Wednesday, August 21, 2019

Why I Love Mediation and You Should Too!

The majority of franchise agreements that I come across or create these days have a mediation clause. For those of you who have no clue what I'm talking about, when a dispute arises, the disagreeing parties have only a few options: do nothing, file a lawsuit, go to arbitration, or sit down and try to work it out a/k/a MEDIATION.

This is not the first time I have addressed this important topic and you can find earlier posts here. And, full disclosure: I serve as a mediator when selected by the parties or their counsel.

But, here is why I love mediation and you should too! To help your clients or your company resolve disputes before spending a fortune.

Litigation and arbitration can burn up a very large sum of money. Remember it is a battle. The courtroom or the arbitration room is the battleground and counsel are the warriors. Let's not get too carried away here but some of these disputes run from tens of thousands of dollars to over hundreds of thousands of dollars.

Mediation is a process that allows parties to work together, usually with the help of a trained and experienced mediator (often a lawyer but not universally), to settle a dispute before an action is filed and sometimes after. Mediators come in all types (ex. commercial law, domestic disputes) and styles (ex. objective neutrals, aggressive, evaluative). But the hallmark of an effective mediator is keeping the parties engaged, keeping them talking and negotiating. Also, an astute mediator may offer "creative" solutions that the parties did not consider.

So counsel, if you have a long-standing client, wouldn't you want to save them time and money? Wouldn't it be the best advice you can provide under the circumstance? Besides, litigation or arbitration is always on the table but why not think of it as a last resort?

Company officials or franchisees, not only could you save those precious funds, but you may find a solution that preserves the relationship. The earlier you seek resolution, the more latitude you have.

Of course some disputes cannot be resolved through mediation but, even when there is a small chance of resolution, it seems like a wise investment.

And, as any commercial lawyer knows, whether a litigator or transactional lawyer, serving our clients' needs is our top priority.

Wednesday, August 14, 2019

Liquidated Damages - Friend or Foe? (Part Two)

In Part One of this topic, we discussed what Liquidated Damages are, how they may be a "penalty," and the potential risks involved in a franchise setting when there is no cap on damages upon an early termination.

This part, as promised, addresses why some franchise companies may want to use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though it may sound counter-intuitive). Post-termination damages in franchise matters is complex and we will just scratch the surface here. (More detail can be found in this 2016 ABA Forum on Franchising's Annual Meeting article  - Show Me the Money! Maximizing Monetary Recovery in Franchise Cases - authored by Bethany Applebee (Subway's General Counsel) and me).

First, the idea of "legal damages" is to make an injured party whole without injecting speculation into the equation. When a franchise company seeks a wholesale remedy of "lost future royalties" for an extended term (let's say 5 years or more), it may be getting more than necessary. That is, many franchise systems seek to replace a terminated franchisee as soon as possible - akin to replacing a terminated tenant on a lease. And, as is the case with a lease, a franchisor has a duty to mitigate its damages by finding a replacement. The real measure of damages is the period of time it takes to find a replacement; so how do you calculate this in advance without some speculation.

Some excellent franchise-lawyers (Rupert M. Barkoff (recently passed away) and Christopher P. Bussert), posited this in their 2009 article: Can a Franchisor Recover Lost Future Royalties? The Debate Goes On, 12 The Franchise Lawyer 2 (Spring 2009):
In fact, when informally asked what "should" be a "fair" settlement of a lost future royalties dispute, many attorneys suggest that two or three years would be an appropriate level of compensation. These opinions may be anecdotal in nature, but they do demonstrate to some level what is considered reasonable in the franchise community on this issue. In addition, when franchise agreements provide for liquidated damages if the franchisee improperly terminates, two to three years of royalties is often offered (and upheld by courts) as a reasonable compromise.
The Barkoff-Bussert thinking was based on a reasonable time to replace a terminated franchisee. Not only is this a fair approach, on the franchisor-side, it eliminates arguments about speculation, lack of mitigation, and other defenses a terminated franchisee may raise. Thus, franchise companies may want to consider this shortcut to damage calculations... and as a means of keeping franchisees from seeking bankruptcy protection.

