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The Pros & Cons: Mediation vs. Litigation

publication date: Feb 3, 2014
author/source: Steve Belmonte


If you feel limited as to your options in negotiations with franchise companies, there’s new hope. Third-party mediation and negotiation services are available to licensees to help them avoid costly litigation. Hospitality experts who once walked-the-walk and talked-the-talk of a franchisor can use their experience to help licensees negotiate out of those agreements. Steve Belmonte explains the pros and cons of mediation and litigation, and why mediation is most likely the best solution for your franchise needs. Not only is it better cost-wise, but there is a high percentage rate of success for both parties.

There is a sizeable new wave of advocacy for mediation that is beginning to build within our industry. The reason is because mediation is probably the closest thing to a “no-brainer” alternative to litigation in many years.

Why? Because litigation is very expensive, arduous and time consuming, and it puts a lot of stress on all parties involved. Likewise, litigation doesn’t focus on settlement or resolution. It focuses on deciding which side is right or wrong. Therefore, any settlement is a byproduct of litigation.

Mediation, on the other hand, is inexpensive, and disputes are oftentimes resolved in one or two days, not one or two years, with a high percentage rate of success for both parties. Let me expand on that.

All too often, franchise contract disputes cannot be resolved in meetings between the two parties, and then one or both make the decision to hire legal counsel in order to get the matter straightened out. Suddenly, what was a two-entity partnership now becomes four entities as legal teams from each side set their sites on resolving the case for the betterment of their respective client, but also improving the bottom lines financially of their respective law firms. So what’s the alternative? The answer is mediation.

Mediation is an informal, non-binding negotiation process through which an impartial third party tries to get the disputing parties to reach a settlement. The mediator's role is to isolate disputed issues, develop options or consider alternate solutions, and encourage the parties to reach a settlement accommodating the needs of the parties. The mediator isn't a judge and has no authority to impose settlement terms. The mediator's role and the goal of the process are to help the parties achieve their own resolution. There are two very important advantages to mediation. First, there is a considerable cost savings. Legal fees and other litigation expenses are not showing any signs of diminishing. Second, there is a considerable saving of time. While I am not advocating that attorneys are not needed, the red tape associated with litigation could potentially extend over the course of six months to a year, if not longer with attorney’s fees topping out at $25,000 to $40,000. Depending on the mediator, a dispute could potentially be resolved in one to two days and cost a small fraction of what you would pay an attorney.

Because mediation is becoming an important negotiating tool in the franchise marketplace, it’s important to select the best mediators who have a through understanding of everything faced in business by those on each side of an issue. Finding a mediator with integrity, fairness and experience is critical if either party is to respect the mediation process.

When selecting a mediator to settle a franchise dispute, consider the following:

• What is the mediator’s training? 
• What is the mediator’s experience as it relates to franchising?
• Has the mediator ever walked in the shoes of a franchisee or served in the role of a franchisor?
• What is the expert’s mediation experience? Litigation experience?
• What is the mediator’s availability?

While some industry experts say that actual “subject matter experience” should not be considered essential, in the area of franchise mediation I strongly disagree. In many cases, hotel owners have embarked on a brand new career when purchasing that first hotel. And that means they are not always savvy to how the game is played or what works best in the lodging marketplace. There is so much that goes into the relationship between a franchisor and franchisee. In order to be successful, a third-party negotiator must be able to represent important issues on behalf of franchisees to the franchise community. The only way to accomplish this is to have a detailed understanding of issues affecting each side, a degree of compassion and the ability to be tough, but honest.

These "little guys" are most susceptible to what some might refer to as predatory behavior on the parts of franchisors, but, in actuality, it is often their own failure in that they have not taken full advantage of the numerous programs that franchisors offer to help its franchisees achieve the American dream. The mediator, the actual person that will help to decide the fate of the franchisee in either achieving his or her dream or walking away from it with the hope of finding success elsewhere, must know the ins and outs of franchising to be effective, and to identify what is fair and unfair. Experience in making that determination is key. By creating a fair and balanced business environment, franchisees will not only improve their personal enterprises and situations, but the entire industry will rise to a higher level.

This is not to say that we begrudge the opportunity for lawyers to make a living and profit off their chosen professions. Many of my best friends have law degrees, and they see their roles as important parts of the American judicial system. But the way the judicial system is set up today and the case loads that jam the dockets of this nation's courts, it is inevitable that lawsuits—many of which are frivolous—become time consuming and money consuming and often work to forever damage what at one time was a friendly and workable business partnership.

In 2002, Mahesh (Mike) Amin, chairman at that time of the Asian American Hotel Owners Assn. and a third-generation hotelier from California who serves as president of The Amin Group, said he believed that “mediation is one of the many opportunities the association planed to evaluate as a potentially viable and desirable alternative method for dispute resolution.” I personally have seen a dramatic increase in the use of mediation services from members of this growing and highly respected group – over the last 5 years, I have successfully settled numerous liquidated damage claims through mediation for hotel owners.

What this tells me – and the hospitality industry – is that mediation works and both parties win. It’s the quickest and most affordable means of alternative dispute resolution available to the industry today – and if both parties walk away from the table satisfied, then why not utilize it?

With that in mind, franchisors and franchisees interested in a win-win resolution rather than a win-lose settlement should consider mediation and try to work out an equitable arrangement. More often than not, the franchisors are just as anxious to resolve matters with franchisees as the franchisees are.

After all, why throw in the towel and possibly lose your business? You may be giving up all hopes of achieving the American Dream.

No one enters into a franchise agreement with the intent to dissolve the relationship. It’s like marriage—no one gets married with the ultimate goal of getting divorced. However, oftentimes performance issues arise when business is not as good as it should be, and finger-pointing and blame-casting become the foundation for a new love/hate relationship.

As soon as threats of “early termination” or “liquidated damages” enter the conversation, it is a perfect time to contact a mediator or a professional negotiator.

However, I am a firm believer that mediation is only as good as the mediator. Franchisors and franchisees must be certain that they are working with a professional organization, and whenever possible, retain a mediator with a hospitality background, or at the very least, someone who knows and understands the world of franchising.

A strong mediator who is familiar with all aspects of hospitality and franchising will be more likely to achieve a win-win result for everyone, whereas litigation can only result in a win-lose scenario. In today’s economy, a “losing” outcome can mean losing everything you have worked so hard for.

Franchisees have come a long way in the past few years toward establishing more equitable franchise agreements, and franchisors have worked hard to improve a system that at onetime was terribly one-sided.

However, problems still remain, and as with any relationship, disagreements can crop up that become the proverbial mole hill growing into a mountain. Past experience tells me that lawyers all too often are willing to let that mole hill grow and grow, because then it becomes a necessity to have a lawyer guide litigants over or around that mountain.

What this industry needs more of is mediation and mediators who understand that the overall health of business is greatly dependent on seeing to it that the mole hill remains just that—a manageable mole hill. In the end, if mediation doesn’t work, you still have the freedom to litigate and seek an alternative outcome. The upside is that very little time and money would have been spent on the mediation process. So mediate or litigate? It’s up to you. My bet is on mediation, and I’m willing to wager that the vast majority of franchise companies will soon follow suit. It makes too much sense not to.

The Pros & Cons: Mediation vs. Litigation

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