going over relatively trivial yet highly detailed matters. Is party A deliberately stalling, or taking reasonable care to protect their interests? And who is to say what counts as a "trivial" issue?

Yet despite the difficulties in characterizing bad faith bargaining, it represents a real problem for mediators and for the mediation process. It is a particularly troubling possibility when one of the parties has greater resources (time, money) than the other. The more powerful party can stall, drawing out the process and using up the other party's time and money. When the mediation process is declared a failure, the stronger party is in an even more favourable position. The weaker party, having depleted their resources, may agree to an unreasonable offer because they no longer have the money to defend their rights in court.

What should you do as a mediator if you suspect that one of the parties is bargaining in bad faith? I don't think that there is any way to be sure that parties intend or do not intend to come to an agreement, and it is important not to jump to conclusions. If one of the parties won't move from what looks like an unreasonable position, try to find out why.

Their view of the dispute may be such that their own position is reasonable.

How does it differ from your view, and from the other party's view?

But there may come a point in a mediation when the mediator begins to suspect that the process is not serving either party and that prolonging it would not be a good use of their time or money.

In this event, the best thing for the mediator to do may be to explain their concerns and then exercise their right to end the mediation.

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Mediation is often touted as the panacea for dispute resolution. It's not, and it suffers a bit from idol worship. I'm a mediation evangelist myself, but it's just a tool and it has many limits.

The goal for dispute resolution should be to find methods with the substance and flexibility to help resolve any dispute in the fastest, cheapest, fairest method possible. I have an idea on this that I call Early Active Intervention, and I'd appreciate comments, critical or otherwise. But before describing it, I point out some limitations on mediating franchise disputes.

In 2009, at the American Bar Association Forum on Franchising, I presented a seminar that covered mandatory mediation clauses in franchise agreements.

The participants (roughly 2/3 franchisor counsel, 1/3 franchisee) were split on the issue. About half looked on the clauses favorably because mediation is very successful in resolving disputes, and they found that mandatory mediation worked in practice to resolve their disputes promptly and fairly.

The other half didn't like mandatory clauses. Franchisor attorneys said that mediation makes sense only at a certain stage of a case, not necessarily the beginning, and that mediation has a chance to succeed only when both parties want to mediate. Good lawyers will know when a case is ripe for mediation. And if one side doesn't have a good lawyer, mediation probably won't succeed. So there's no reason to force mediation in the beginning of a dispute.

Franchisee attorneys expressed dissatisfaction that too often franchisors used the requirement to force the franchisee to take the time and spend the money to go to a mediation in the franchisor's home city with no intention of resolving the case short of franchisee surrender.

My sense is that all these are very good points. Mediation is very successful in resolving disputes, which is why I'm a mediation evangelist. Most mediation providers provide success rates at 65% - 85%. But it's not clear what those rates really mean. Did the cases resolve early or late, in one session or in many over time. Was there an expensive initial session that one side abused in bad faith? And, perhaps a question that can't be answered, would the cases have resolved without mediation? After all, probably fewer than 10% of business cases go to trial regardless of whether they're mediated. So if you count any case that settles before trial as a mediation success if the parties tried mediation at some point, then the success numbers will naturally be very strong.

Breaking it down further to the franchising area, I'm unaware of any statistics on the success of mandatory mediation requirements in franchise agreements. But the anecdotal evidence of dissatisfaction is strong. And most lawyers agree that mediation makes no sense when one party does not want to participate in good faith.

It's clear that resolving franchise disputes early and before they become lawsuits or arbitrations is a worthwhile goal for franchisors and franchisees. Both save time and money by resolving the dispute early, and they can return to focusing on their business rather than their disputes. Also, a new incentive for pre-filing resolution is that, since Item III of the FDD now requires disclosure of settlement terms, franchisors have far greater flexibility in settling suits before a complaint or arbitration demand is filed.

To address some of these issues, and to focus on speed, cost ,and fairness, I've come up with a process I call Early Active Intervention (EAI). It involves a voluntary effort on both sides to resolve the dispute as early, quickly and inexpensively as possible. The parties use a facilitator, but the facilitator is much more active than in standard mediation . Primarily, if a dispute is not ripe for resolution, the facilitator can structure a limited information exchange to allow the parties to obtain the information they need to form a reasonable judgment as to how to reasonably resolve the dispute. Then the mediation resumes.

Because EAI is voluntary, parties not wanting to participate won't. Because the tools are broader than standard mediation, early intervention is always appropriate. Because the facilitator is expected to take a more active role, the facilitator has more flexibility to address issues related to parties or counsel who appear to be proceeding in bad faith. And because the rules are spelled out, expectations for the process are shared.

Here's my proposed clause for a franchising agreement:

EARLY ACTIVE INTERVENTION CLAUSE

Early active intervention. If either of us has a claim against the other, either of us may invoke early active intervention ("EAI") against the other before filing [suit or arbitration]. EAI is subject to the following rules:

1. Notice. EAI is triggered by the initiating party's sending notice (the "Notice") to the responding party that states that the initiating party is initiating EAI, and that provides a concise statement of the initiating party's claim.

2. Tolling. Initiation of EAI tolls the statute of limitations on the initiating party's claims. The responding party may terminate tolling on 14 day's notice.

3. Response. Within seven days of receiving the Notice, the responding party shall send the initiating party a concise statement of its defenses or counterclaims (the "Response") to the initiating party's claim.

4. Preliminary negotiation. Upon receipt of the Response, you and we may (but are not required to) begin negotiations within three days pursuant to effective negotiation principles, which shall be as follows:

i. Parties with authority. You and we will have at the negotiation the person who has the authority to resolve the dispute.

ii. Principles and goal. The goal of negotiation will be to seek a business resolution of the dispute through cooperative communication in which we focus on each other's interests and seek to generate options to satisfy those interests, using objective standards to evaluate interests and options.

iii. Need for further information or documents. If the dispute is not resolved by negotiation, you and we shall seek to determine whether either needs further information or documents to develop reasonable judgment to evaluate reasonable resolution of the dispute. If either side needs further information or documents, we shall seek to agree on how to share information and documents no later than 30 days after the date of our agreement.

iv. Further negotiation. If you and we agree to continue negotiation following information and document exchange, negotiations shall begin with fourteen days after completion of the information and document exchange.

5. Selection of EAI facilitator.

i. Timing. If you and we do not agree to negotiate, then within seven days of the initiating party's receipt of the Notice, you and we shall mutually select an EAI facilitator. If we do choose to negotiate, either side has the right to invoke selection of an facilitator at any time.

ii. Failure to agree on facilitator. If you and we are unable to mutually select an facilitator in seven days, the EAI process shall terminate.

iii. Fees. You and we will each be responsible for half of the facilitator's fees.

6. Case facilitation conference. Within seven days of the facilitator's selection, the facilitator shall hold a case facilitation conference by telephone. The conference shall address the following topics.

i. Information and document exchange. If you and we have not agreed on exchange of information or documents, the Facilitator may decide on the appropriate scope of information and document exchange. The presumption shall be to allow only that discovery necessary to make the process fair in the sense of giving you and us enough information to reasonably evaluate the merits of our respective positions. The facilitator shall set a short time limit, no longer than 30 days after the case facilitation conference, to finish exchange of information and documents.

ii. Facilitation schedule and site. The facilitator shall set a date for a personal case facilitation conference with you and us. The conference shall be scheduled no later than 30 days after the end of information and document sharing. The facilitator shall decide the place of the conference.

iii. Facilitation conference. The facilitator may require you and us to submit materials to the facilitator that we send confidentially to only the facilitator or that we share with each other. You and we will have at the facilitation the person who has the authority to resolve the dispute. The facilitator's role will be to actively mediate the dispute to seek resolution by using suitable facilitative, evaluative, and transformative mediation principles.

iv. Litigation management. If you and we are unable to resolve the dispute at the facilitation conference, the facilitator shall assist you and us in developing a litigation management agreement to cover discovery, time limits, and other matters to seek to limit the cost and time of [suit or arbitration].

v. Flexibility. The facilitator shall have the discretion to alter these rules as the facilitator sees fit.

7. Method of written communication. All written communication shall be by e-mail. For purposes of calculating dates, receipt of written communications will be deemed contemporaneous with sending.

8. Voluntary termination. Either you or we may terminate the EAI process at any time by sending three-days notice to the other.

About the Author: Peter Silverman is a franchise lawyer, mediator and arbitrator. You can reach him at [email protected]. Any thoughts he offers are his personal opinion and are not legal advice.

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Recently, I was asked: "If you could negotiate any terms up front, what would be the key ones?" Here is my general approach:

First, review the FDD and determine if they are using franchise brokers to sell. If so, you can knock off about 11-20k from the franchise price by asking for the broker's rebate.

Now, you have a budget and money. Use it to hire a professional franchise attorney who will negotiate the terms in the agreement that make sense for your situation. (And yes, franchisors will offer addendums or side agreements - the California has a database is full of such side deals. If you accept at face value that franchisors "won't do x", then franchising is going to be a one sided deal for you.)

Any terms that go directly to the franchisor's business model, such as royalty rate and advertising spend are not on the table, except if you are going to be an area developer.

1. Get rid of the personal liability condition - it is a millstone which will force you to continue funding a mistake. The franchisor is not guaranteeing anything, why should you? Never sign an agreement with an unlimited personal guarantee.

2. Enumerate exactly the oral/written representations you are relying upon when signing the contract and carve out an exemption from the too general integration clause.

3. You probably want a discussion about the choice of laws/forum selection clause.

4. On item 7/8 in the FDD, you want written representations which clarify some of your concerns. Specific to your individual situation.

5. Get rid of the cross default clause, and the obey all laws clause. These clauses transfer too much bargaining power, via threats, to the franchisor. They are also completely unnecessary.

6. Get rid of the right of first refusal, which will drive down the value of selling.

7. Carefully review the liquidated damages clause, if there is one.

8. Avoid any franchises which radically restrict your use of social media for local marketing; these franchisors are already signalling that they are going to waste your national ad fund.

Those are the general areas, and there may be more important specific clauses of concern to you depending on your own business model. It is impossible to give good guidance on the territory issue, for example, with seeing the exact clause and knowing of your own local marketing ideas.

Do not waste your time trying to talk with other franchisees. if there is an independent franchisee trade association, talk with them directly about how the franchise agreement has changed, for better or worse over time.

You have the maximum bargaining power at the beginning of the relationship - just before you say "yes".

If you don't have professional training in negotiation, hire an attorney who does have specialized skill in this area.

Expect to pay between 7-10k to get an agreement which protects your rights. The value will be well worth it.

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You believe that your franchisor has intentionally, with little or no justification, inflicted serious economic harm on you and other franchisees.

A group of franchisees has formed The Fight Association, and wants to hire the biggest baddest franchisee trial lawyer to punish the franchisor. The Fight Association's trial lawyer fires a couple of strongly worded missives to the franchisor, with the message: Capitulate or be Sued.

Some other franchise owners, horrified by the damage to the relationships, to the brand, and their ability to resell their own units, want some form of negotiation, discussion or mediation with the franchisor. Even in face of the clear economic damage inflicted by those working at the franchisor's corporation.

Should you fight or negotiate?

There are three important lessons for franchisees and their associations to learn from Mnookin's research.

1. Fight your franchisor only when they have shown themselves to be an unreliable negotiating partner.

2. It is smart to start bargaining from outcomes that neither party can from either the litigation or arbitration process

3. The franchisee community as a whole needs to commit resources to continual training in interest based communication. If interest based negotiation is going succeed over the long haul, you need to commit funds to training.

Background- Managing Mental Traps

Robert Mnookin is the Director of Harvard's Program on Negotiation, and so it unsurprising that he frames the advice in his book as a way of managing two types of mental or intuitive traps, one set of traps which promotes fighting and the other which promotes cooperation.

(This is conceptually similar to one of the original themes from the Harvard Program on Negotiation: negotiation is the rational management of the inherent tension between claiming value and creating value, explored more throughly in The Manager as Negotiator, Lax and Sebenius.)

Mnookin identifies (6) mental traps in Chapter 1 of the book, and then goes on to evaluate (7) major confrontations in which one or both sides could reasonably see the other as the devil; someone who had intentionally inflicted serious harm with little or no justification. (Of particular interest to the franchise community is the chapter 8, "Disharmony in the Symphony".)

Here are Mnookin's traps, which shape the perceptions of the conflict

1. Tribalism involving an appeal to group identity, creating an in-group. It is us against them. Universalism is at the opposite end of the scale, the tendency to overlook important differences in culture, history and group identity. "Why it is just business, after all."

2. Demonization is the tendency to see the other party's action completely defined by being rotten or bad to the core. Contextual rationality is the impulse to find reasonable explanations for individual bad behavior.

3. Dehumanization is way of putting the other party outside normal moral concerns, treating them as a mere object. The other end of this spectrum is one of Redemption: everyone deserves a second chance.

4. Self-righteousness is the tendency to frame the problem in which you are blameless, but the other fellow is entirely to blame for this problem. The other extreme is to see parties always being Equally at Fault for a conflict.

5. Zero-sum trap in which my interests necessarily are in opposition to yours. At the other end is the view that there is always an Win/Win which makes both parties equally well off.

6. The Fight/Flight response, which for the franchisee community would be litigate or sell. At the other end of spectrum, we have Policy of Accommodation.

Finally, there is the call to battle in which the trial lawyer has to call out the franchisee troops for a battle with the franchisor in using the language of war, and the techniques of demonization, tribalism. and others.

The (3) Lessons: When to fight, How to Negotiate, and How to Follow Through.

(1) When to Fight - Only Fight as a Group with an Unreliable Business Partner.

In Chapter 5, Mnookin, relying upon recently declassified reports, examines Churchill's decision not to negotiate with Hitler. He does a remarkably good job of situating us in a world in which Hitler's manifest evil is not yet apparent and Churchill's War Cabinet is unmoved by Churchill's emotional appeals.

It is not known yet that Dunkirk will be a resounding success, that England will win the Battle of Britain, nor that Hitler will uncharacteristically hesitate for many months about deciding to cross the English channel.

A Britain that had insufficient resources to win a war on their own, seemingly without powerful allies, had to seriously consider whether a separate peace might be worth entering into.

Churchill was convinced that Germany was aiming at enslaving England, but his War Cabinet was more persuaded that Germany's goal was only more territory in Eastern Europe.

Since both England and Germany shared a hatred of Communism, it made sense to the War Cabinet that Germany would have to turn east and face down Russia.

What was critical, according to Mnookin, was that Churchill eventually framed the problem this way: if the negotiation was to fail, and this was likely given Hitler's total unsuitability as a bargaining partner, then British morale would be so undermined that they could not credibly commit a fight to the finish. The failed attempt at negotiations with Hitler would end in surrender.

This strikes me as correct. If the party you want to negotiate with has shown themselves to be utterly capricious, unable to be counted upon, then the very attempt at negotiation, should it fail, will undermine the group's commitment to prolonged litigation.

