Franchising Highlights from the US
By its nature, franchising develops close and intense business relationships.  I have found that to be true in all countries where franchising is growing.  There is no  better indication of that intensity than when serious disputes arise between a franchisor and one of its franchisees.  One of the themes of franchise disputes in the US may be universal, as it illustrates one of the weak points of the franchising model: the franchisee claims that it was misled when it bought the franchise; that few of the promised services of the franchise system were actually delivered; and that it lost an entire life savings when the franchised business failed.  The franchisor claims that it misled no one (and in fact actually delivered a full 200-page pre-sale disclosure document), provided all promised services, and did its best to help the franchisee succeed even though the franchisee did not follow the system or the franchisor’s recommendations.

This is franchising’s own morality play.  Franchising in the US has seen this classic dispute play out in its rearview mirror for decades.  In a sense, this is an inescapable part of any business that puts other people in business for themselves.  The reasoning goes: There will always be people who go into a franchised business who, for a dozen different reasons, simply will not find success – that’s the risk we all take in business.

Finding a fair resolution to their investments and their contract rights is a serious business challenge for franchisors and their franchisees.  Of course helping both sides in the US are lawyers (lots of lawyers!), courts, judges, and, more recently, arbitrators and mediators.

All-American Motivation for Disputes
US Franchisors are motivated to avoid any litigation or arbitration case from being filed if they can possibly steer it off.  In the US, a lawsuit or arbitration filed with claims against the franchisor sounding in fraud, deceit, conversion, and/or the violation of franchise or securities laws will trigger a disclosure requirement that may have to linger in the franchisor’s franchise disclosure document (“FDD”) for the next 10 years.  Even if the case is quickly settled, and the franchisor pays money to the franchisee, the terms of the settlement must be disclosed for 10 years as well.

Franchisees are motivated to clash swords with their franchisor by anger and embarrassment, a sense that they have been victim to the franchisor’s drive for ill-advised growth, and that they have nothing to lose.  In the US, lawyers will frequently represent franchisees with their fees set at a percentage of any award received by the franchisee should he or she win the dispute.

This makes for a potent and emotional mix that presses the parties toward litigation or arbitration.

Alternate Dispute Resolution
Some franchise companies have been especially innovative in finding effective techniques for resolving disputes early, before they become serious enough to take to a court or an arbitrator.  A few large national franchisors have established an “ombudsman” program featuring a designated employee with a unique institutional freedom to listen to franchisees and who has direct access to the highest levels of management.  A franchisee with a problem could contact the ombudsman in confidence, consult with him/her, and the ombudsman would be charged with seeking answers, help, or management attention to the situation.

Franchise agreements began including provisions that require the parties to meet in person to negotiate and then mediate any dispute before taking the more formal step toward a court or an arbitrator.  If those steps were not successful the agreement would require the parties to resolve any dispute by use of arbitration rather than filing an action in court.

These tools in the arsenal of Alternate Dispute Resolution (“ADR”) have served franchising well.  It is in the interests of both sides that every step be taken to preserve a valuable relationship that both have invested in heavily.  They allow both sides to put their best foot forward to find a fair resolution, and a resolution based on the judgment of business people who built the relationship before the dispute is handed over to the lawyers for dissection.

Arbitration
The arbitration process looks a lot like litigation to the untrained eye: lawyers assert their claims and counterclaims, both sides exchange documents and engage in some limited discovery such as taking depositions, there is an evidentiary hearing before a designated fact-finding arbitrator, and the arbitrator issues a decision in the dispute that is binding on the parties.  Arbitration has been a fixture of US federal law since early in the 20th Century.

Lawyers like to remind themselves that arbitration is “entirely a creature of contract,” which is to say that arbitration in the US does not exist unless the parties mutually adopt it and commit to it by written agreement as the preferred means of resolving their disputes.  The agreement to arbitrate creates the location, the process, and the rules of engagement.

Arbitration in the US is under attack in the current federal legislature, and may be effectively eliminated in specific areas, such as employment disputes, if our more liberal legislators have their way.  How this may affect the availability of arbitration to franchisor-franchisee disputes remains to be seen.

Of course there are pros and cons to arbitration:

Pros:
• Generally faster resolution than a public court.
• Private, although may be required to be disclosed in FDD.
• Less lawyer time fighting technicalities, so less expensive than court.
• No mindlessly extensive discovery, limited by reason.
• Award is final; appeal rights extremely narrow.  This limits the expense of otherwise endless litigation.
• Arbitrator is selected by the parties, and usually has deep experience in the field.
• The parties can agree on a location for the arbitration to take place.

Cons:
• Must pay fees to the administrator and the arbitrator; a public court is free or minimal filing fees.
• Arbitrator is not a jury or a judge.  He or she is usually an expert in the field of the dispute.  This may affect the types of awards received.
• There is no appeal to an arbitrator’s ruling except in very narrow circumstances.
• Franchisees must agree to the arbitration provision in a franchise agreement when they sign the contract, not when the dispute occurs.
• The location of the hearing may be in the other party’s backyard, not yours.
• Some think the results are “unpredictable”.

Mediation
Mediation is professionally assisted negotiation.  It is not binding on the parties, and if the process does not result in a mutually agreed upon settlement, then the parties are free to pursue other resolution means.  Even though it is not binding, I have been surprised by the effectiveness of mediation.  I have represented franchisors with intractable disputes that I thought would inevitably head to court or arbitration, only to see the parties find terms on which to settle before the end of the mediation session.  Much depends on the skill of the mediator, of course, to help the parties see settlement as being in their best interests.  There is a subtle emotional dynamic in mediation, which I suppose is why it can be surprising when it resolves the dispute: the process brings the parties face-to-face and allows them to lay their complaints on the table for discussion in a controlled circumstance with the guidance of someone with strong mediation skills.  The cathartic effect of a serious confrontation is powerful, and has resolved so many problems between franchisors and franchisees of good will.

The conclusion is that franchisors and franchisees in any country need to use all of the tools available to them to resolve their business disputes.

The author: Andrew A. Caffey, acaffey@caffeylegal.com
The first publisher: CEDRE, www.franchiseland.com
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