What Is Mediation
Mediation is a voluntary dispute resolution process where a neutral third party helps you and your franchisor negotiate a settlement without going to court. Unlike arbitration or litigation, mediation gives you direct control over the outcome. If you can't reach agreement, you walk away and pursue other remedies.
Mediation in Franchise Disputes
Many franchise agreements require mediation before arbitration or litigation can proceed. This mandatory pre-dispute step appears in Item 19 of the Franchise Disclosure Document (FDD), which outlines all dispute resolution procedures. The FDD also specifies where mediation takes place, who pays mediator fees (typically split 50/50), and how long the process can last, usually 30 to 60 days.
Common franchise disputes involving mediation include territory encroachment, renewal term denials, franchise fee disputes, and breaches of franchisor obligations outlined in the franchise agreement. Because mediation preserves your relationship with the franchisor, some buyers prefer it when the dispute might be resolvable through negotiation.
How Franchise Mediation Works
- Pre-mediation review: Before entering mediation, have your attorney review the franchise agreement's mediation clause. Confirm the timeline, cost allocation, mediator selection process, and whether settlement discussions remain confidential.
- Mediator selection: The FDD may specify mediator qualifications. Some franchise agreements require mediators with franchise industry experience. Verify this before the process begins.
- Mediation session: You, the franchisor, and your lawyers meet with the mediator. The mediator meets separately with each party to understand positions and explore settlement options. This shuttle process typically takes one to three sessions over several weeks.
- Settlement agreement: If you reach agreement, it becomes binding. If mediation fails, you can proceed to arbitration or court as specified in your franchise agreement.
- Cost and timing: Mediator fees range from $1,500 to $5,000 per day, depending on complexity. Split costs typically run $750 to $2,500 per party per session.
What to Check in the FDD
- Item 19 specifies mandatory mediation before arbitration. Verify the timeline you must follow to initiate mediation after a dispute arises.
- Confirm whether the franchisor's Item 19 clause allows you to pursue mediation for disputes over territory rights, renewal decisions, or franchise fee disputes.
- Check if mediation is truly optional or if refusing it forfeits your right to arbitration later.
- Look for any cost-shifting language that might require you to pay the franchisor's mediation costs if you don't "substantially prevail."
Mediation vs. Arbitration
Mediation lets both parties control the outcome. Arbitration hands that control to an arbitrator who decides the winner. Mediation is also faster and cheaper if it works. Many franchise agreements require you to attempt mediation first, then move to arbitration or court if mediation fails within the specified timeframe, usually 60 days.
Common Questions
- Can I be forced into mediation if I don't want to? Yes, if your franchise agreement includes a mediation clause in Item 19. Refusing to participate may void your right to arbitrate or litigate later. Review this clause before signing.
- Is what I say in mediation confidential? Generally yes. Mediation communications are typically protected from disclosure in subsequent arbitration or litigation. Confirm this confidentiality protection in your franchise agreement or local mediation law.
- What happens if mediation fails? You move to the next step specified in Item 19, usually binding arbitration. Your franchise agreement defines this sequence. Document all failed settlement offers in writing for arbitration proceedings.