Fortunately, I don't believe that many franchise systems -although there are a few- have franchisors who have absolutely no credibility as a bargaining partner.

My own view, is that systemic challenges are not well suited to litigation, but the franchisor who owns little or no units will have always have trouble convincing the franchisee community to adopt systemic changes, when there has been a local history or either mistrust or bad decisions.

It will be hard for the franchisee community in these cases not to see the franchisor as acting intentionally to harm their own economic interests and misplaced litigation is the likely result.

(2) How to Negotiate out of Shadow of the Law

In 1983, after a bitter commercial fight, IBM and Fujitsu concluded an agreement over the extent to which Fujitsu could use, copy, or otherwise reverse engineer IBM's operating system. One year later, the agreement was in shambles - with each side reasonably convinced that the other had acted intentionally to inflict serious economic harm on the other with out justification. Devils!

For the next 10 years, Mnookin would play an important role both as arbitrator and mediator in both settling and assisting the parties to settle their dispute.

At one point, Mnookin and the other mediator, Jack Jones, had to convince each party of viability of IBM giving Fujitsu the right to inspect, in a very secure environment, IBM's source code. This was needed if Fujitsu was going to be able produce a compatible IBM OS, without infringing or copying on IBM's source code.

IBM could have rejected this deal by saying "Are you crazy, Fujitsu is a major competitor! The 1983 agreement doesn't give them the right to inspect our source code and they will never get that in arbitration. Screw them."

Fujitsu might have also rejected the deal because the restrictions placed on them by the secure environment were highly disruptive to their own programming practices.

But what both parties, even though intense rivals, came to see was that starting from a point which was not available through either litigation or arbitration produced an agreement superior to what any party could get through litigation or arbitration.

This is important advice: don't start bargaining from only those outcomes possible from litigation or arbitration. Both the franchisor and franchisee community need to focus on what would be the best outcome for all of them, and identify what steps need to be taken to get there - especially in the face of previous intractable conflict.

(3) Follow Through and Interest Based Negotiation Training

The last lesson is very important for the franchise community. In 1997, Mnookin was contacted after a bitter strike by San Francisco orchestra.

The orchestra's bargaining committee was itself bitterly divided, barely on speaking terms. Management's representative was seen as a destructive bully, intent on getting his own way.

"Moreover, the musician's relationships with one another were badly strained. They were traumatized. They had no authority structure, no strong leadership in collective bargaining."

Mnookin was able, in the short term, to introduce both sides to interest based negotiation, which involves both active listening and the management of creating value versus claiming value techniques. Both parties took part in the standard Harvard negotiation program, with some excellent short term results.

The parties spent, in 1998, six days in total to come to a new contract. However, they had spent almost 14 month in communication and in joint sessions prior to the bargaining at the table. "For complex negotiations, with critical conflicts behind the table, this is an appropriate ratio." says Mnookin.

However, 6 years later the symphony negotiating committee shunned additional training in interest based techniques, despite having new members who did not have these skills.

It's new attorney was suspicious of interest based negotiation and had argued in public that collective bargaining was essentially adversarial in nature and that the best deals could only be made when everyone was facing collective disaster.

Interestingly, the former management representative, Pastreich summarizes the value of interest based negotiation best:

"The greatest value of adversarial negotiation might be the opportunity it gives musicians to express anger and frustration accumulated during 3 years of doing a job that, by its very nature, allows them relatively little control over their working lives, while the greatest value of interest based bargaining might be the opportunity it gives musicians to work with managers and board members at solving problems in an atmosphere of teamwork and cooperation."

The parties did not make the necessary long term commitment to interest based negotiation, so reverted to the ordinary form of collective bargaining - a process which favours the ill prepared, but obstinate negotiator.

Conclusion

Franchise relations are not going to change overnight, but many franchisee associations, franchisors, and counsel can learn a great deal from Mnookin's book on negotiation.

Finally, the thoughtful exercises Mnookin prescribes in managing the (6) traps are worth reviewing to see which could be employed in your franchise system.

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One of the most common provisions in franchise agreements is the "forum-selection" clause.

Under these provisions, the parties agree that any lawsuit filed by either one of the parties will be brought only in a court in a specified city and state. The chosen court will almost always be in the city where the franchisor has its home office.

A forum-selection clause is used as a cost-shifting tool in franchise contracts.

The franchisor, which presumably has a large number of franchisees in diverse geographic locations, would find it financially burdensome to have to hire different lawyers in a number of different states to defend or prosecute lawsuits against its franchisees. Using the forum-selection provision, it shifts the burden of traveling for a lawsuit (and obtaining counsel in a sometimes-remote forum) to the franchisee.

Some states have laws that consider forum-selection clauses in franchise agreements to be void - so that a franchisee protected by the state law will be able to sue and be sued in his or her home state.

Other states will stop short of voiding those provisions, but will permit a franchisee who sues the franchisor first to do so in his / her home jurisdiction.

Case Study: Maaco Franchising, Inc. v. Tainter

Even where these state laws do exist, they don't always carry the day. Take, for example, the recent case involving Maaco Franchising and two California-based franchisees. In 2004, Maaco entered into a franchise agreement with Richard and Diane Tainter for the operation of a Maaco automotive painting and repair shop located in Palo Alto, California.

The Franchise Agreement

The franchise agreement contained a Pennsylvania choice-of-law provision, as well as a forum-selection provision requiring that all litigation occur in Pennsylvania federal or state courts. Under the franchise agreement, the Tainters agreed that they would submit to the personal jurisdiction of Pennsylvania courts, and waived all objections to the jurisdiction or venue of any action brought in Pennsylvania. This type of language - requiring a franchisee to waive objections to the jurisdiction of the other state's courts - is common in franchise agreements.

Before signing the franchise agreement, the Tainters also received a franchise offering circular with a California-specific addendum. This type of addendum can be found in any franchise disclosure document where the franchisor is registered to sell franchises in a registration state like California.

The California addendum in the agreement stated that California has a statute that "might supersede" the franchise agreement, "including the areas of termination and renewal." Importantly, however, the franchise agreement itself did not have any state-specific addendum modifying the terms of the contract.

Maaco's lawsuit against the Tainters

In September 2012, Maaco sued the Tainters in September 2012, alleging that the Tainters failed to pay royalty and advertising fees, and for failing to comply with an audit. Maaco filed the lawsuit in Pennsylvania court (in accordance with the forum-selection clause).

Opposing Maaco's decision to sue them in Pennsylvania, the Tainters argued (among other things) that:

(1) the forum-selection clause was invalid because the parties did not reach a "meeting of the minds" agreeing to a forum outside California;

(2) the forum-selection clause should not be enforced because it is contrary to California's "strong public policy disfavoring the enforcement of out-of-state forum-selection clauses," citing California Business & Professions Code §20040.5; and

(3) that even if the forum-selection clause was valid and enforceable, other factors weighed in favor of transferring the case to the Northern District of California.

The Court analyzed the matter by referring to 28 U.S.C. §1404(a), which allows a court to transfer a case to any other district or division where the case could have been brought "for the convenience of parties and witnesses, and in the interests of justice." The Court recognized that the forum-selection clause in the contract was entitled to "substantial consideration," but that it would not be dispositive.

The Court noted that the Tainters, as the moving party, had the burden of showing why they should not be bound by the forum-selection clause and that a transfer was necessary in this case.

1. Meeting of the Minds

The Tainters argued that they did not "agree" to a forum outside of California based on the U.S. Court of Appeals for the Ninth Circuit's holding in Laxmi Investments, LLC v. Golf USA, 193 F.3d 1095, 1097 (9th Cir. 1999). In Laxmi, the court found that there was no "meeting of the minds" about the forum-selection clause because California Business & Professions Code §20040.5 prohibits franchise agreements from "restricting venue to a forum outside of California.

Based on the above statutory provision, the Tainters argued that they never agreed to a Pennsylvania forum for its dispute; in other words, that there was no "meeting of the minds" between the parties regarding the Pennsylvania forum-selection clause.

To support that argument, the Tainters pointed out language in the Franchise Disclosure Document (which said that California "might have statutes that supersede the Franchise Agreement") meant that Maaco could not insist on a forum outside of California.

Analyzing the Tainters' argument, the Court said that, "under federal law, forum-selection clauses are presumptively valid and enforceable unless enforcement is shown by the resisting party to be unreasonable under the circumstances."

To meet this burden, the resisting party must show:

(1) the clause was invalid for such reasons as fraud or overreaching;

(2) enforcement of the clause would contravene a strong public policy of the forum in which the suit is brought; or

(3) that enforcement of the clause would be so gravely difficult and inconvenient as to be unreasonable and unjust and that it would deprive the party of its day in court.

Reasoning that the unambiguous language in the agreement clearly stated that the parties waived any objection to the jurisdiction or venue of Pennsylvania courts, the Court found that the language in the separate disclosure document was "insufficient to negate the Tainters' express agreement to litigate in a Pennsylvania forum."

In other words, the fact that the disclosure document said that California law "might supersede" the parties' choice of Pennsylvania as the proper forum for disputes wasn't good enough to overcome the clear language of the contract.

As a result, the Court found that there was a meeting of the minds between the parties regarding the forum-selection clause in the Franchise Agreement.

2. Strong Public Policy

Next, the Tainters argued that the forum-selection clause was unenforceable as it contravened California's "strong public policy," as embodied in California Business & Professions Code §20040.5.

Turning to this argument, the Court said that the question is not whether enforcing a forum-selection clause is contrary to any strong public policy, but whether it would "contravene a strong public policy of the forum in which the suit is brought."

Pennsylvania courts, the Court said, regularly enforce clauses electing a Pennsylvania choice of forum. As a result, the Court held that the Tainters' "strong public policy" argument could not override enforcement of the forum-selection clause.

3. Transfer for Convenience of Parties and Witnesses

Lastly, the Tainters argued that the Court should transfer the case for the convenience of the parties and witnesses, as permitted by 28 U.S.C. §1404(a). The interests that can be considered under this Section are "plaintiff's forum preference as manifested in the original choice; the defendant's preference; whether the claim arose elsewhere; the convenience of the parties as indicated by their relative physical and financial condition; the convenience of the witnesses -- but only to the extent that the witnesses may actually be unavailable for trial in one of the fora; and the location of books and records." Quoting Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir. 1995).

The Court found that a California forum would certainly be more convenient for the Tainters, who live in the State.

Presumably, the Tainters' witnesses, books and records would all be located there.

On the other hand, the Court reasoned that Pennsylvania would be a more convenient forum to Maaco, which had its principal place of business in the State during its relationship with the Tainters and maintained offices there.

Noting that the function of a venue transfer is not to "shift inconvenience from one party to another," the Court held that a "plaintiffs' choice of venue should not be lightly disturbed," particularly in light of the contractual forum-selection clause.

Additionally, the Court said that Pennsylvania courts are more familiar with Pennsylvania law, which the parties had chosen as the law governing the franchise agreement. Therefore, the Court declined to order transfer of venue to California.

Maaco v. Tainter: Lessons Learned

Currently, many franchise registration states specifically require, as a condition to registration, that the franchise agreement have a state-specific addendum to the franchise agreement (as opposed to the disclosure document, as in the case of the Tainters) that says that the franchisee has the right to sue or be sued in her home state. Those provisions will usually be enforced.

The key takeaway for franchisors from Maaco v. Tainter is that forum-selection clauses are valuable tools that can help them shift some of the burden of litigation costs to its franchisees.

Courts in states that don't have special franchise laws will usually enforce forum-selection provisions, unless there is a clear reason not to do so. A state-specific addendum to a franchise agreement, which may be at play in certain franchise registration states, will usually be enough to require a court to transfer a case to the franchisee's home state.

For prospective franchisees, the lesson from Maaco v. Tainter is that it's important to read and understand the franchise agreement - and any state-specific addenda - before signing the contract. If your proposed franchise agreement contains a forum-selection clause, understand what that provision will mean to you if your relationship with the franchisor implodes.

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Franchise agreements were always too long - twenty years - in the early days of franchising. But you couldn't get a bank to loan mortgage money for a store build out on a twenty year note if you didn't have a twenty year franchise agreement. You didn't know that? That's why the agreements were for such long terms.

And, to make matters worse, in those days they usually provided for renewal of 'this agreement', rather than for renewal on the terms of whatever contract was then being used for new franchisees.

So the contract engineering failed to provide for system wide currency and essentially harmonized and rationalized terms of dealing across the scope of the system.

Now, franchise agreements tend to be for ten years, with renewal on the contract then being used for new franchisees.

The Evolution of Business Models

But the rates of change and evolutionary development in practically every business and market have escalated greatly. E-Commerce has further accelerated the ease and the speed of new competitive entry into any business when demand boosts appear.

Think of franchises that have typically sold products from expensive mall store locations, only to find that those formerly 'special' or 'exclusive' products started showing up in supermarkets and discount stores, and now on the Internet, making them more easily and less expensively accessible from sources other than those mall locations.

Food gift baskets, spiral sliced hams, vitamins and health foods are examples. Sam's club now carries Starbucks Coffee. Toys-R-Us is having a tough time due to toys being merely a group of hundreds of product groups available in enormous multi-category retail operations.

When a specialty product ends up in a supermarket or discount store where it is one of thousands of products available at a single location, the store can 'football' discount the specialty as a traffic builder and make its margins on its other products.

The mall site franchisee selling that single product line does not have that opportunity.

How does he sell at mall retail prices what the supermarket is using as a leader at much lower prices, where shoppers can simply throw the product in the cart and not have to carry it all over the mall?

With similar economic effect, saturation in the fast food business has destroyed margins and return on investment. Franchisees are less willing to invest in updating stores with lessened prospects for returns on that expenditure, and less willing to renew agreements on less favorable terms in order to remain in a business that is in the mature or decay stage of its life cycle.

The point of all this is that market changes are rapidly making franchise agreements less reliable as the set of rules by which a franchise system is operated.

Renewals - Is there Value?

More and more, your most successful franchisees are not interested in renewing their franchise agreements, not interested in continuing in the franchise relationship. They perceive little incremental value in associating with you for another term, because your techniques, like the techniques of everyone else, are not capable of turning back the clock to the easier money days when your concept was new and fresh and almost no one else was doing the same thing.

Along with their view of their own suffering, their franchisors are seeing lower initial fee income as fewer new franchises can be sold, more expensive operating costs at company owned stores with competition inhibiting price increases to keep up with expenses. Franchisors typically increase the number of stores as best they can, flooding markets and increasing the animosity that comes when one's franchisor is competing with him.

Franchisors are going on the Internet also, and these sales rarely are directed to the franchisees, but are taken more and more by the franchisor through direct on line sales.

Animosity keeps growing, and revolts happen.

Unfortunately, most franchisors are looking to their franchise agreements more than to what is happening in the market place, trying to force a relationship to work according to the agreed model rather than the reality model.

Termination Conditions - Legal and Business Reality

Attitudes about franchisees having to stick it out and play your tune because the contract says they must, and that you have a covenant not to compete to enforce if they leave, or a provision that allows you to take over their store if they leave, cause franchisors to mislead themselves into believing that they are more powerful than they really are sometimes.

