Pre-Litigation Considerations for a Franchisee Lawsuit Against a Franchisor
March 16, 2023It’s a common question among franchisees: Can my franchisor impose obligations on me before I can take them to court? (e.g. in-person meetings, mediation, etc.)
Franchisors commonly require that franchisees participate in meetings or mediation to try to resolve disputes informally before the franchisee can file a lawsuit or arbitration demand. Franchisees should be aware of these requirements, often referred to as pre-litigation dispute resolution requirements, to avoid unnecessary costs and delays if they ever find themselves in a dispute with their franchisor.
Abiding by Pre-Litigation Settlement Agreements
There are two common pre-litigation dispute resolution requirements, in-person meetings and mediation.
In-Person Meetings
Generally, this will involve the franchisee meeting with the franchisor’s officers at the franchisor’s headquarters. In the meetings, which may or may not involve counsel, the parties will try to resolve their differences and come to a mutually agreeable resolution. Although there is no guarantee the parties will be able to find common ground in these informal meetings, a successful meeting will save both sides significant costs associated with litigating a dispute and likely help to preserve the relationship.
Franchisees should be wary if the franchisor demands that they produce documents or comply with other non-contractually mandated requirements before participating in the meeting, as these demands may be a way for the franchisor to collect evidence that they could use against the franchisee in any future litigation.
Mediation
In mediation, a third-party mediator will attempt to assist the parties, who are generally represented by counsel, in negotiating a settlement. Mediators cannot issue a binding decision, and it is ultimately up to the parties to agree on the settlement terms, meaning that engaging in mediation does not guarantee the parties will actually resolve their claims.
Mediators, however, can be a great resource in helping the parties resolve their disputes, and mediation is often far more productive than in-person meetings. The added effectiveness of mediation does come with increased costs, as the parties generally split the cost of the mediator and usually must cover their own attorney’s fees unless the franchise agreement provides otherwise.
Both Methods of Resolutions
Occasionally, franchisors will impose both types of pre-litigation dispute resolution requirements on franchisees, meaning that franchisees will have to first participate in an in-person meeting and then mediation before advancing to litigation or arbitration. This can impose significant costs and greatly delay any resolution. In order to help mitigate this possibility, franchisees may want to consider negotiating an amendment to the franchise agreement that imposes strict time frames to comply with the meeting and mediation requirements, and states that the requirements are waived if they are not met in the time stated. In that way, franchisees will ensure that the franchisor cannot use the requirements to cause undue delay or increase the franchisee’s costs.
Unenforceable Requirements
Although courts often find that pre-litigation dispute resolution requirements are enforceable, and will dismiss or stay a proceeding until the requirements are met, some courts have recently refused to enforce the contractual obligations for various reasons. For example, the court in Cumberland & York Distributors v. Coors Brewing Co., 2002 WL 193323 (D. Me. Feb. 7, 2002), refused to enforce a pre-litigation mediation provision on the grounds that the mediation provision was ambiguous as it lacked a time limit for completing the mediation. The court reasoned that the lack of a time limit could delay the final resolution of the dispute, stating that “surely a party may not be allowed to prolong resolution of a dispute by insisting on a term of the agreement that, reasonably construed, can only lead to further delay.”
Other courts have refused to enforce pre-litigation dispute resolution requirements on other grounds. The court in Kemiron Atlantic, Inc v. Aguakem International, Inc., 290 F.3d 1287 (11th Cir. 2002), for example, refused to require the parties to participate in mediation and precluded enforcement of an arbitration clause as neither party gave notice to mediate after a dispute arose between the parties over a payment. The agreement in that case provided that mediation was a condition precedent to arbitration, or something that must be completed before arbitration may commence. As neither party requested mediation, the court ruled that the arbitration provision was never activated and the case could proceed in district court. Understanding when a court may decide when an agreement is unenforceable can be a powerful tool for franchisees trying to circumvent the sometimes onerous pre-litigation dispute resolution requirements.
Work Toward Franchise Dispute Resolution
If you have a dispute with your franchisor and are unsure if you are required to comply with a pre-litigation dispute resolution requirement, or if you are planning on entering into a franchise agreement and would like assistance in negotiating a mutually agreeable agreement, our knowledgeable franchise attorneys at Garner, Ginsburg & Johnsen are here to help.