FRANCHISE STRATEGIES FOR LITIGATION AND ARBITRATION
A franchisor facing franchisee lawsuits needs a strategy
– sometimes a strategy to win, sometimes a strategy to survive.
Too often companies
on the defensive in litigation or arbitration make ad hoc decisions
based on immediate tactical considerations. Franchise companies, more
than any other business, worry about copycat lawsuits. One franchisee
finds a plaintiff’s lawyer to take his case and other disgruntled
franchisees pile on. The more franchisees that plaintiff’s counsel
can sign up the more affordable litigation becomes for the franchisees
and the bigger the franchisor’s problems becomes.
This is why franchisors
must define a strategy to avoid franchisee disputes and to contain the
ones that inevitably arise – before the fighting starts.
Part of the strategy is memorialized in the company’s
franchise agreement in clauses that waive the right to jury trial and
disclaim punitive damages. Choice of law, jurisdiction and venue are
kept in the franchisor’s home state. Most franchisors have this
part of the strategy down.
What most franchisor’s neglect, though, is a
strategy for responding quickly and aggressively to threatened legal
We are advocates
of dispute avoidance and resolution systems. Franchisors
know very well the value of systems carefully designed and consistently
applied. A system for avoiding conflict can work as well as a franchisor’s
operating system. Usually, though, complaining and squabbling starts,
and the franchisors has no plan in place to respond to the actions of
disgruntled franchisees. This is a mistake.
The litigation strategy has to involve clear, immediate
and decisive communication with other franchisees that may be infected
by the complaints of a few disgruntled dealers. Communication with the
unhappy franchisee-claimant and his or her counsel is also critical.
The company’s message needs to be decided on ahead of time and
consistently communicated, so that unhappy franchisees and their lawyers
know that the company is resolved to defend itself vigorously and contain
claims before the spread.
Litigation is very expensive, but franchisors must not
make the mistake of trying just to avoid litigation expense. Instead
the franchisor must recognize that litigation is expensive for the plaintiff-franchisee
as well. Consideration of legal fees and court costs is an important
part of planning litigation strategy. Knowing how much of a fight you
can afford and how much of a fight your opponent can afford are critical
to your decision making. A sound litigation strategy must include an
analysis of the parties’ respective resources and resolve in the
Settlement strategies should also be carefully considered
before the fighting starts. Franchisors rightfully worry about a settlement
with a single franchisee being thought of as “blood in the water”
by other unhappy franchisees and their counsel. Therefore, the way that
settlement discussions are conducted and the way disputes with franchisees
are resolved is critical to the future of your franchise company.
Planning for the downside of franchisee litigation and
arbitration is something that needs to be done prospectively and proactively
with the help of people that have been through the litigation mill.
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