But these scenarios are really more correctly evaluated from the perspective of chaos theory, because there are so many dependent variables at work that predictability of outcome is not just the product of contract drafting and market fluctuation.

Franchisees Revolt

Franchisees do not run to join in a fight as much as people would like to think.

There are techniques that tend to (but not always) isolate the leader(s) from the rest of the franchisee pack. Although few people think of it this way, the Protestant Reformation and the American Revolution worked in the exact same dynamic as a franchisee revolt.

Very few colonists fought King George. Most lay in the weeds, unwilling to take the risk of confrontation. They rightly believed, in the case of the American Revolution, that whatever the fighting colonists won would be winnings for all the colonies.

It isn't like that in franchise revolts, however. The folks who stand up and fight do not obtain anything for those who lacked the commitment to the struggle.

All too many times I have represented such franchisee groups, had many drop out or not join in the first place on the idea that they will get whatever the fighters win. In every instance, I have later heard from the less brave, wanting to get in on something that is already over, to board a train that left without them. Usually they simply get ground out or bought out very cheaply.

The management of franchisee dissidence is facilitated by tuning into what is happening in the system, not by seeing dissent and cowering in denial until you are in court as the franchisor defendant, in a fight not of your choosing, where you didn't get to pick or to frame the issues, where you go last and not first. When you are sufficiently alert to see it coming and to start planning for it, you have many, many more options.

Unfortunately, however, most franchisors wait until they are in court as defendants or until the franchisees start leaving and litigation to enforce post termination 'rights' becomes inevitable, on the belief that if you let one get away with it, the rest will follow.

When I evaluate a potential or actual revolt situation, I analyze it in multivariate contexts. There is no 'do this first' kind of approach. It is all done simultaneously in every mode. The order in which they are presented here is for convenience of expression only, and is not intended to be directional.

1. There is a need to understand what the market environment is doing to the system.

2. There is the issue of what that environment is doing to the franchisor and what the franchisor is doing to react to it.

3. There is the issue of what the franchisor's reaction is doing to the franchisees.

Structural considerations come into play-does the franchisor have company operated stores, and, if so, what are they contributing, if anything, to the perceived problems. The same questions are addressed to e-commerce, if that is a factor, and to how it is structured and how it is being operated. At the same time, advertising fund management is very frequently a focus of contention.

Then you look at the range of franchise agreement terms under which the system operates, and you ask questions to determine whether whatever it is the franchisor is doing conforms to those agreements, or at least, may be permitted by those agreements.

Along with this inquiry is the issue of whether, even though in conformity with terms of agreements, is what the franchisor is doing quite different from what was represented to the franchisees when they bought their franchises. This is more than technical, for even though statutes of limitation may have run out on misrepresentation claims in court, that plays a large role in how you manage the contention.

Ultimately, if the franchisor is doing everything right, in the sense that his agreements permit what he is doing, the franchisor has to make economic decisions. There are costs in ignoring the problems, and there are certainly costs in trying to solve the problems.

Trying to decide which costs to accept, and how much of them to accept, and to manage the enforcement of 'rights' issues, and to manage the 'propaganda' and 'political' issues are all absolutely obligatory aspects of franchisee revolt management.

There are no hard and fast rules, for the reason that each franchise system has its own 'baggage'. That baggage may be heavier or lighter depending upon whether there is more or less professional management in place, how difficult it is to deal with corporate ego issues that grew out of certain people having become addicted to always being told they are right.

Now that you are at the end of this article, do you feel like you have not been given a road map for franchisee revolt management? Good! There ain't no road map.

It''s a matter of complexity and sophistication that must be dealt with one situation at a time. Too many variables prevent a simple directional tutorial on how to do it for your company. What works for one company in this situation may be totally wrong for most other companies. It''s exactly like a recipe for making chili. Every ten miles down any road in Texas, the recipe for chili is different. Handling franchisee revolts for franchisors is just like that.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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Americans negotiating in China must understand the Chinese decision making process.

One of the difficulties negotiating Win-Win deals in China is widespread usage of gate-keepers (assistants and other access-controllers) in Chinese business.

Unlike their American counterparts, Chinese access-controllers often take on the appearance of important decision-makers, when in fact they are low-ranking functionaries.

The American gatekeeper says, "He's unavailable, would you like to leave a message?"

In China, you are more likely to hear, "He's leaving the country on business tomorrow and you need to send a detailed proposal including technical specs on your product or service by noon."

Gatekeeper as Messenger

The trick to handling gatekeepers in China is to understand that they are one-way, one-time messengers directly to your decision-makers office - and treat them that way.

You can't and should not negotiate with a gatekeeper - but you needn't obey him either. He wants a proposal that, according to him, will go right to the top people.

Treat this for what it is - a one shot delivery system. Craft your message accordingly.

Gatekeepers as information sources

The Chinese gatekeeper says a lot about the organization, decision-making structure and boss that he is working for - you just have to know what to look for.

Is he treating his boss with imperial deference? You'll be expected to do the same.

Is he hostile or condescending to foreigners? That probably means his boss is too.

Is he an informed, helpful, professional facilitator with the authority to begin and maintain a business relationship? That indicates his organization may make a good partner.

Most of all, the gatekeeper will tell you exactly what the company wants from you - he just wants it the next day, for free.

How can We handle this?

In many cases, the gatekeeper is a frustrated, neglected, disrespected poor wretch, toiling away in obscurity in the shallow end of the bureaucratic pool.

A little attention may go far. "I need your advice - how have past Western suppliers / partners handled this?" "How does your boss like to see information - tech specs, financials data or detailed explanation?" "What kind of proposals has he been happy with before?" "What would you do if you were part of our team?"

Dealing with gate-keepers

1. Identify what they want. HINT: It's probably not a transaction. Chinese gatekeepers are notorious for acquiring IP, plans and big-picture technical data. This can work for you or against you.
2. Control the content of your proposal or message. Figure that whatever information you provide will be lost and used against you. If it's advertising or a semi-public whitepaper - no problem. If it's highly sensitive or proprietary data, then that is a problem.
3. Information is a two-way street. Talk about "WE" a lot, and find out what others have done right in the past. Play on his desires to do a good job. "I don't want to waste your boss' time...", "I consider this a tremendous opportunity and I'm nervous about making a mistake..." Let him fill in the blanks on who makes the decisions, what their criteria will be. Try your best to get names and titles. If you can get him talking about the decision-making process, that's a win.
4. Don't invest anything you aren't afraid of losing - and that includes TIME. Gatekeepers are a direct, one-way conduit to the real decision-maker, and should be treated as such. Service providers in China have learned not to spend the time crafting detailed proposals - even outlines. Most of the consultants I know have a two page introduction prepared that they customize for prospects in China. Don't outline projects, provide timetables or analyze problems for free. Local service providers (probably related to the boss in some way) will get the actual contract based on your assessment.
5. Know your limits - and know when to walk away. If the gatekeeper was sent to steal information then this is never going to turn into a deal. Sometimes the most important piece of information is that the negotiation is not worth the time or effort.

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It seems to me, looking at this phenomenon over the 53 year history of my practice as a conflicts specialist/litigator, that most of what I have to try (or where I have had to be sufficiently aggressive to cause my adversaries to lower their demands to an acceptable level) could have been remedied in one tenth the time & for one tenth the expense.

The introductory phase of conflict presents rather similarly across the range of dispute causes/subjects.

They begin and develop in the same manner. There is a grain of dissatisfaction over some subject/event/program or other that is either not identified as it first begins to sprout or is given almost no weight.

Ignore Some Irritations

Many times, ignoring that first flicker of annoyance is the sensible thing to do, judging by hindsight because it never developed into fulminating melee.

Sensible people appreciate that no relationship, business or personal, is without occasional inconvenience.

Sensible people absorb the minor shocks/vicissitudes of ongoing relationships because the value of the relationship itself is an overall positive. With quality control relationship management the difference between the ebb and flow of normal relationships and problem development is much more discernible.

But that is relative, not an absolute, and the value morphs as the relationship develops over years - sometimes becoming more valuable and sometimes less.

There is a dependent relationship that is expressible quantitatively between length of relationship/severity and frequency of difficulties/quality of reward for staying in the relationship. An econometrician could assign values to each of these factors and the passage of time would cause them to move along lines that diverge and intersect in trends to provide a mean scale within which, given a large enough sample, one could posit relative satisfaction generalities and, by measuring deviations from the mean, posit the potential for eruptions. I promise that at this point I will stop all this econometric mumbo jumbo and get down to brass tacks.

The major target of this discussion is distributive systems, vertical in the instance of managing franchise and dealer relationships. The application is the same in all business relationships that endure over a significant period of time, but I am going to use the vertical distributive relationship as the focus of this article.

Frequently people enter commercial relationships with unrealistic expectations. This is sometimes the product of hype and sometimes worse than that. If there is no enforceable agreement providing for a term of years, the situation is easily remedied.

The remedy is not always cheap as investments in infrastructure may have been made in expectation of success.

If there is an agreement for a period of years the exit cost is often extremely high, both in terms of cash and other non cash elements (think move out/covenant not to compete/transfer of customer loyalties). Often the deal is as expected but does not succeed for other reasons, some economic and some just a failure of relationship management skill.

Those involved can sense when the tension begins to rise and can also appreciate when the tensions increase. They suppress the angst for as long as possible because they simply dislike confrontation and don't want to waste money lawyering up every time there is a pissing contest. Somehow they never just sit down and try to find a path to YES. Maybe even if they did that path would not be available for one or both. Why is that so frequently the case?

The process of a relationship becoming disputatious is similar to that of an illness progressing from a sneeze or cough to pneumonia. The issue is when to intervene and how to arrest this progression. There is no magic point. How that point is identified is affected by attitudes of caring or not caring; of follow up quality control communication or simply leaving the strategic health to the care of the tactical functionaries. But everyone reports to upstairs, and dissatisfaction where the rubber meets the road becomes amplified as it effervesces upward.

Large institutional companies operate upon the assumption that all is automatically normal and positive because in some sense the belief is that anything but utter calamity is affordable and someone down below may always be thrown under the bus in the process of cosmetic accountability.

But most of us aren't General Motors and most of us can't afford the General Motors attitude - nothing matters because we are professional grade people. Sadly, even calamity failed to alleviate the kind of arrogance that persists even today in that company - and in more like it.

In many companies there is official doctrine. One must agree with the official proclamation of what and where and how or be moved out of the organization. This reduces the potential value of internally generated relationship quality control.

In short, people are afraid of speaking up when their doing so could be extremely helpful if only there were open minds.

Where the game is to "make it" through your assignment and move on, leaving problems to the poor bastard who will take over from you in this position, effective trigger point spotting will simply not occur. In so many companies there is the middle management belief that upstairs never wants to hear anything except positive reports and will punish in one way or another those who raise "issues". They really don't give a damn, won't bother monitoring what is going on until it is lawyer up time.

Even at the General Motors level of wealth that system doesn't work. What then for the rest of the rational commercial world?

But, When Is It Just Too Much To Take?

Real people managing real companies that have to face real vicissitudes of relationship quality fluctuations have to be alert to trigger points that, if left unattended to, may sour important ongoing transactional success. Left unmonitored, even the best commercial relationship tends eventually to unravel.

For instance, your largest customer begins to believe that he is too important to you and that you will absorb all sorts of impositions in order to keep his business. This would include, stretching/exceeding credit terms, taking unauthorized discounts and allowances, making demands that you the seller, absorb the freight, seeking "gifts" and inclusion in perquisites that few others ever receive. The list goes on and on.

Many companies fail to recognize at an early point in this progression that some relationship discipline must be imposed to prevent this kind of malignancy from metastasizing. While the customer may be important to you, on these facts you are also important to him as a critical supplier on whose products or services he makes a lot of money downstream.

Doing nothing leads only to ultimate confrontation, because the more the customer gets away with these ploys the more he demands. Too much is never enough.

I start trial in such a case in three months. My client let this customer get away with far too much for too long, and when the axe finally had to fall, the customer sued. This particular scenario is one in which the customer has used similar tactics on others of his critical suppliers and has also ended up suing them.

The abusing customer should never win, but everything positive that might have been preserved is destroyed by failure to see the truth about the coming threat in time to defuse it.

Why The C-Suite Gets Bad Information

It is perhaps not fair to expect the people at the low end of the ladder to deal with their opposite numbers in client companies in handling potential problems. In an ideal environment they would report the issue upstream and a conscientious middle manager would take it to his boss for consideration. Then one of those people would take the initiative to contact his opposite number in the other company and deal with whatever it is that needs attention.

No one will say this, but making people fearful of expressing themselves in any way but the approved way for fear of infliction of punishment is precisely what Lenin and Stalin did following the Russian revolution. If you thought of how something may be working in your company to make it look like that, perhaps the failure of that method and the need to correct those impressions would be easier to recognize.

In a more advanced mode there could be a company ombudsman to whom people could go with identified oncoming issues, and the ombudsman would pull the laboring oar in getting upper management to address it positively. And if the ombudsman also had the authority to go consult with critical professional resources (legal, financial), including outside resources, the ability to head trouble off at the pass would indeed be enhanced.

Novel Retainer

I have my own way to handle this problem. I urge non litigation clients not to hire me on an hourly fee structure, but rather on a monthly or quarterly retainer that covers absolutely everything other than litigation/arbitration and out of pocket expenses.

That prevents people not calling me for assistance because they dislike knowing that when I pick up the phone the damn meter starts running. I am available 24/7 under that arrangement. The initial period of the retention is one of adjustment regarding whether the anticipated work turns out to be more or less than anticipated for the flat fee retainer, but as time passes the retainer gets adjusted up or down to keep it fair to everyone.

I urge consideration of this mode of relationship configuration upon my brother and sister attorneys. It may be less remunerative in the short term, but it builds a much better attorney-client relationship, so that in the longer term the economics are rather favorable.

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Just back from the wars, so to speak, I found that most folks are too socially emasculated through the process of institutionalized position sensitivity to even have an inkling about what to do when a dominant position person goes off the deep end and his actions threaten to destroy businesses if not brought to a screeching halt. Such was the war just concluded, in which we represented numerous franchisees of a franchisor who's point person thought and acted like a white bread Benito Mussolini.

This was a renewal issue in which the franchisees had the right to renew on the same terms they currently enjoyed unless the franchisor was then selling new franchises, in which instance they would have to sign the then current franchise agreement in order to renew.

Obviously, new franchise agreements are historically upon worse terms for franchisees than expiring agreements. At least that is the predominant experience in the franchising business.

Money, restrictions, franchisor prerogatives and other matters that impact the relative economics of a franchise relationship tend to move in favor of the franchisor with each new iteration of the agreement.

This franchisor was a more than over the hill operation and had not sold new franchises for about twenty years. It had seen the attrition of most of its franchisee population and did not even have an operations manual.

