How to Assure Your Franchise Mediation Fails

Chuck Modell October 11th, 2023

Early mediation of franchise disputes is very popular today. Franchisors and franchisees who willingly engage in early mediation of franchise disputes often find a way to resolve their dispute and avoid protracted, expensive and time-consuming arbitration or litigation. They also find that mediated settlements can produce creative, win/win results that could never be achieved by having an arbitrator, judge or jury declare one victor and one loser.

Unfortunately, some franchisors and franchisees, and/or their attorneys, participate in early mediation only because the franchise agreement requires them to do so, and they need to “check the box” before starting the war. While much has been written about how to make your mediation a success, as a frequent mediator I have learned a lot from reluctant participants on how mediations get derailed. Perhaps by understanding the ways these people sabotage the mediation, presumably unwittingly, you can avoid the pitfalls that can derail your mediations.

Come into the mediation with a bottom line, beyond which you will not move

Lawyers often ask their clients for their bottom line. However, doing so sets you up for failure. For one thing, it can box you into one avenue for settlement, when there may be other paths to achieving the result you seek. For another, once you draw a line in the sand, even internally, it becomes harder psychologically to go beyond that point; the franchisor or franchisee feels that if it goes beyond that point it has “lost,” and the attorney feels if he or she does not at least get a settlement above that bottom line, they have failed.

Think about this in another context. You are looking for a house. You decide you want to pay about $900,000 and absolutely will not pay more than $1,000,000. You look at dozens of houses in this price range, and they do not have the features you want. Then you find the perfect house for $1,100,000. It is nicer than anything you have ever seen, with far more of the features and amenities you want. I suspect that 9 out of 10 times you would find a way to make it work – and the 10th time you will wish you had done so. (Take it from someone who drew that line and missed an opportunity in 2021 to buy a vacation condominium that sold 2 years later for 20% more than I could have bought it for!)  But now let’s vary the example slightly.  You picked those numbers because you knew that at current mortgage rates, this is all you could afford. If I told you I had the perfect house for you for $1,400,000, I suspect you would not even consider it. However, you should have asked me if I was willing to finance it, because if I was willing to finance it with no interest over 15 years, you actually would have paid less for that house than if you had gone out and gotten your own financing and paid me just $950,000 for that house!

The point here is that in any transaction, price is only one factor to consider. This is especially true in the franchise context where you not only have money involved, but precedence, other terms that can get people what they want in the relationship, the risk of suffering a total loss if you do not resolve the problem, and the time and cost of an adversary proceeding.  Thus, while you should certainly consider what you want before embarking on mediation, keep an open mind as to tradeoffs that can be made, and other avenues that can be taken, rather than the black and white one you initially envisioned.

Start the mediation with an unreasonable offer/demand, hoping to either split the middle or prove you are being more reasonable than your adversary

Mediation involves compromise but it is not about reaching a middle ground. It is about trying to find a win/win resolution to a dispute, or at least one that is better than the lose/lose result that often follows a long, drawn-out dispute. I have followed up on some of the cases I have mediated that did not settle and found  a few things to typically be true.

  1. First, one or both sides look back at what happened to them after the mediation and wish they had been more open to compromise in the mediation.
  2. Second, the impasse often occurred because one party started at such an extreme that the other never seriously engaged. When I later spoke to the attorney who took the seemingly unreasonable position, I found that their client never expected to reach a settlement anywhere near the amount they offered or demanded (not a surprise) but took such a one-sided position thinking it gave them more room to compromise.  Regrettably, if they had started more reasonably, we likely would have settled on acceptable terms. Think about this again in terms of buying or selling a house or business; if as a seller you list it too high, you will never have a chance to negotiate with many serious buyers, and if as a buyer you make an unreasonably low offer to purchase, you will never get a counteroffer (exactly what happened to me in the condo example above).

