Franchise Update Magazine Issue II, 2012 | Page 34

Grow Market Lead

Legal
perspective
By James Mulcahy
and Steven Emmons

Dispute Resolution:
Protecting the Franchisor
Keep your brand out of costly lawsuits

D

espite the best intentions and
bona fide efforts of reasonable
clients, not every lawsuit is
avoidable. Certainly not in
these litigious times. Franchisors must
be prepared to defend their companies
wisely, tenaciously, and efficiently.
In franchise systems it can go like this.
A mistake was made, or might have been
made. Well, at least, it’s alleged to have
been made, and the allegations come
from one or more disgruntled franchisees. Despite your objective review of
the situation and face-to-face meetings
with these franchisees, they simply won’t
accept your very reasonable conclusion
that nothing wrong occurred or, if it did,
that no one was damaged. Why are they
being unreasonable?
It could be they’re acting in good faith
and things simply appear very different
from their perspective. It could be there’s
so much emotion behind their claim that
they’ve lost all objectivity. Or, it could be
they believe there to be more leverage
against the franchisor than actually is
there. Of course, it could be something
else, too. In any event, they’re not settling.
You’re not interested in paying tribute.
And the battle begins.
The law suit cometh

Franchisors should consider the following
checklist in determining an initial course
of action to minimize the possibility of
conflicts escalating into litigation or,
where the lawsuit has already been filed,
to quickly assess their options before getting deeper into the litigation.
• Early assessment of the dispute: identify and evaluate favorable and unfavor-

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Franchiseupdate Iss u e II, 2 0 1 2

able facts and available legal arguments
and procedures.
• What is the potential for good or bad
publicity? What impact will this type of
publicity have on your business, customers, and employees?
• What would be the likely effects on
your business of sustained litigation, e.g.,
monopolization of internal resources,
distraction of key employees, and costs,
both hard and soft.
• Financial capabilities of the plaintiff
and legal expertise of opposing counsel.
• Settlement potential, given your
business priorities and objectives and the
anticipated wants and needs of plaintiff
and plaintiff’s counsel.
• Your ability to convey a clear message to plaintiff that you are fully prepared to defend to the end; this includes
hiring defense counsel with a history of
significant jury trial success.
By having an experienced trial lawyer
on your side from the outset, you unambiguously communicate to the plaintiff
that you are prepared to go the distance,
unless plaintiff offers very attractive settlement terms. With experienced trial
counsel representing you, the option to
proceed to trial or settle is yours every step
of the way, and your negotiating position
gets stronger as the trial date approaches.
Alternative Dispute Resolution

Over the past decade the use of mediation and arbitration (together called Alternative Dispute Resolution, or ADR)
has grown significantly as an alternative
to litigation. ADR can offer several distinct advantages, including more focus
on the merits of the dispute (by keeping

it confidential and out of the public’s
view), more control over scheduling,
and more say in the selection of the
decision-maker over the dispute. Let’s
take a quick look at their respective
pros and cons:
• Mediation (using a neutral party to
facilitate settlement discussions) is faster
and less expensive than arbitration or litigation, but it functions well only when
both parties desire a fair resolution and
are dealing in good faith. You should be
able to determine in short order whether
your opposition is there to find a fair resolution, or instead is seeking unwarranted
settlement terms or informal discovery,
or simply playing for time.
• Arbitration (hiring a private individual to decide the outcome of the
dispute) can be faster and less expensive
than litigation (no guaranty though).
However, arbitration generally comes
at considerable sacrifice: potentially less
rigor in the legal analysis of the case and
very restricted rights to appeal. With those
assets that matter most to the franchisor’s
success (trademarks, trade secrets, etc.),
you need all the protection available,
including appeal rights. So for disputes
involving those items, steer clear of arbitration. For disputes that are significant
but don’t involve the family jewels (for
example, certain franchise terminations),
arbitration may work best.
As a franchise executive, you have a
business to run. Don’t let disputes distract
your team unnecessarily. Get disputes resolved quickly, reasonably, and without
creating a reputation for your company
as an easy target. To make that happen,
you’ll want to be prepared and well represented by experienced counsel. n
Jim Mulcahy is the founding and managing
partner of Mulcahy LLP, a firm dedicated to
franchise and distribution law. He has more
than 30 years of experience, is a seasoned
trial lawyer, and is former general counsel
of American Suzuki. Steve Emmons has
more than three decades of experience and is
the former general counsel of Taco Bell. He
handles the transactional side of franchisor
needs, including drafting documents, disclosure
and registration, and expansion and impact
issues. Contact them at www.mulcahyllp.com
or 949-252-9377.