Peter the Point Man decided that the value of being his franchisee was far above then current relative economics and that he was not going to be so foolish as to honor renewal terms, no matter how clearly they may be stated in the soon to expire current agreements of my clients. They were the best performing franchisees, historically, in the system and had been there for about forty years. Had Old Pete been possessed of any good sense, he would have paid them to show him how to operate the company owned units which lost money while theirs prospered every year more and more.

Any econometrician would tell you that in these circumstances the relative value of the relationship among the parties were indeed skewed, but in favor of the franchisees rather than the franchisor. Had Old Pete simply gifted these franchisees with the entire company, he would have come out far better off economically compared to facing years upon years of continuing losses eventuating in the bankruptcy of his company.

These franchisees had been clients of mine for over thirty five years, having once before been confronted by an earlier edition of delusional point person. I sued the franchisor on their behalf then, and the results of that litigation was the ultimate cause of their having favorable contract terms now.

My clients believed that when renewal time came around this Bozo had plans to try to rip them off, and so we had almost a year head start in setting Him up for his comeuppance.

Franchisors love discussions. Discussions leave no tracks. Writings are tracks, and thus are despised by franchisors, especially if they have an agenda to be predatory and need deniability in case there is strong push back by the franchisees. Peter the Point Man, however, failed to recognize that our insistence upon having email confirmations and exchanges to prevent negotiations from being nothing more than conversations was providing us with a plainly visible trail of the development of his entire program to rip us off.

His arrogant lack of subtlety even went so far as to acknowledge his obligation to negotiate terms with us and then insist that the negotiations be restricted to only those issues raised by the franchisor.

He even went to the trouble to have his lawyers send us a proposed contract amendment saying just that.

No one signed that, on advice of counsel.

He then told us that business requirements prevented him from being able to negotiate the renewal terms right now and offered a one year extension of the same terms to accommodate his claimed business needs. In fact, what he did during that extension period was to have his lawyers create a spurious FDD, which he registered in Virginia so that he could claim that he was in reality engaged in selling new franchises and therefore exonerated from having to negotiate new terms with us or to offer renewal upon the same terms as before. He then imperiously insisted that we sign his new franchise agreement, which was full of incredibly stupid positions that no competent franchisor would ever put into his agreement.

To be sure, he also changed the economics drastically in his own favor (as if that needed to be said). The State of Virginia took one look at his company financial reports and immediately slapped him with an initial fee impound.

My clients had been successful business operators for over forty years, and had been in only one real battle royal in their entire lives, the earlier litigation with this same franchisor under other "leadership". They found it very out of character for me to insist that they seriously do things to bring about the entrapment of the present franchisor management. I had constantly to explain to them that if they didn't handle the situation as a prelude to a main battle they were going to lose their businesses.

They, like most folks, erroneously believed that they had obvious rights and that that was all that was necessary for the correct result to ensue.

They were initially incredulous when I explained to them that there is no right on earth that is self-executing, not even those in the Constitution. If you don't stand and defend your rights, they can easily be taken from you, and this was an obvious situation in which that was exactly what would happen unless we succeeded in entrapping the franchisor into revealing his hand in an evidentiarily usable manner.

They had never heard of such a thing, and their regular lawyers had no inkling or experience with this sort of confrontation technique. They were always fearful of giving offense and messing up their negotiating posture. They refused at first to believe that there was in this instance no such thing as negotiations and accordingly no such thing as a proper negotiating posture. Fearful of burning bridges and self-destructing, it required a lot of tough love quasi-military training to get them to go along with my urgings.

Only as the unfolding of the fact pattern revealed that I had absolutely correctly assessed the risk and danger profile did they come to accept the ancient truth that the only way to deal with a bully is to whip his ass half to death - or at least until he came to terms.

Peter the Point Man had no experience in working with a company that was actively selling franchises. His overlord had once before been with a franchising company that had, under his leadership, gone into bankruptcy. Between them both, they were playing with far less than a full deck - were several bricks short of a load.

Accordingly, they compounded mistake upon mistake. They failed totally to do what every real franchisor always does to market a franchise program. They even sent us a letter half way through the litigation saying that they hoped soon to have an operations manual ready for review. The list of bozo mistakes would provide a standup comic with at least fifteen minutes of material.

They informed the court that their position was that the issuance of the spurious FDD was all they needed to prove that they were indeed engaged in selling new franchises. They could not have posited a more ridiculous strategy. This was the easiest possible position for us to defeat. Four days before we were to take their depositions in anticipation of an immediate preliminary injunction hearing, they had an epiphany, and about a week later the case was resolved upon very favorable terms for my clients.

The lesson here is that while it is nice to have polished manners and live by reasonable rules of commercial civilization, there comes the moment when those rules do not apply. If you continue to live by those rules you will simply be eaten alive. In times like that you need representation that understands and understands how to execute battle plans that level any playing field.

When someone decides that a business relationship is there to serve the terms of an agreement rather than the agreement being there to serve the quality of the business relationship, the result will be calamity if not immediately changed. Usually that change can only be brought about by aggressive confrontation.

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As always, you can call me, RIchard Solomon, at 281-584-0519.

There are in every segment of our economy, at every moment of the day companies/people who sense that some significant project for which they bear responsibility is starting to move in a bad direction.

Whether it is:

1. A franchise system filling with disenchantment due to market changes for which requisite adjustments have not been found and made-

2. A fashion house trying to cope with designer disputes and threatened license terminations-

3. Dealers that need to be terminated in order to more effectively aligning the company's direction with its marketing strategy or foreign trade issues -

4. How to build a more international network and mitigate exposure to foreign jurisdictions should things not go as planned -

The list is endless - that movement from well being to impending serious difficulty arises.

The people to whom you regularly turn for guidance in more normal circumstances are less helpful when life starts to get tougher.

They may have long tenure and vast company and specific industry knowledge as well as knowledge of the people involved. However, theirs is not responsibility for stepping away from the immediate picture and providing calibrated options that can with econometric reliability be sorted and prioritized.

Finally, let us assume that the situation/company/relationships now coming into higher risk are worth saving. Some are so desperate that the die has been cast.

Most of these relationships are founded upon written agreements containing clauses taught in law school or by long custom that are terrible impediments to braking as brinks are more closely approached. Feeling trapped by inopportune language, most law firms I have encountered advise the pulling of triggers, giving notice of claim or default, stated in those stilted lawyerese that so endears our profession to the rest of the world.

But contracts have other clauses, largely unwritten in the traditional sense. They have become incorporated into the business model of the agreement by the force of experience and change. Lawyers who can read often can't find these clauses due to lack of substantive insight. They may be legal scholars, but this isn't a law school final exam.

If pulling triggers for fear of being accused of not exercising one's rights and thereby losing them could without sacrifice of position be replaced, would you consider it?

And what factors would you have to take into account to decide to take a more unorthodox approach to dispute avoidance that could save the deal/relationship/realignment project that you really wish to implement?

Begin with the metrics. The metrics are not a set of likely numbers if one approach is chosen. The metrics are differentials between performance number sets when alternatives are not only netted against each other, but considered in series. Yes. You can do both. If you know you can still fight if the preferred approach doesn't work, with no loss of position, could you ever even think of not doing this as I suggest you should?

Obviously this is not addressed to scorched earth egoists who like fiddle music in the midst of conflagration. Most companies are rational. It is to those rational companies that our approach makes the most sense.

Few people are always or absolutely right. In most instances there is room for adjustment. The passage of time alone suggests market changes that make old agreements less suitable to modern issue resolution.

Lawyers who believe only in contract language can never accomplish what I am speaking of.

If you would like to explore this avenue to rational prosperous relationship preservation, give us a call 281-584-0519.

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A colleague recently asked me this question:

"You've stated that defects in the FDD or disclosure process can sometimes be used by unhappy franchisees to exit their franchise systems, even if a significant amount of time has passed. What are the most common defects in the FDD or disclosure process that can be used in this way?"

This scenario is a focus of my practice and I've handled dozens of these situations for both franchisees and franchisors.

The question has two parts, which will be discussed in separate articles.

Part 1. What are some common significant disclosure violations?

Here are eight common disclosure violations which I regard as significant:

1. Failure to disclose sufficiently in advance of signing or taking payment (e.g., handing out the FDD at "Discovery Day" and then signing the contract without waiting the necessary 14-day period). In this scenario, the Receipts are typically not signed and dated, or they are signed later and backdated.

2. Making defective financial performance representations. Franchisors want to put their financial data in the best possible light, and sometimes they cherry pick data in violation of FTC guidelines.

3. Providing different or "updated" financial performance information after the FDD, but before contract signing, either verbally or in writing. Many franchisors decline to provide an Item 19 financial performance representation at all. That's the safest course legally for a franchisor, but it makes it hard to sell franchises. What do you tell a proposed franchise buyer when his bank asks him to prepare a budget for his loan application? If you give him some projections, that becomes an unlawful financial performance representation.

4. Failing to provide an updated FDD after the previous document expires. The documents have to be updated within 120 days after the end of a year.

5. Providing an updated FDD which does not include updated financial statements. The financial statement requirements can be confusing, but they are a fertile area to check for disclosure violations. Sometimes the footnotes contain information that conflicts with the disclosures in the FDD text.

6. Providing a parent company's financial statement in the FDD in lieu of franchisor financials, without also providing a guarantee of performance by the parent company.

7. Failing to address ownership of key trademarks by entities other than the franchisor. Check the trademark registrations to see if the trademark owner is the same as the franchisor. Often the business owner starts a new entity to operate the franchise, and sometimes the trademark will be shared between the franchised units and the preexisting company units. Is there an Agreement between the trademark owner and the franchise entity addressing this shared ownership? How is this relationship described in the FDD?

8. Failing to update a prior FDD before signing, where a material change requiring an updated version has occurred since FDD preparation.

If this material is relevant to YOUR situation,

please give me, Stan Dub, a call at: 216-991-4480

My education and experience in crisis avoidance and - if that fails - crisis management began rather early in my now more than 50 year professional practice.

The purpose of this article is to illustrate how the seeds of disaster are planted and grow, slowly at first in many instances and then explosively, and how best to avoid or manage those life threatening events.

The context is a story of three companies' experiences. One probably could not be avoided, as it was the product of the human tendencies that operate as it approaches critical mass and then explodes.

The other two were instances of avoidable mismanagement coupled with refusal to deal with anything that was not openly supportive of the agenda of a limited leader/owner - bullying as we conveniently call it today.

1. Let's deal with the giant company syndrome first.

It was the company's heyday. It led its field in almost everything it attempted. It had more money that just about any enterprise on earth. Its sales were more than the gross national product of several countries combined and its profits were mind boggling.

Department heads worried more that if they failed to go over their budgets the budgets would be reduced the following year. While enjoying an as yet unearned designation as an antitrust specialist, I was the lowest of the low in an enormous group of highly educated experienced people. What I really got to do was observe and learn.

No confidential information will be revealed in this article. Everything here is of public record and very old. Most of the people involved are long since gone to heaven.

In retrospect I think it is probably impossible for normal human beings to remain modest, humble and maintain their essential humanity in the face of so much wealth and power. I am not against wealth and power, but in this instance we are speaking of national level wealth and power - supernormal even for large companies.

Oddly enough, while antitrust enforcers sought and failed to bring it down, it ultimately brought itself down with inbred delusionality.

2. What I quickly learned was that most crises come from management blindness and resulting gross miscalculation.

The notion that one may be possessed of so much power, authority and wealth as to be immune from disastrous consequences is practically always the seed from which the tree of emergencies grows. This company was an extreme example of that, far more so than any other place I have ever been.

What I observed that opened my eyes to the notion that no one is sufficiently powerful to be immune to disaster was a trio of catastrophic instances of management arrogance and of management being oblivious to the opportunities for change in the marketplace.

• The management arrogance incident involved attempting to destroy a critic who had put his finger on a fundamental product weakness.

• No one was to be permitted publicly to suggest that this company was imperfect.

• The corporate braggadocios included such things as boasting that it was four deep in every position - the definition of wastefulness - and that its law department was The Praetorian Guard of the World's Largest Industrial Organization.

You just can't make this kind of stuff up.

The consequence of the incompetent attempt to destroy the critic was the establishment of organized insistence upon better automotive safety and the enactment of laws addressed to that and several other issues on which prior to that moment in history the company had had its own way. The genesis of the plot was laid to the law department.

Oddly enough, at the same time, its most effective potential competitor came out with a revolutionary design named The Ford Mustang that swept the market with excitement. Lee Iacocca really was the smartest man in the room.

Within a very short few years the Japanese, led by Honda, took up where Ford had begun and the era of the giant, powerful, fast, quick, gas guzzling behemoth of an automobile began to fade.

Ultimately, the product of such ingrained arrogance was the failure of the entire company and a federal bailout to try to save the jobs it potentially represented. In such a rarified atmosphere it is probably unrealistic to expect what would seem rational to normal people.

The recent Supreme Court of Canada's discussion the value mediation and the protection of confidential information exchanged during mediation, reminded me of the excellent program several years ago at the ABA Forum.

Mediators Peter Klarfeld, Michael K. Lewis, and Peter Silverman, collectively "KLS", discussed the advantages, disadvantages and benefits of mediation over litigation, for franchise disputes.

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

6 Advantages of Mediation over Litigation

KLS argued that there were at least six (6) benefits of mediation over litigation:

2. Informed risk management;

3. Creative solutions;

4. Preservation of relationship;

5. Mutually advantageous, and;

6. high success rate.

Finally, KLS believe that in a number of disputes, parties are more likely to live with their agreed upon settlements than find satisfaction with a Court judgment which may not speak to their business priorities.

4 Benefits Even When Mediation Doesn't Produce a Settlement

They also point to four (4) benefits of mediation even if there is not a settlement: reduced trial preparation, possible future settlement, more tempered appreciation of strength and weakness of case, and an overall reduction in misunderstandings and clarification of priorities.

3 Considerations of When Mediation is Superior

But mediation is not without its risks. Some parties use the mediation for pure delay, and there are times in which one party needs to make a statement through the trial process that certain behaviors will not be tolerated.

In sum, mediation is likely to be more effective than litigation if:

a) the parties wish to preserve their relationship, what KLS called "in-term disputes",

b) the dispute depends on business judgments rather than simple contractual analysis, and;

c) there is either a unilateral or mutual misunderstanding about positions which a mediator can reasonably dissolve.

Creating the Mediation Process in Advance

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 presented a thoughtful list of 4 issues to consider when drafting a mediation agreement for the franchise system.

1. Should the mediation be mandatory or not?

The stratetic point I really liked was from Peter Silverman. He pointed out one big 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.

Open Questions

KLS raised 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?

I wrote this in 2013, and it seems appropriate to revisit the topic, today.

Following on the heels of similar strikes in recent weeks in New York and Chicago, hundreds of St. Louis area fast food restaurant employees walked off the job May 9, which affected more than 30 area businesses including a number of fast food franchise businesses. The strikes spread to Detroit on May 10.

These employees joined a growing wave of protests over wages and other terms and conditions of employment in what is one of the fastest-growing segments in the U.S. labor market.