Don’t let the mediator in on your discussion of offers or counteroffers

The purpose of mediation is not to have a third-party carry offers back and forth from one room to another. You can do that without a mediator. In a mediation, you have someone who can be in both rooms, hearing what is important to each side, and without disclosing any confidences, help each side get what they need out of a settlement. This is a critical component of mediation, and if you kick the mediator out of your room whenever you talk, you lose the value the mediator can provide as you consider offers. All too often in a negotiation, the parties will talk “around” each other; with each offering what they think is a reasonable proposal, but without fully understanding what the other side may need to reach an agreement. As a result, you may give away too much on one point (which becomes difficult to backtrack on), while offering too little to get a deal done. If the mediator can participate in the discussions between the attorney and client, again subject to a pre-mediation agreement that the mediator will hold everything in confidence except that which you authorize the mediator to disclose, the mediator can help you fashion a proposal that gives away no more than you need to give away, while addressing the needs of the other side.

Set fixed timelines for the ending of the mediation

Too often, parties come into a mediation with a fixed deadline for completion—say “5:00 tonight, at which time we have other commitments.”  It is one thing to have a “target” stopping time, and another to have a fixed deadline. With a deadline, people tend to either stop making offers as they approach the deadline, deciding they cannot reach an agreement or hoping the other side will cave to their demands by the stopping time, or they spend more time looking at their watches than thinking creatively about how we might take that round peg and shape both it and the square hole to fit together.

While mediations should not be meetings of attrition, franchise mediations often require parties to think outside the box. When people start approaching arbitrary deadlines, they are less inclined to try and be creative, figuring it is hopeless. Mediation is a process, and it takes time to make each side realize the weaknesses of their position, the strength of the other side’s position, and/or the benefit of resolving the dispute. This may seem intuitive, but it takes time to get there and if you set arbitrary ending times, you are setting yourself up for failure. Keep an open mind and keep a flexible schedule as you work with the mediator to resolve your differences.

Choose the wrong mediator

Before you retain a mediator, think about your case and what you need from the mediator. In all cases, you want a mediator both parties can trust. This means finding a mediator whose opinion you value—and that your adversary will value. However, while that is a critical first step in selecting a mediator, there is more to it. You also want a mediator who is not so fully scheduled that he or she will not be able to take the time to review pre-mediation submissions, consider the issues, start thinking about possible ways to bring the parties together, and stick with the mediation, whether that means through a long day or in follow-up communications with the parties.  If you are just “checking the box,” then select the least expensive mediator you can find, so that your wasted day will at least cost less. However, if you are looking to resolve a dispute, choosing the right mediator and letting them help you consider and formulate settlement offers, is critical.

If you have a case that involves complicated franchise issues, you need someone to help the other side understand your position, and help you fashion a resolution that can work within the confines of the franchise system. Frankly, it does not matter whether that person has a franchisee or franchisor background, because they are not making decisions for you, but simply helping the parties think through the issues and reach a workable resolution. A person who knows how franchising works, the typical responsibilities of each party in the relationship, and limitations imposed by the franchise model, will understand issues unique to franchising that must be considered in settling cases. For example, only someone who understands franchising will fully appreciate the need of franchisors to protect the system in the case of a substandard operator, which should always be a concern of franchisors but has also been the subject of claims by franchisees when franchisors do not address problematic situations. Likewise, when a franchisee refuses to participate in marketing campaigns, or to contribute to pooled advertising, or the franchisor allegedly misspends pooled advertising money, these are issues that people who mediate construction disputes or divorces, or a retired judge who has little business experience and limited knowledge of franchised businesses, may not understand.  On the other hand, there may be situations where you have a weak case, and all you need is for someone to browbeat the other side into resolving the case with less money than they would pay to litigate it.

So how do you find the right person? Ask others you know in franchising for referrals. If you do not know anyone you can ask for referrals, use the ABA’s list-serve. And talk to the mediator before engaging them to get an idea whether they have the time, negotiating skills and experience to help you resolve your dispute.