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

1. Involuntary change to the brand, concept, or products;

2. Merger or consolidation issues;

3. Franchise agreement issues - interpretation of terms, or changes to the agreement over time;

4. Advertising fund issues;

5. Price gouging for mandated product purchases;

6. Software issues, such as the failure of POS or reservation systems, and;

7. Less tangible matters, such as a general failure to keep up with the competition.

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.

 

Over one half of existing franchise agreements include arbitration clauses which require franchisees and franchisors to resolve most of their disputes where the franchisor's place of business is located and before professional arbitrators who presumably have experience dealing with the same types of issues on repeated occasions. 

 

Some find this comforting and cost effective while others think it unfairly favors franchisors. 

 

Reacting to the "consumer" oriented nature of the franchisees' complaints - usually prompted by those who have lost their disputes in arbitration - the U.S. Legislature now has before it two pending bills which will invalidate all arbitration clauses in existing and future franchise agreements as a matter of law. A recent event has made the passage of these bills even more likely."

 

In New Brunswick, the passage of the Mediation Regulation, under the New Brunswick  Franchise Act, which comes into force on February, 2011, now provides for a type of mandatory mediation for franchise disputes.

 

One party can ask for mediation, and the other party has 7 days to decline the request and provide written reasons for doing so, section 4 of the Mediation Regulation.

 

Although the regulation does not specify the cost consequences for declining mediation should the dispute become a legal procedure, I can imagine a Judge being interested in substantive reasons for declining mediation.  

 

If you are a franchise mediator, it might be a good time to hang out your shingle in New Brunswick.