You may even remember similar actions by Wal-Mart employees on Black Friday in 2012.

Although strikes are often associated with labor unions, the workers involved in these impromptu strikes are not unionized.

Instead, the efforts are being supported by a coalition of organizations, including labor groups, nominally coined "alt-labor," that are not legally unions.

But this does not mean that their activities are not protected by U.S. labor laws, specifically the National Labor Relations Act ("NLRA"). Enacted in 1935, the NLRA protects the right of workers to join together to bargain collectively with their employer and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.

The NLRA also protects the right of workers to refrain from any and all such activities.

Among other things, employees covered by the NLRA (which includes most, but not all, private sector employees) have the right to walk out or strike, even if they are not in a union. Many employers who are unfamiliar with unions or do not regularly deal with unionized workforces, can sometimes fall into a trap for the unwary by disciplining or discharging employees who are engaged in protected, concerted activities such as a strike.

Even though failing to report for work or even walking out during the middle of a shift impacts an employer's operations and may, in fact, violate an attendance policy, depending on the circumstances, an employer may actually be prohibited from disciplining them or questioning them about such protected activities.

In some cases, however, striking and picketing may not be protected. One such circumstance involves what is known as "recognitional picketing." This occurs when employees, and perhaps non-employees, picket an employer with the goal of obtaining recognition. When employees (and non-employees) picketed Wal-Mart on Black Friday, Wal-Mart filed a charge with the National Labor Relations Board. This charge was ultimately resolved when the union involved agreed to cease organizing the employees.

For franchisors and franchisees, an ounce of prevention is truly worth a pound of cure. To lawfully confront the potential for such activities, wise and savvy employers need to train their supervisors and managers now, before any such activity begins. Trained managers and supervisors not only have the tools to respond effectively and lawfully should such an incident occur, but are vital to warding off such activities in the first place.

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

Rupert Barkoff, a "Dean" 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?

A franchisee who sued his franchisor for fraud learned the hard way why it's important to read the Franchise Disclosure Document, cover to cover, before buying a franchise.

A California franchisee of Big O Tires sued the company in California court, alleging that Big O defrauded him when it sold him a franchise.

The California Court of Appeals ruled against him because the disclosure document Big O gave to the franchisee before he bought contradicted each and every one of his claims.

Mr. Hailemariam purchased his Big O Tires franchise in February 2008. Before he bought the franchise, he received Big O's Uniform Franchise Offering Circular ("UFOC"). The UFOC was similar in content and structure to the Franchise Disclosure Document that franchisors are now legally required to give prospective franchisees.

After operating a store for little more than a year, Mr. Hailemariam closed it down due to financial difficulties. 'In August 2009, Mr. Hailemariam sued Big O in California state court alleging that the franchisor fraudulently induced him into purchasing a franchise.

Specifically, the franchisee alleged that Big O:

(1) told him (falsely) that he did not need experience to operate a tire store;

(2) provided exaggerated earnings claims;

(3) concealed from him that many of its franchisees had failed;

(4) told him that it would sell him tires at competitive prices, when the same tires were often available for less money from other sources;

(5) falsely stated that it develops new products and services; and

(6) had expertise in locating and outfitting stores.

Big O moved for summary judgment on the franchisee's claims. Based on a Colorado choice-of-law provision in the franchise agreement, the trial court held that Colorado law (and not California law) applied.

Reasonable Reliance

Under Colorado law, the Court said that a plaintiff claiming that he was defrauded must be able to show that he reasonably relied on the defendant's misrepresentation (or on the material facts that the defendant purposefully concealed).

Courts in Colorado apply the concept of "inquiry notice" when considering whether a plaintiff's reliance on alleged fraudulent statements was reasonable.

Quoting the Colorado Supreme Court, the Court summarized the doctrine as follows:

[W]hatever is notice enough to excite attention, and put the party upon his guard, and call for inquiry, is notice of everything to which such inquiry might have led. . . .

When a person has sufficient information to lead him to a fact, he shall be deemed conversant of it. . . . . The presumption is that, if the party affected by any fraudulent transaction or management might, with ordinary care and attention, have reasonably detected it, he reasonably had actual knowledge of it.

[As a result] [w]here the means of knowledge are at hand and equally available to both parties, and the subject of purchase is alike open to their inspection, if the purchaser does not avail himself of these means and opportunities, he will not be heard to say that he has been deceived by the vendor's representations.

Quoting Cherrington v. Woods 290 P.2d 226, 228 (Colo. 1955).

In other words, a person who receives a franchise disclosure document is supposed to read it. If he doesn't read the document, he can't later complain that he didn't know what was in it when he signed the franchise agreement. Moreover, if there was enough information in the disclosure document to allow the person to investigate the truth of the other party's claims, he can't later complain if he failed to do so.

The Franchisee's Fraud Claims

The Court held that statements made in the UFOC received by Mr. Hailemariam before he bought his Big O Tires franchise should be considered when determining whether he had access to those facts. Applying Colorado law to the facts, the Court examined each of the franchisee's fraud claims.

1. Exaggerated Earnings Claims

Regarding Mr. Hailemariam's claim that Big O exaggerated earnings claims in Item 19 of the UFOC, the Court examined Big O's UFOC, which stated: "BIG O DOES NOT GUARANTEE THE SUCCESS OR PROFITABILITY OF YOUR STORE IN ANY MANNER."

Big O also pointed to the actual language of Item 19, which included data from 211 stores. The data from the 211 stores supported Big O's own estimate of the average sales per store.

In Item 19 of the UFOC, Big O stated that it would provide substantiation for the data upon the franchisee's request, and stated that a franchisee should conduct an independent investigation of the information by contacting existing and former franchisees of the system that were listed in Item 20 of the UFOC.

But Mr. Hailemariam did neither of those things, and the Court found it significant that he failed to make those inquiries.

2. Concealing Failed Franchises

Regarding the franchisee's claim that Big O concealed from him the failure rate of its franchisees, Big O again pointed out that Item 20 of the UFOC contradicted Mr. Hailemariam's claim.

Specifically, Big O showed that the UFOC specifically listed the number of transferred, cancelled, and terminated franchises during the periods specified in the UFOC - and that if Mr. Hailemariam had bothered to read the UFOC, he would have known exactly what the failure rate was.

3. Tire Sale Prices

Turning to the allegation that Big O misrepresented to Mr. Hailemariam that it would sell him tires at competitive prices, Big O again referred to the UFOC. Big O argued, and the Court found it significant that, Big O did not guarantee any specific supply of tires, and the franchise agreement did not contain any provision obligating Big O to supply tires to franchisees at competitive prices.

What the franchise agreement did say is that Big O was only required to provide tires to franchisees "to the extent available," and that Big O could set the recommended prices for the tires.

So again, the clear language of the UFOC rebutted Mr. Hailemariam's claims.

4. Store Location

Mr. Hailemariam claimed that Big O misrepresented that it had certain expertise in locating and outfitting stores, when in actuality the site he selected with Big O was not a profitable or good location. In response, Big O noted that the UFOC specifically told Mr. Hailemariam that the "final decision" regarding a store's location was left to him, and that Big O disclaimed any liability for that decision.

Because the UFOC stated that selection of a location was entirely the franchisee's responsibility, and not Big O's, the Court gave no credence to that claim, either.

5. Need For Experience

Considering Mr. Hailemariam's claim that Big O (falsely) told him that a franchisee did not need experience in the tire business, the Court found it significant that the UFOC contained this disclaimer:

BIG O DOES NOT GUARANTEE THE SUCCESS OR PROFITABILITY OF YOUR STORE IN ANY MANNER.

Mr. Hailemariam acknowledged this disclaimer in his Franchise Agreement, which the Court found significant in overcoming the fraud claim.

Failure To Read The UFOC

With regard to all of the franchisee's fraud claims, the Court found it significant that, on the cover page of the UFOC, Mr. Hailemariam was admonished to read the circular carefully and show it to an accountant. The franchisee admitted that he did neither.

The franchisee's failure to read the UFOC was especially significant because he negotiated with Big O for three years (since 2005) before executing the franchise agreement and consulted with an attorney in obtaining the lease for his store.

Despite this long period of time - and his having sought legal counsel to obtain a lease -- he paid little attention to Big O's franchise offering circular and franchise agreement, and never sought legal advice regarding them.

Under the doctrine of inquiry notice, the Court found that Mr. Hailemariam should be charged with knowing all of the information in those franchise documents.

Last, the Court gave considerable weight to an integration clause in the franchise agreement, where the franchisee acknowledged that he was "not relying on any promises of Big O which are not contained in the Big O franchise agreement . . . [or the] accompanying Franchise Offering Circular."

Based on the disclosures, statements, and disclaimers made in Big O's franchise offering circular and franchise agreement, the Court held that Mr. Hailemariam could not have reasonably relied on any of Big O's alleged misrepresentations or concealed material facts. As a result, the Court granted summary judgment in favor of Big O and against the franchisee. The Court of Appeals affirmed the trial Court's judgment in all respects.

Lessons For Franchisees and Franchisors

If you are considering buying a franchise, this case is a warning of the importance of actually reading your Franchise Disclosure Document before you sign on the dotted line. It also illustrates the importance of hiring an experienced franchise attorney to help you understand your legal obligations before committing to a franchise.

If you are a franchisor, this case shows why it's important to have a well-written and legally compliant Franchise Disclosure Document. Big O was able to win this lawsuit because its UFOC specifically contradicted each one of the franchisee's claims.

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To read more of Matthew's articles on Franchising Law, please click here.

Franchisee association leaders confront potential system wide disputes in many key areas such as:

Note that this list focuses on issues most likely to affect existing franchisees, i.e. your constituent members, under their existing franchise agreements. Claims arising in the sales process, e.g. fraudulent inducement or registration/disclosure violations, may also be system-wide affecting franchisees that purchased in particular time periods.

What is the best way to proceed legally? There are three choices:

1. Class actions
2. Associations as the plaintiff
3. Test cases,

Determining the best way to proceed involves questions of time, effect, and cost, as well as political considerations with respect to your membership:

What is the quickest way to resolve the problem?
What is the least costly way to resolve the problem?
What legal option offers the strongest potential impact?
What legal option will draw the greatest support from the franchisees?

1. CLASS ACTIONS

Advantages:

Potentially the largest recovery on behalf of all affected franchisees
Potentially the greatest "buy in" from franchisees, who will be members of the class

Disadvantages:

Increased prevalence of class action waivers
Selecting the best named plaintiffs
Costs of notice (possible shifting to defendant)
Delay and difficulty of obtaining class certification
Avoiding conflicts of interest by different subclasses
Pressure to settle by contingent fee attorneys

2. ASSOCIATIONS AS PLAINTIFF

Advantages

Potentially the easiest case to manage.

Disadvantages

Usually the Association cannot claim damages for its members. Claims for declaratory or injunctive relief are more appropriate.
Delay and difficulty establishing association standing:

(i) Whether the members of the Association would have standing to sue in their own names;

(ii) Whether the issues presented are germane to the Association's purpose in protecting and enhancing the economic rights of its members; and

(iii) Whether the claims asserted or the relief requested by the Association requires the participation of individual members.

Franchisors are likely to question whether the Association truly speaks for "all" or "most" franchisees. The courts have discretion to deny association standing for "prudential" reasons going beyond the three-part test above.

3. TEST CASES

Advantages:

Avoids the procedural issues inherent in class actions or association plaintiff cases, hence, may be the quickest and most cost effective solution.
The principle of "offensive collateral estoppel" means that a franchisor can be bound by the result in one case, when other franchisees present similar claims.  Well-suited to renewal issues. Well-suited to "individual impact" cases.

Franchisors are likely to react to these claims and even to potential claims - e.g. the Grill-n-Chill cases.  They may not give the association credit, but they will react!

Disadvantages:

Selecting the right cases.
Getting a franchisee to step up to the plate.
Getting other franchisees to support the funding.
"Offensive collateral estoppel" after arbitration is generally not available.
Statute of limitations concerns.

4. SOME RECENT SUCCESSES FOR FRANCHISEES

A) Protection of Renewing Franchises and Franchisee Assets

In a successful regional lawn care system, the franchise agreements had historically provided that the franchisees themselves owned their customer lists, which is the most important asset of their business. In recent years the franchisor changed the franchise agreement to provide that the franchisor owned the franchisee's customer lists. Long term franchisees coming up for renewal faced these new agreements, as they would be required to sign the "then current" franchise agreement as a condition of renewal.

Upon being retained, we created an independent franchisee association seeking a negotiated solution to protect the franchisee's ownership of their customer lists.

When the franchisor initially refused to negotiate, we filed suit on behalf of two "test case" franchisees alleging that the franchisor had breached its duty of good faith and fair dealing in purporting to require a renewing franchisee to sign a new franchise agreement that would result in the transfer of assets to the franchisor without consideration. After the briefing of cross-motions for summary judgment, the franchisor relented and agreed to new contract language for its renewing franchisees that would protect their equity in the value of their customer lists.

B) Win-Win Settlement for a National Brand Independent Franchisee Association

Following an evidentiary hearing and closing argument in arbitration as lead trial counsel, we have negotiated a win-win settlement that preserves the independent association's ability to attend and monitor all meetings of the franchisee advisory council, which the franchisor sponsors, including the FAC's private dinner meetings and or other executive sessions from which the franchisor had sought to exclude the association's representative.

This settlement achieves the association's key goal of transparency, i.e. that all FAC activities must be transparent for the benefit of all system franchisees, thus creating "checks and balances" to prevent the franchisor from exercising undue influence over FAC members and to keep the FAC from becoming a rubber stamp.

C) Protecting Franchisees When The Franchisor Files Bankruptcy

When Giordano's (a popular Chicago pizza restaurant brand) filed for bankruptcy protection due to financial problems being experienced by its shareholders, the majority of franchisees retained a bankruptcy counsel to protect their interests. The bankruptcy attorney then enlisted CDC to defend the franchisees from the Trustee's complaint that the franchisees had failed to pay royalties and to allege counterclaims in the adversary proceeding, alleging that the franchisor had breached its contracts (and the duty of good faith and fair dealing) by requiring the franchisees to pay above-market prices to a franchisor-owned commissary for basic ingredients such as cheese, sauces and dough.

In negotiating with the Trustee, a comprehensive settlement was reached whereby the franchisees will receive significant protection against unfair pricing including the freedom to shop elsewhere and to prepare their own sauces and dough. The franchisees also receive 10-year extensions of their franchise terms and reform of the advertising program.

Lawsuits and arbitrations often sort out disputes in their legal sense.

They rarely sort out disputes in a satisfactory personal, business or financial sense.

Anyone familiar with the litigation and arbitration process can tell you about how unsatisfactory the result was in most instances.

• They cost a fortune.
• Think of the legal fees.
• Think of the administrative costs (court reporters, expert witnesses, transcripts, travel, and the value of company resources wasted in the process).
• Think of how little you achieved compared to what you hoped to achieve.

A few people come out of the process glad that they did it. Many do not.