And, if a franchise company does not build a Liquidated Damages clause into its franchise agreement, should a franchisee negotiate for one? In states where courts have or may award damages for the FULL remaining term, it seems logical for franchisees to pursue this stop-gap clause. To determine if it is wise for a franchisee to negotiate for a Liquidated Damages clause, seek out an experienced franchise-lawyer in your area, preferably a member of the American Bar Association's Forum on Franchising.



Wednesday, August 7, 2019

Liquidated Damages - Friend or Foe? (Part One)

This topic has only been mentioned tangentially in this blog some time ago -- Franchisees - Damages Warning: Lost Future Royalties (see the last paragraph of that post)

In my experience, Liquidated Damages are most commonly found in construction contracts, where damages can be imposed for delays in completion or other material breaches. But we jump the gun. What are Liquidated Damages and what the heck do they have to do with franchising?

Simply stated, Liquidated Damages is the amount of money that both parties in a contract agree upon if a breach of contract occurs or legal action arises as a result of a contract breach. That is, if there is a breach by one party, instead of arguing about the potential actual damages that may result, the parties agree in advance at the time of the contract is signed  that the damages will be predetermined. Sounds simple enough ...

But, Liquidated Damages has a checkered past and, if applied in a punitive or excessive manner, can be challenged as an unenforceable "penalty," even though the parties "agreed" in advance. Therein lies the rub: agreed? Oftentimes Liquidated Damage provisions are imposed by one party and, when that occurs, the "penalty" argument ensues. Although there is more legal nuance to how Liquidated Damages work, let's turn to how Liquidated Damages are used in franchising.

The post mentioned above Franchisees - Damages Warning: Lost Future Royalties summarizes the hazards that can ensue when a franchise agreement is terminated by a franchisee prematurely (i.e. before the full contractual term is fulfilled) and the franchise company seeks damages in the form of "lost future royalties" and other lost fees the company expected. If there is no Liquidated Damages clause, some franchise companies believe they are entitled to the lost royalties and fees for the entire remaining balance of the contract term (think: a 20-year term with 10 years left to go). This can be a hefty amount! And some courts have granted these types of damages. Very bad for franchisees.

Of course, the higher the amount sought, the greater the likelihood that a franchisee will fight or perhaps seek the shelter of a bankruptcy court. This increases the franchise company's legal fees and may leave the company holding an empty bag. Very bad for a franchise company.

So there are risks on both sides.

Stayed tuned for Part Two of this post where we will discuss how some companies may use Liquidated Damages to their advantage and why franchisees may want to negotiate for a Liquidated Damages clause (even though this may sound counter-intuitive).


Thursday, August 1, 2019

Marijuana - Pot - Cannabis ...the Bud Turns

Some of the MOST popular posts on this blog have concerned franchising and marijuana. (See "Franchising Marijuana" Part OnePart Two, Part Three and Part Four)

Franchise lawyers have been nipping around issues concerning the ultimate franchising of cannabis-related businesses. With the passage of more and more state laws legalizing medical and recreational pot, franchising and marijuana is a hot topic. (Illinois is a recent entrant)

In 2016, an article appeared in the American Bar Association's Franchise Law Journal that I mentioned in this blog: Franchising a Marijuana Business: It's not Quite Mission Impossible. Shannon McCarthy (a partner with Miller Nash Graham & Dunn, LLP in Seattle, Washington) and Dawn Newton (a partner with Donahue Fitzgerald, LLP in Oakland, California) provided a comprehensive treatment of the legal issues and challenges.

This month, Rochelle "Shelley" Spandorf  added to the legal literature with "Cannabis Entrepreneurs: Know the Perils of 'Accidental Franchising."  

Shelley is a franchise-colleague of mine from the American Bar Association’s Forum on Franchising. She is a partner in the Los Angeles office of Davis Wright Tremaine. A certified specialist in franchise and distribution law in California, she has dedicated her legal practice to representing primarily franchisors, suppliers and other brand owners expand through trademark licensing. She is the first woman to chair the American Bar Association’s Forum on Franchising, the nation’s preeminent association of franchise attorneys, and has twice chaired the Franchise Law Committee of the California Lawyers Association.

In other words, Shelley knows what she is talking about! Her article shines a bright spotlight on the subject and it is worth a read. Thanks Shelley!