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 actions.

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 battle.

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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