There are better ways to manage disputes. After fifty years of law practice, I have learned how to avoid them rather than embrace them. The difference is incredibly better.

In any business context people can begin to become unhappy with their relationship.

The reasons for that are almost endless. The buildup of every full blown dispute began substantially before it came to "lawyering up" and the end of it came long after.

A large part of the reason is that people naturally seek to avoid confrontation. They don't want to deal with it. It isn't high on anyone's list. And so in most instances it gets worse rather than better.

Positions are taken that are defensive in the confrontation sense - what if we come to blows kinds of things. People write things, memos, emails, instructions that make matters worse rather than better.

Months and sometimes years are spent in mutual distrust (to put it nicely) and people do all the wrong things, like send each other accusatory emails and far worse.

The value of whatever the relationship may have been intended to be in the beginning is lost, at least to one side of this, but it keeps on going, more weed than flower.

That's how conflict and dispute management usually works. Anyone in business for a long time has probably experienced some or all of this. Not everything we do works out the way we intended.

How can we change the way this is traditionally handled so that the length of its infectious presence is minimized and its cost greatly reduced?

Where do you begin in trying to answer the question whether to try this better way of conflict avoidance?

To begin, one truth needs to be recognized: Anger has a Value of Zero.

If you can convince yourself of the truth that anger has no value, and if you can see that earlier rather than later dispute avoidance effort holds significant potential for favorable results, we can begin to bring costly confrontations to less destructive conclusions more quickly.

At the point at which you are thinking of sending someone an accusatory email, you are about at the end of confrontation avoidance at reasonable economic cost. If you have just received an accusatory email, this is your last practical chance to step back from the brink.

Part of the war persona is the ancient battle boast - I am wonderful and you are terrible.

If someone made you read BEOWULF in high school or college then you know what that ritual is all about. This is a tipping point that people do not recognize. They think it is a beginning. It is way past the beginning. This problem began way before that email, and if you had recognized it well before that moment you might never be sending or receiving it.

When you think of all you spent after that email went out in your last "fight to the death", you will understand the savings of funds and resources associated with my approach.

There is a pigeonhole practice for dispute avoidance called Conciliatory Law Practice.

But, what I am suggesting is way beyond that, far from any touchy feely politically correct exercise. This is hardball played with intellectual acuity rather than with noise.

Specifically, there are always ways to derive valuations of potential conflict results. Among those valuations there is one or more that both you and your potential adversary can live with, no matter what the nature of the dispute. These valuations are not solely derived through accounting exercises.

Accounting is a numbers only game.

If you have ever seen this work you will never handle potential disputes in any other manner?

Can a completely unreasonable person refuse to participate as a matter of irrational obstinacy? Sure. Then you can always go back to wasting resources in all out confrontation with nothing lost by way of positions having been compromised. Is that likely to happen?

Probably not. I have seen very angry people awaken to the realization that this is the best way possible to deal with disagreement. It is how you find the leverage point that makes this work.

Often that requires some very outside the box thinking.

A large portion of the difficulty and expense of dispute resolution is that there are pre-emergence symptoms that are not recognized and dealt with.

Financial advisors evaluate and assist in the management of financial variables. There are other kinds of variables that impact the humanities side of company performance as well as its financials. If these are taught about in school, few people get passing grades and most don't take the course.

Business degree curricula being certificate oriented and template compliant regimes such as they are, the analysis and competent management of non-arithmetic variables are beyond their scope and capability.

What is taught is that nice people do right and you are a nice person so you must be doing right all/most of the time. Since neither proposition is regularly true in most instances, troubles happen.

No amount of instruction can rule out disputes. Disputatious situations will arise no matter what. What is unfortunate is that they are not identified with sufficient anticipation and not competently managed so that their impact is negated or minimized. Dispute anticipation can't be taught. This comes only with years of actual dispute management/resolution experience that enables one to see what it was that caused the disputes to arise in the first place and in retrospect identify when a dispute began to take root.

I have spent so much time over so many years going through case files and interviewing the people involved in so many lawsuits that a sensitivity to moment of arising and methods of avoidance simply became part of my psyche. In later years I can recall conversations with client managers in which the real goal was not in the resolution of the situation but in the avoidance of blame for its having happened. This, simply put, is unnecessary.

How does one go about not having to worry about blame for difficulties?

Dispute forecasting is both art and science. It does not readily lend itself to hourly rated retention, as the passage of time during which difficulties are identified/anticipated, how best to manage them is identified through collegial consensus, and the chosen method(s) implemented make hourly rated expenses prohibitive. Mission creep and the incentive to maximize billing poison the quality of the endeavor.

In addition, the resource to provide the expertise is not usually conducive to appointment to officer or director status. The resource needs to remain outside and to be involved in doing the same things for other companies in order to maximize its usefulness. A resource with only one client quickly becomes more fearful of alienating that client than focused on confronting root causes of difficulties. The ability to move on without suffering economic dislocation is indispensable to this kind of work.

How then does one establish and carry out being someone's effective dispute avoidance/management resource?

I believe the most effective relationship in the performance of these functions is a continuous presence/availability. Now that we have such things as email and electronic file transfer, we do not need to be constantly under foot. We can be available for face to face meetings at client need or convenience, but most of this can be performed remotely.

Retention terms should be periodic but not hourly. The resource and the client can come to mutually acceptable terms per month or quarter so that mission creep and billing incentives are removed from the scene. Since this kind of work requires the establishment of trusting relationships with relevant management and open channels of communication with no increase in project cost, this longer periodic arrangement fits/works better than any other.

The alternative is what companies suffer through now. A conflict on any given situation begins to arise. It is swept under the rug for as long as possible. Eventually it grows, like Rossini's description of slander, from a whisper to cannon fire. During this period of development, memos are written, emails are sent, and angry conversations occur that are later received in evidence or memorialized in deposition testimony transcripts and dueling affidavits. When the lawyers finally get involved the situation is on fire, the expenses are horrific (including management dislocation), and in many cases the resulting damages can destroy or financially undermine a company.

This unfortunate set of circumstances is no longer necessary. People need to feel free to deal up front with negative issues without career threatening consequences. When significant disputes can be avoided through competent variable management techniques, these negative impacts can be eliminated or so mitigated that threat levels are not critical. Of course conscious, intentional misconduct is an exception that nothing can eliminate. However, vindictiveness and scofflaw behavior are rare notwithstanding all the attention they get in the newspapers and on TV.

Most folks want to play reasonably close to the rules. The more you think about this the better it sounds and the more you will want to consider this approach.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

There are in every segment of our economy, at every moment of the day companies/people who sense that some significant project for which they bear responsibility is starting to move in a bad direction.

Whether it is a franchise system filling with disenchantment due to market changes for which requisite adjustments have not been found and made; or a fashion house trying to cope with designer disputes and threatened license terminations; dealers that need to be terminated in order to more effectively aligning the company's direction with its marketing strategy or foreign trade issues - how to build a more international network and mitigate exposure to foreign jurisdictions should things not go as planned - the list is endless - that movement from well being to impending serious difficulty arises.

The people to whom you regularly turn for guidance in more normal circumstances are less helpful when life starts to get tougher. They may have long tenure and vast company and specific industry knowledge as well as knowledge of the people involved. However, theirs is not responsibility for stepping away from the immediate picture and providing calibrated options that can with econometric reliability be sorted and prioritized.

Finally, let us assume that the situation/company/relationships now coming into higher risk are worth saving. Some are so desperate that the die has been cast.

Most of these relationships are founded upon written agreements containing clauses taught in law school or by long custom that are terrible impediments to braking as brinks are more closely approached. Feeling trapped by inopportune language, most law firms I have encountered advise the pulling of triggers, giving notice of claim or default, stated in those stilted lawyerese that so endears our profession to the rest of the world.

But contracts have other clauses, largely unwritten in the traditional sense. They have become incorporated into the business model of the agreement by the force of experience and change. Lawyers who can read often can't find these clauses due to lack of substantive insight. They may be legal scholars, but this isn't a law school final exam.

If pulling triggers for fear of being accused of not exercising one's rights and thereby losing them could without sacrifice of position be replaced, would you consider it? And what factors would you have to take into account to decide to take a more unorthodox approach to dispute avoidance that could save the deal/relationship/realignment project that you really wish to implement?

Begin with the metrics. The metrics are not a set of likely numbers if one approach is chosen. The metrics are differentials between performance number sets when alternatives are not only netted against each other, but considered in series. Yes. You can do both. If you know you can still fight if the preferred approach doesn't work, with no loss of position, could you ever even think of not doing this as I suggest you should?

Obviously this is not addressed to scorched earth egoists who like fiddle music in the midst of conflagration. Most companies are rational. It is to those rational companies that our approach makes the most sense. Few people are always or absolutely right. In most instances there is room for adjustment. The passage of time alone suggests market changes that make old agreements less suitable to modern issue resolution. Lawyers who believe only in contract language can never accomplish what I am speaking of.

If you would like to explore this avenue to rational prosperous relationship preservation, give us a call at 281-584-0519.

Trouble hides in the weeds for a while before it actually strikes out and bites.

There is little difference between finding out where and what it is and snake hunting.

In the corporate world, the two most probable snake hunters will be the General Counsel and the Chief Financial Officer.

The CEO/Chairman may liminally sense it but people in that role tend to deny it for as long as possible.

They don't want to be distracted or confronted by it and they don't want to think about the expense of dealing with it. That allows it to fester a bit.

Eventually someone with awareness of the situation will walk into the General Counsel's or CFO"s office and start a conversation that leads to revealing what is hiding in the weeds..

The GC or CFO will be the person who brings it to the attention of the CEO, at which point the CEO recognizes as the result of that conversation that this must be dealt with or the costs associated with dealing with it will get out of control.

Real trouble can't be dealt with via publicity or advertising.

General Motors has been advertising for years that its management are all "professional grade" and they are going to take at least a $ 750,000,000 hit for shoving its faulty ignition switch issue under the rug for several years and for power steering malfunctions of several year's standing - about 3.5 million cars.

Toyota is about to take a similar hit.

Johnson & Johnson has been doing this for decades.

Someone in the past knew of the problem and decided to try to conceal it and fix the aboveground part of it on the cheap. That almost never works. The company is just deluding itself.

Scores of other companies do this every year.

They never seem to learn.

Denial is a very strong impulse.

Waiting to deal with it until after your potential adversaries have already lawyered up is a very wasteful approach. You can make a much better arrangement for your company if you lead the way. The humiliation and injury to sense of integrity associated with GM's head engineer on this particular matter testifying under oath at his deposition that he does not recall the matter; when it came up; making any decision not to fix the defective cars that already went out to the market, but just to correct it going forward are simply tragic.

When those who know are so afraid to tell the truth for fear of being fired, your company had made a terrible blunder.

Even if GM can afford $300,000,000. In addition GM has now taken the Chevrolet Cruze off the market and Edsels itself beyond anything in history. Professional grade? Yeah right! This is what comes from head in the sand techniques of dealing with impending crises. These were known long ago and nothing helpful was done.

Your company may not have the financial depth to take these hits periodically.

My belief regarding who are the first to begin to register impending trouble is based on the fact that it is always the General Counsel or the CFO who is the first to call me and suggest we visit.

They are the two most likely places that management go to for consolation and direction when bad things are on the horizon. They are usually the people in whom most managers have the most confidence.

Those are the guys to talk to if you are a crisis avoidance specialist.

Sometimes it is their outside law firm if company management does not want it known that they have brought in a crisis specialist,

If potential crisis is perceived it should never be taken by a company's regular law firm.

The reason for that is that they have an inherent conflict. Their first concern is always going to be for self preservation. Either they may have had a hand in the trouble - think Enron - or they tend generally to be ultra possessive about other lawyers being allowed to get close to their clients. If you have ever watched them at a convention with a client person, it is fun to watch them cling to these folks constantly to avoid any other lawyer getting a chance to be alone with them, even for a second. If you know what to watch for, it is hilarious.

Many a crisis situation has been mishandled for just that reason. Confidentiality obligations keep me from telling some horror stories.

They tend to call who they know. The worse the matter is perceived to be, the more likely it should and will go to a specialist rather than to their usual law firm.

There may be liaison with both groups for a short period, but the crisis specialist has a different perception of how potential bet the company situations should be handled. For one thing, putting a lid on the PR folks is an immediate must. What goes out of a company has to be carefully and centrally controlled, and PR template denials are usually the worst opening gambit. If you are being compelled to say something by a stock exchange you are very late in knowing about the issues arising.

But even then the PR auto deny gambit is usually a wrong move. In this day of people tweeting their bloody lives away, control over unvetted public statements by the company itself must be as tight as possible.

Sometimes it isn't a business dispute, but a problem of some key person or group being involved in improper and potentially embarrassing conduct, the scope of which is limited only by the human imagination. Corporate board room types are not well versed in how to manage this kind of damage control, but the first place the news will go is to the GC or the CFO in all likelihood. That is the moment when (after the CEO is advised) the potential crisis management specialist needs to be called.

Misconduct by a key person may be exploited for economic advantage and it may have been engineered deliberately just for that purpose.

Anywhere in the world. Any kind of matter at all.

The difference between the normal course difficult situation and the impending potential crisis is that the latter cannot be dealt with using template approaches.

Template approaches are taught in every law and business school and is practiced by every medium/large law firm and PR group.

Why that is inappropriate and why it usually leads to a terrible result is another story, but it usually does not get you where you want to be. In a really terrible situation, a bet the company problem template approaches are regularly disastrous.

Finally, another nice attribute of the crisis specialist is that, since he won't be anything like the people you socialize with, you are done with him after the conclusion of this one situation.

You can then go back to the golf pals with no bad blood hanging over those relationships.

For the 5 Most Fascinating Stories, a weekly report, click here & sign up.

As always, you can call me, RIchard Solomon, at 281-584-0519.

The temptation is to think of this title as some word game without substance. If you give yourself a chance here you may see something very worthwhile and you may even want to put your company on this regimen rather than what you now have/use.

Litigation management is currently thought by most companies to consist of having an in house ex litigator monitor and work with the company's outside law firm(s) to shepherd cases through their lifecycle, relieving management of that burden and trying to keep a lid on outside law firm litigation expenses.

It quickly becomes rather inbred in many dimensional facets that have negative or at best neutral implications.

That is a really costly way to proceed and promises no happier resolution of disagreements that what I am going to propose here.

The system was born of less than imaginative contract draftsmanship (in cases dealing with accused default behavior in contract settings).

Since the scope of this can be made rather large, I will confine this discussion, the first in an intended series, to business disputes arising out of contractual relationships and in some instances tortious behavior as well.

Franchising is full of these instances. The fashion world is full of these instances. Just about all licensing of technology and the performing arts are very similar.

(I would prefer at this point to exclude from this discussion the extremely large technology licensing dispute territory for the reasons that there we are usually talking about giant parties to which legal expenses are thought of as chump change, and that antitrust and market opening considerations are always hovering over every aspect of these disputes. They are in those respects somewhat different in their management profiles than "normal" business dispute management.)

Almost all substantial business agreements provide that in the event there is a claim by one party that another party is engaging in behavior amounting to a default, prompt notice must be given in writing by the complaining party.

To be sure, some of the personalities involved have already discussed the issues and failed to resolve them, which is why the contract requires trigger pulling.

In my never humble opinion the main reason why this trigger is so often pulled is that in this stage of dealing with the problem the specific management resources have no resort to expert dispute resolution assistance.

Very few companies can afford or justify having a dispute resolution management expert on the payroll, and almost none of their outside firms have anyone capable and prepared to perform that role.

Actually, it is much more profitable for the outside law firm for the situation not to be resolved quickly and amicably at that point.

The pulling of this trigger inevitably calls for the writing of a strongly accusatory letter to the opposite party setting forth the complaining party's position in rather aggressive terms.

This, of course, though professionally correct, is really calculated to throw down a gauntlet, the single worst thing that could be done at this moment. It also starts a quick clock in most instances within which one must sort it out or whip it out, as we say in Texas.

This is the standard of American commercial corporate law practice, taught in every law school and practiced by all the right law firms - and it is the worst approach that could be devised.

Obviously the parties may "grant" each other extensions of time to do this or that, but the tone has now been set.

They aren't getting ready to get this resolved.

They are getting ready to go to war over it. In any privately held company where the leader is spending his/her own money, unless there are giant ego issues, this should instantly be recognized as insane and the company's lawyers should be asked to explain why such a terrible regimen has been inflicted on the company by those believed to be protecting its best interests.

Just about every time I get called in to help with a bad situation, this nonsense is inevitably what I find has been done.

The standard reasons given for the terrible first letter is that supposedly if you don't laundry list every blemish on the opposing party's face you will be claimed to have waived what was omitted and to have ratified that omission as now a part of the working agreement in question.

Rubbish! It really is the obvious primeval gauntlet throwing.

What should be done, even in the presence of gauntlet throwing contract clauses, is for disagreements with third parties should be given professional attention as they arise.

That is the moment when management can most profit from professional expert guidance.

Since your company's current legal resources do not include this focused resource, it should be found and summoned for discussion re how best to proceed, and then a decision made whether the recommendation is worth pursuing.

If the decision is to go with this approach, the gauntlet throwing contract clauses can be finessed as the immediate situation dictates it be handled, hopefully prior to the name calling stage of the relationship, but even if it is already too late for that to be avoided. After all, if you have already called someone a sonofabitch, s/he has also done the same to you, so the books are balanced albeit not at the optimum level.

If you like what you see, retain the resolution expert and observe how this approach works as well as how it preserves everyone's right to revert to combat in the event it is not bearing fruit.

No positions are compromised when this is done correctly. There is no downside risk other than that you may miss out on an expensive fight.

(As odd as it may seem, some clients have actually received CYA letters from their outside law firms disclaiming responsibility if following my approach backfires and bites them in the ass.

That has never happened yet, thank goodness. This doesn't always work. When it doesn't work no rights, positions or leverage have been lost and very little money has been spent, comparatively speaking. When it does work, which is most of the time, it works wonderfully.)

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As always, you can call me, RIchard Solomon, at 281-584-0519.

The next major economic blunder I witnessed enabled me for the first time to take the matter out of the hands of the blunderers.

A major client had acquired the leading company in its industry segment. The government attacked the acquisition under the antitrust laws.

The company's large Wall Street outside law firm with a partner on the company board recommended that the company simply roll over and agree to divestiture because no company had ever beaten the government in a merger case brought under Section 7 of the Clayton Act.

I opposed that and, to make a long story short, that was the first time the government ever lost a merger case under Section 7 of the Clayton Act.

It was then I began to realize that not having over the horizon insight into crisis avoidance/management did not have to be an incurable disease. You must immediately look beyond your normal representational resources for a specialist who can handle bet the company situations.

Later, after I had established my own law practice as a boutique business litigation resource, I had many more occasions to be that specialist.

A couple of other stories will help the reader with insight into how I handle potentially disastrous situations by going outside the box and looking back into the interstices of how the issues began to develop. I can now usually head them off or resolve them if I wasn't lucky enough to have been brought in at the very beginning before it went viral.

These examples developed in the following manner and they blew up in the clients' faces at just about exactly the same moment.

1. CEO - Great Leader, Terrible Witness

In the first such instance my client's former trial firm had garnered the account by agreeing with everything the head honcho said, telling him that he was absolutely right and that if he didn't make his stand on the issue in this case he could kiss his business advantages goodbye.

None of that was true and a competent law firm would have known that. To this day I don't know whether they knew it and misrepresented the situation in order to get the case or whether they really were that ignorant. They made their stand and lost the case. That was the point at which I was contacted.

The client wanted to appeal. The client wanted to sue the lawyers for not putting the president back on the witness stand for further testimony.

What an appeal would have accomplished would have been to take a lower court's correct rulings and have them confirmed by a federal court of appeals for a more potent precedent to be used against the company in all future cases on this pivotal issue - and there were a lot of them waiting in the wings.

When a franchise company loses a major case its franchisees see it as a wounded animal and close in for the kill.

I almost got fired because I urged them not to appeal but to simply take the defeat and move on.

I again almost got fired when I privately told the president that he was the worst prepared witness I had seen in years and that putting him back on the stand would have only made things much worse.

But I urged him not to sue the other lawyers because there were far more important things needing attention and there was no high probability of success in the malpractice suit anyway.

I think I was kept on because I was willing to be the first lawyer to say no to the president and take my chances on his being mature enough to recognize what it takes to do that.

There were more than a couple dozen other cases pending in courts all over the country to deal with, all previously "handled" by the same predecessor law firm, and they were all potential time bombs. We either favorably settled or tried to a victory over 15 of these lawsuits, whereupon the company started to shrink from the sheer weight of pervasive contention.

2. Winning Lawsuits versus Good Business

Winning lawsuits does not automatically translate into marketplace success, and this company turned out to be a one trick pony left behind by advances in its core technology.

Illustratively, when I suggested diversification over dinner one evening, the response was "When I want a goddam lawyer to tell me how to run my business I'll ask him".

The opportunity to avoid becoming irrelevant arose early and often. The company was enabled by a technological change in its industry, and it had mastered that technology. However change continued and its owner refused to adjust even though many asked him to.

"That's not part of our franchise" was his stock response to requests from his franchisees for support on the implementation of the newer technology in their franchises.

Told that the new technology was not part of the franchise, they opened separate businesses to exploit the new technology, using other names, and paid no royalties on that business.

Then the owner of the franchisor became furious and began accusing these franchisees of stealing from him. These were many of those other lawsuits I inherited from the prior law firm that had obviously not done any homework or saw the problem and pretended it wasn't there for the sake of the monthly bills.

The hardest of these were the California cases where covenants not to compete are not enforceable in franchise settings. Fortunately for my client, counsel for the franchisees was no more astute than that and mispleaded their claims so poorly that they could be defended to the point at least of them paying us money in most instances as the price for a release from an unenforceable covenant not to compete and a franchise agreement.

Configuring a potential loss into a revenue event allows it to be reported rather favorably.

3. Mass fraud claims

Next, in another case over 120 franchisees joined together as joint plaintiffs in a gigantic racketeering and antitrust case with pendant fraud claims, asking the court for $ 62,000,000. The company's CPAs threatened not to give a going concern opinion because of that case.

As tough as it was - and 120 plaintiffs with the same history tend to be believed by judges and juries - the franchisees actually paid us $ 750,000 to settle the case they had brought.

The real point of this story is that the owner of this franchisor had so cowed his officers and senior managers that they were afraid of making any gesture in the direction of the newer technology.

The man bullied everyone but me, it seemed. One of his officers once told me that they tried to keep us apart because at least now they were not losing lawsuits and they wanted us to continue as the company's counsel.

In the end our attorney client relationship was somewhat taken for granted to put it nicely and I asked them to obtain other counsel.

They threatened in writing to sue me for leaving them and went around telling people in town that they had fired me for incompetence.

No one believed that and I just ignored it.

That was the right decision. The company has since slipped into almost total oblivion, still unable to accept the notion that it has to evolve in order to enjoy continued success. I can keep the wolves from the door, but no trial lawyer can force any company to open its eyes to realities it wishes were not so.

The last of these stories involves another franchise company whose owner rose to the point of being delusional about almost everything.

4. Wasting your empire.

This last company, also a franchisor, benefited mightily from the advent of the personal computer. Its market position was so strong for several years that it could require its franchisees to buy their PC and other inventory from them and to pay in advance for it. It too was the largest distribution resource in its field.

Ultimately the market began to evolve and its hundreds of franchisees were seeing other avenues they wanted to investigate. The VAR and VAD - value added retailer and value added distributor - were making their entrance into the market and wanting recognition.

The company began to lose its grip on its franchisees, partly from the changes in the market and partly from the delusionality of its owner.

It had come to me before becoming my client and been turned down because the lawsuit it wanted to bring simply did not include any valid claims. When I told this to its in house general counsel his response was that they would find and hire a lawyer who agreed with them. They did. They lost.

The owner had once borrowed a rather small amount of money - around $ 250,000 - giving a note that, in the event of default, would be convertible into a large percentage of the company's stock. The note holder sold the note to someone else, which was his right to do. The maker, owner of a by now very successful franchising company, decided that it was inappropriate for the holder of the note to sell it and announced that he would refuse to pay it. The note holder gave notice of intent to convert the note into shares of the company, which the owner refused to recognize.

The head of the company refused to honor what was essentially a slam dunk obligation and hired the same firm to represent him and the company in that debacle as well. He lost control of the company; had to pay the note plus interest; and had to pay the expenses and attorney fees of the suing note holder. The franchisees, as could be expected, saw this as the pregnant moment to strike and they did so.

While this was going on I had favorably settled or prevailed in 14 straight franchisee cases in courts all over the United States. Ultimately those victories were to no avail.

That franchise system is now no more than a shadow of its previous self. Its former owner fled to a pacific island and continued to get into more trouble until he was kicked off the island.

The enterprise was literally wasted because its controlling interest refused to deal effectively and immediately with impending negative prospects.

As odd as one might think it, similar lapses occur all over the United States. Company leadership seems to feel that by taking a fresh look at a bad situation there is an inherent exposure to criticism. Fear of "embarrassment" and wishful thinking lead to these companies doing and saying the wrong and most damaging things imaginable, urged on by the two most inept resources at hand.

One should never follow the advice of its PR people when bad things happen. PR people do not deal in reality and do not know how to address tough situations in other than formulaic ways, assuming that all situations, no matter what, can be made to fit into their templates. That is simply wrong. At its best it is inadequate.

Similarly, a company facing distress should not give responsibility for addressing it to the accountants or law firms that were associated with the conduct that is being challenged. Those law firms and accountants are almost always preoccupied with covering their own potential liability and for that reason have a poisonous conflict of interest. Get new resources in there and see whether there is a more realistic way to go about addressing difficulties when they arise. For examples of what to do or not do, seehttp://www.franchiseremedies.com/Franchisor_Mishaps.htm.

If you really do want to minimize injury and damages from impending difficulties, you need to make yourself open to critical assessment.

People with confrontation avoidance capability need to be able to speak to you about the situation in real terms in real time.

You are not right because you say you are right.

Even when you really are right the circumstances may be such that you would better serve your own interests by considering compromises of less than indispensable issues and principles.

Disputes are never about "the principle of the thing". They are always about several principles that are vying with each other for priority of consideration.

With the passage of an amazingly short period of time the leading principle may seem less important and other considerations may call more heavily for your attention. Life is fluid, not static.

Get an expert and watch better things happen to you.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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There are exceptions to Blaise Pascal's suggestion that the more things change the more they are really the same - Le plus ca change le plus c'est la meme chose. Franchise branding is one of those situations from the perspective of many legal doctrines.

This case study is somewhat dear to my heart because it involves a company that in years past I used to represent from time to time until it decided to hire its own in house general counsel, a man who's entrepreneurial spirit caused him to think it was just fine to demand a kickback/referral fee from outside law firms he hired to represent the company in lawsuits.

When I declined to pay him for the company's legal business, for reasons just about anyone can appreciate, the company and I parted ways.

To be sure, there were other ways in which the gentleman derived extraneous income from his client's business, and it might be a good story scenario for Saturday Night Live, but not here.

Fortunately, there were other firms that also declined his blandishments that in desperation were hired anyway because the company's situation was rather desperate and the firms were ethical enough to just say no.

In these desperate situations the large firms did not produce victories and charged a bloody fortune to obtain settlements that were hardly favorable, in one instance charging $16,000,000 before fessing up that they were unable to present a plausible case.

The latest of these exceptional situations came to a bad end recently and represents a good case study about a company's management believing it could simply spend its way to victory no matter what.

It happened eventually to General Motors, so for a privately owned franchise company to convince itself that a litigation budget was the road to invincibility is an exceptional case study in arrogance and one worth discussing.

There is a doctrine in intellectual property law known as "secondary meaning". Secondary meaning imputes to a "look" the value and power of a trade or service mark when that "look" becomes so identified in the public mind with the company that the look alone becomes an automatic source identifier. Imagine that the Golden Arches were not registered intellectual property of McDonalds. Even without that statutory protection they so speak to McDonalds in the mind of the public that one would say with confidence that they had secondary meaning.

Not all things that could eventually have secondary meaning as source identifiers attain that status, and some that do eventually lose it because the "look" becomes generic to that segment of trade, mainly through its functionality aspects.

Functionality is a secondary meaning killer because serving a function common to most companies in that business inherently means that all will adopt it. In the beginning, however, for a fleeting moment something functional could be a source identifier in that interim before others start using it throughout the industry. Think of the "serpentine" line up of customers waiting for service back in the early days of Wendy's when Wendy's was the only company using it. There was actually a case on that subject in Tennessee back in the day (Judy's Hamburgers).

In normal circumstances functional features do not achieve secondary meaning status. This case study involves the assertion of an incredibly ridiculous claim that the interior appearance of this brand of restaurant was itself a brand identifier. Impossible and absurd on its face in all but the most exceptional situation (which this was not), but insisted upon as the product of arrogance and stupidity by company management and by the large nationally known law firm it hired to make that assertion in court. The legal expenses were outrageously huge.

One could posit that they were not outrageous on the theory that the firm had to know it was a balls out loser and would only make the assertion if it could find a client dumb enough to pay a fortune to finance the effort. It would be difficult to find a competent trade dress lawyer to give an opinion that the functional aspects of the interior of any chain restaurant had secondary meaning.

Face it, the interior contains tables, chairs, counters, maybe a bar, and any kind of "back of the house" configuration you like. Paint and decor could be extremely distinctive, but that could be fixed by an accused infringer with a cheap paint job on a weekend.

No one litigates over something curable by a cheap paint job.

Where it is a paint job resolution the accused infringer has to be a fool for refusing to redecorate and the franchisor has to be a fool for not being able to resolve it short of the cost of full blown litigation to a verdict. That is a total failure of relationship management as well as dispute resolution management. But this company and its former franchisee did exactly that.

Moreover, the company hired one of the country's major franchise litigating firms to handle it. No large firm can afford to turn down a big fee with all that overhead, no matter how stupid the position it has to take in a public forum.

Let's take a second look at this and give someone the benefit of the doubt by suggesting that the decor infringement claims were really just the manure spread across a field planted with the seeds of a post termination covenant not to compete. If that is the case, then the franchisor is doubly stupid. If the covenant is enforceable, why screw it up with BS? And if the covenant claims are worthless, is the BS decor infringement claim going to put lipstick on this pig? This is wall to wall stupidity no matter how you slice it.

Something tells me that maybe this client went through a number of competent firms with self respect who turned it down before it came upon a firm who, for the right money, would represent anyone on any claim regardless of the merits. There's a song about a girl who just can't say no, and this is that kind of firm. I know this company's regular firm - went to school with one of its partners, and he is smart enough to know better than to do this to a regular client. I also know the trial firm who took the case, and this is the kind of trash they will roast in a slow oven for a long time and tell you it's good brisket. If you are a spoilt child client who will pay anything to have someone tell you that you can have your way, I guess you really deserve this kind of result. Intelligent folks don't shoot themselves in the foot (or elsewhere on their anatomy) like this.

One could posit that the usefulness of this court's ruling to other departing franchisees represents an enormous impact loss. Almost all franchise contracts and disclosure documents claim great value in distinctive decor. Will their next step be to try to force franchisee investment in a new decor that is distinctive, an investment that at this stage if its life cycle holds no promise of generating ROI. When arrogance trumps analysis the result is always to ignore realities.

Certain kinds of relationships - franchising is one of them - tend to imbue the lead player with a sense of entitlement that simply won't work all the time. The passage of time - the impact of history - changes in technology, market and company life cycle changes all coalesce to erode balances of power. What once may have been a reliable option may, even with the same contract language over time become less useful and even dangerous. That's called reality. Refusal to take hard looks at your situation when trouble arises often leads to unnecessary expenses of large magnitudes and to serious structural damage to your future potentialities. The insights borne of crisis management experience transfer well from industry to industry and company to company. Don't let your access to this resource go unused. It may save your company, your distributive systems and your future.

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Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

A recent decision from a federal court in California addresses the enforceability of a general release of claims signed by former franchisees. Quick tutorial: a "general release" is a document where the signing party (releasor) agrees to relinquish the right to enforce or pursue any and all legal claims against the non-signing party (releasee). While general releases in the franchise context are usually unilateral (given by the franchisee, or former franchisee, to the franchisor), they can be and sometimes are mutual.

The court decision deals with Grayson and McKenzie, who are former franchisees of 7-Eleven, Inc. Grayson and McKenzie are also the name plaintiffs in a class action lawsuit they filed against 7-Eleven relating to 7-Eleven's collection of a federal excise tax on pre-paid telephone cards they and other franchisees sold at their respective stores.

When those cards were sold, 7-Eleven collected excise taxes from the plaintiffs, and paid those taxes to the federal government.

In 2006, the federal government stopped collecting excise taxes on pre-paid phone cards. The government authorized a one-time refund of the tax for payments made between March 2003 and July 2006.

The federal government made refund payments to 7-Eleven for millions of dollars, but the franchisees in the lawsuit alleged that 7-Eleven did not return any portion of the payments to them, even though those franchisees believed they were entitled to a 50% share of the refunded money.

The reason the franchisees believed they were entitled to a portion of the tax refunds was because of the way the 7-Eleven system is structured. While most franchise systems are designed so that the franchisee will pay the franchisor a royalty fee (as well as other fees) based on the franchisee's gross sales, 7-Eleven's system is built differently.

In the 7-Eleven system, 7-Eleven and the franchisee will split the store's gross profit as well as the operating expenses.

Based on the "share and share alike" operating structure, the plaintiffs in the lawsuit alleged that they were entitled to a 50% pro rata share of the excise tax refunds received by 7-Eleven. The franchisees sued 7-Eleven for: (1) conversion; (2) money had and received; and (3) breach of implied contract.

7-Eleven moved for summary judgment on Grayson and McKenzie's claims, asking the court to dispose of the franchisees' claims. 7-Eleven based its request on general releases that the franchisees had each signed in 2004 and 2005, respectively, when they terminated their franchise agreements with the company.

In response, Plaintiffs argued that California Civil Code Sec. 1668 prevents the releases from excusing 7-Eleven from liability. That section states:

All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.

In essence, the franchisees argued that their general releases could not be used to dispose of their legal claims because 7-Eleven had engaged in intentional wrongdoing, and that California law does not permit 7-Eleven to obtain a release of those types of claims from the franchisees.

The Court began its analysis by recognizing the rule that "generally, California Civil Code Section 1668 invalidates contracts that purport to exempt an individual or entity from liability for future intentional wrongs, gross negligence, and violations of the law."

As to the franchisees' conversion claim, the Court stated that "[a]bsent a public interest, section 1668 does not invalidate a release from simple negligence or strict liability claims." The Court found that conversion is a strict liability tort, and because there is no "public interest" involved in a franchisee-franchisor relationship, the conversion claim was released by the franchisees.

As to the second claim, money had and received, the Court found that the essence of the claim does not require a plaintiff to show that the other party engaged in either gross negligence or intentional wrongdoing. As a result, the Court found that claim to be released as well.

Turning to the final claim, breach of implied contract, the Court found that the claim did not involve an intentional tort (which is the type of action that California law protects against), and that it was therefore also released by the franchisees.

Based on the foregoing, the Court held that the releases signed by Grayson and McKenzie released 7-Eleven from each of the claims asserted by them, and entered summary judgment in favor of 7-Eleven.

This case is a good reminder to franchisors of the value of obtaining a general release from a franchisee when it is possible (and legally permissible) to do so. A typical franchise agreement will require a franchisee to provide a general release upon the franchisee's sale of the business, or upon renewal. A prudent franchisor will be sure to collect a general release upon the occurrence of either event.

To franchisees, the decision is instructive. General releases, legitimately obtained, are enforceable in most circumstances and will usually result in nullifying any legal claims that may exist against the franchisor.

As a result, it's important to understand these documents -- and the requirement in most franchise agreements that they be signed under certain circumstances -- before entering into a franchise relationship.

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At a recent lunch for "Old China Hands" I was asked about the differences between Chinese and American negotiation. Since these people had been around the block a few times, I didn't waste a lot of time with background.

The two main differences between Chinese and American negotiation happen at the beginning and end of the discussion. The middle part of the conversation - what most people consider the REAL negotiation - is actually pretty similar for both Chinese and Western negotiators

1. Chinese and American Businessmen Start Negotiations Differently

Chinese start with a relationship, while Americans begin with a transaction. Chinese are trying to get to know if you are trustworthy - and how long you plan on sticking around. Americans are trying to figure it how much money you are going to spend or charge - and if you've got the cash or assets to back up your offer.

Americans spend the first half of the first conversation waiting for the small talk to end so they can get down to the important part - talking about deal points, dollars and delivery dates.

The Chinese side concludes that the Americans are either sharks who refuse to reveal anything important about their character or are too dim to understand how gentlemen really do business.

2. American Negotiations End as Quickly as Possible -- Chinese Negotiations Don't End

US-Chinese deals may start from slightly different places, but they end in different dimensions. An American deal-maker wants to wrap things up as neatly and tightly as possible - as quickly as he can.

Once that contract is signed, the negotiation stops and both parties are bound to the terms they agreed to.

For the Chinese side, however, the signed agreement is more of a beginning than a conclusion. Now that both sides have agreed to general terms, it's time to start the real business.

3. Relationships vs. Contracts

Chinese do business based on relationships. Written agreements are nice for noting down important points, but the real bond that holds partners together is the relationship.

Americans do business based on contracts that both sides agree to abide by. Relationships are nice for making execution and operations run more smoothly, but the contract is what controls the commercial association.

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In March, the Ontario Superior Court of Justice released its decision on a motion for summary judgment in Dodd v. Prime Restaurants of Canada (Prime).

The decision offers further insight into how the courts will apply the new summary judgment rules in the franchise context and raises some interesting issues regarding the interaction between Section 11 of the Arthur Wishart Act (Franchise Disclosure) (AWA) and a mutual release agreement executed by a franchisor and a franchisee in the context of a failed franchise.

The dispute in this case arose between the owner of East Side Mario's and two of its franchisees. In 2003, the parties entered into an agreement to open a new East Side Mario's franchise in Toronto. Almost immediately after opening its doors, the venture began losing money and the franchisees fell behind on rent, royalty and financing payments.

After one year, the franchisees made a voluntary assignment in bankruptcy and the franchisor took over operation of the restaurant. Concurrently, the parties entered into a mutual release under which they released each other from any debts, claims or actions. The franchisor also agreed to pay the interest on the financing debt owed to GE Canada Equipment Financing G.P. (GE) and to use reasonable efforts to find a buyer for the restaurant that would assume the debt to GE.

Shortly after executing the release, however, the franchisees issued a Notice of Rescission (Notice) on the basis that they had received inadequate pre-sale disclosure contrary to Ontario franchise legislation. The franchisor responded to the Notice, advising the franchisees that the Notice was unenforceable due to the mutual release and stated its intention to meet its obligations under the mutual release.

For nearly two years thereafter, the franchisor did precisely that: it operated the restaurant, paid interest on the financing debt and found a buyer for the restaurant. The restaurant was sold and the debt to GE settled with the proceeds and some further contribution from the franchisor. But, two years after serving its Notice, the franchisees commenced an action against the franchisor claiming, inter alia, damages for breach of contract, negligence, misrepresentation and rescission of the franchise agreement. The franchisor brought a motion for summary judgement on the basis that the action was barred by the mutual release. In response to the summary judgment motion, the franchisees claimed that a trial was necessary to determine the validity of the mutual release which the franchisees' argued was not enforceable since it was both unconscionable and void pursuant to Section 11 of the AWA.

The Court refused to grant the franchisor's motion for summary judgment.

Enforceability of the Release: Unconscionability and Section 11 of the AWA

The franchisees argued that the release was not enforceable because it was barred by Section 11 of the AWA, which voids any "purported waiver or release by a franchisee of any right given under [the] Act." They also argued that it was an unconscionable agreement and therefore unenforceable at law.

With respect to the latter, the franchisees argued that the mutual release contained all four of the essential elements of unconscionability: a grossly unfair and improvident transaction, the absence of independent legal advice, overwhelming imbalance in bargaining power and intentional exploitation of this vulnerability. In response, the franchisor maintained that there was insufficient evidence before the court to establish all of these requirements and the onus was on the franchisees to do so.

The Court concluded that the conflicting evidence in relation to the value of the benefits realized and rights forgone by entering into the mutual release, whether the franchisees had legal advice at the time they executed the mutual release and whether there was in fact an imbalance of power were all matters that should be resolved at trial, with the benefit of oral evidence.

The franchisor also argued that Section 11 of the AWA cannot be used as a bar to render ineffective an agreement between the parties to a franchise agreement that was intended to settle claims arising out of an alleged breach of that statute. In support of its argument they cited the Court's decision in 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (Tutor Time). In the Tutor Time case, the franchisor had provided a prospective franchisee with a disclosure document that failed to meet Ontario disclosure regulations.

Subsequently, in order to settle the ongoing dispute and with the advice of independent legal counsel the parties entered into a settlement agreement that included a mutual release of all rights and claims. Some time later, the franchisee delivered to the franchisor a notice of rescission of the franchise agreement. On a motion for partial summary judgment, the Court held that the mutual release was effective notwithstanding Section 11 stating:

s. 11 does not have application to a release given (with the advice of counsel) by a franchisee in the settlement of a dispute for existing, known breaches of the Act by the franchiser in respect of its disclosure obligations, which would otherwise entitle the franchisee to a statutory rescission.

The Court, however, declined to follow the decision in Tutor Time in this case. It distinguished the dispute before it from the Tutor Time decision on two bases. First, unlike the franchisee in Tutor Time, it was not clear to what extent the franchisees were aware of potential rescission claims at the time the release was executed. Second, there was conflicting evidence regarding the extent to which the franchisees had independent legal advice before executing the mutual release.

On this basis, the Court concluded that the extent to which Section 11 of the AWA may render ineffective the mutual release as a bar to the franchisees' action was a matter for determination at trial.

Lessons From the Decision

The decision provides some useful guidance on the way in which a court will consider a mutual release in the franchise context.

First, it should be noted that the Court appeared to accept the franchisor's argument that even if Section 11 of the AWA rendered ineffective any waiver of rights under the AWA, the release would still be effective to prevent parties to the waiver from claiming common law or equitable relief such as breach of contract, misrepresentation and negligence. In the case at bar, the franchisees made numerous common law and equitable claims that will be barred unless the mutual release is found at trial to be unconscionable. Thus, there is a clear benefit from continuing with the practice of obtaining releases from franchisees despite Section 11 of the AWA.

Second, the case provides an additional reminder to franchisors that mutual releases should only be finalized with franchisees who have received independent legal advice. The Court's refusal to summarily enforce the release in Prime flowed from the factual uncertainty as to the franchisees' access to legal advice at the time the release was executed. Had the franchisee obtained legal advice prior to signing the release, it would have been very difficult for it to assert that it was unaware of the potential rescission claim.

Any reasonable lawyer advising a franchisee in the context of a mutual release would need to review the previous disclosure document that had been provided by the franchisor to ensure that the franchisee is not inadvertently waiving a meritorious rescission claim without fair compensation.

In most cases, careful review of a disclosure document would allow counsel advising the franchisee to identify arguable deficiencies which could ground a claim for rescission under the two-year limitations period. If the franchisee insists that it only "discovered" a rescission claim after signing the release, it would need to prove this late "discovery" with clear and convincing evidence. Franchisors should therefore encourage their franchisees to obtain legal advice and request written confirmation that such advice was received prior to entering into any agreement to resolve a dispute.

Third, franchisors must be wary of entering into agreements with franchisees at a time when the franchisees are in desperate circumstances because it leaves them vulnerable to a claim of unconscionability. Moreover, simply because a franchisor has seemingly extended itself to "bail" its franchisee out by, for example, taking over rent or debt interest payments or relieving the franchisee of royalty back payments, does not mean that the release was mutually favourable.

The argument made by the franchisees in this case was innovative but not unreasonable: the franchisor stepped in to protect its brand and would have done these things whether or not the franchisees released them. Moreover, it also made the point that the franchisor would not likely have pursued the franchisees personally. As such, while the franchisees gave up the right to seek rescission and make other claims, it "received little of real value in return." While there are certainly strong arguments to counter this effort to claim that a mutual release is overwhelmingly favourable to the franchisor and not the franchisee, these arguments should be considered when approaching a franchisee to negotiate an agreement to resolve a dispute.

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This post was originally published on McCarthy Tétrault's website and written by Jane A. Langford, Tyler McAuley and Adam Ship