From DDIFO Magazine Independent Joe Issue 1 May 2009, by Judy Rakowsky

In 1995 when many major brands were turning away from courtroom battles to resolve problems between franchisors and franchisees, Dunkin’ Donuts’ legal counsel spoke to the brand’s firm embrace of mediation.

“Anything that keeps people out of the courtroom is a good idea,” said Jack Laudermilk, Dunkin’ brand’s legal counsel, as he hailed mediation in remarks to Nation’s Restaurant News. “It’s a great program,” Laudermilk said. “It’s fast, inexpensive and nonbinding.”

Indeed, Dunkin’ Donuts was one of the founding members of the National Franchise Mediation program along with Burger King, McDonalds, Pizza Hut, Taco Bell and Hardee’s.

The program was trumpeted in “Settling Disputes” a 1994 book by Linda R. Singer, which chronicled the rise of mediation as a way to resolve business conflicts with far less acrimony and expense than going to court.

“Because of its flexibility, mediation is adaptable to business disputes of all sizes and complexity,” Singer wrote. “The process emphasizes solving problems rather than establishing who did what to whom in the past.”

Mediation has become such a widely accepted alternative to litigation that it is credited with helping to drive a trend away from jury trials. In fact, the American Bar Association set up a “Vanishing Trials Project” because contract cases, among others, are so unlikely to wind up being decided at trial. As cases settled through mediation increased, the rate of civil jury trials decreased by two thirds from 1976 to 2002 in federal and state courts, according to the National Center for State Courts.

But Dunkin’ Donuts has turned its back on the trend of steering clear of the courthouse. The brand does not mention mediation as an option in franchising agreements and, lately, has resorted with gusto to the arena of lawyers and long delays through litigation.

Between 2000 and 2002, Dunkin’ brands filed 350 lawsuits against franchisees compared to 12 similar suits filed by the far larger McDonald’s in the same span, according to Nation’s Restaurant News and the Boston Business Journal. Dunkin’ Brands filed 157 lawsuits against franchisees between January 2006 and June 2007 compared to 5 by Subway, according to those publications. And in 2008, Dunkin’ Donuts filed 50 new lawsuits, bucking a national trend and its previously stated interest in alternatives.

At the recent annual meeting of the American Association of Franchisees and Dealers, DDIFO Chairman Kevin McCarthy said several panelists mentioned the proliferation of litigation by Dunkin’ Donuts.

“I was saddened to hear several references to the fact that DD had become known for being overly litigious with its franchisees,” McCarthy said. “It appears to have become a more common opinion in the franchisee community that things had been deteriorating over the last several years.”

One panelist noted, “In the days of Bill Rosenberg cooperation between the franchisor and franchisees was much better.”

“Litigation creates an environment of lack of trust, of intimidation, and fear,” said Jim Coen, executive director of DDIFO. “It’s not conducive to a strong franchisee-franchisor relationship.”

Coen, also the executive director of the New England Franchise Association, said Dunkin’ brand’s strategy is costly on many levels. It also undermines the shared goals with franchisees of avoiding bad publicity and the corrosive effects of airing conflicts in public. Litigation keeps control in the hands of lawyers and judges, who are not the business experts. “We need to find a way to resolve these disputes more efficiently and in a way that is less costly and involves less intimidation and fear than the current way Dunkin’ Donuts brand does,” Coen said.

In the 1995 Nation’s Restaurant News article, Laudermilk said that one of the nine cases that the brand considered for mediation was not “ripe,” so officials decided to assume a “wait and see” posture. But the brand has made no other public comments to reveal what it may view as shortcomings of the mediation process.

Dunkin’ Donuts officials were asked to comment on Laudermilk’s 1995 statements lauding mediation.

Stephen J. Caldeira, communications chief for Dunkin’ Donuts, did not address the company’s view of mediation, but said in a prepared statement, “At Dunkin’ Donuts, we value the partnership we have built over nearly 60 years with our more than 1,000 franchisees and recognize that our viability as a franchisor depends entirely on their success.  Our goal is, and always has been, to protect the health of the entire system for the benefit of all.  This includes ensuring that every franchisee upholds the same standards, which is the backbone of both a consistently outstanding guest experience and a strong brand reputation. ”

Bob Purvin, chairman of the American Association of Franchisees and Dealers, said that mediation is widely seen by the 50,000 franchisees and over 100 independent franchisee groups in his organization as the way to go.

“Through mediation you can often add value,” said Purvin. “A lawsuit or arbitration is about winning. Mediation is about getting along; resolving, compromising, building.”

Purvin said that often by the time the AAFD hears from a franchise owner involved in a dispute with a franchisor the franchisee is looking to recover damages for a perceived loss. But, Purvin said, when asked his ultimate goal, the franchisee “almost invariably would opt to fix the problem so the relationship can continue as originally envisioned.”

“It is time,” Coen said, “to talk about mediation and to use it.”

“I believe mediation is a much better way to resolve conflicts,” Coen said. “Franchising is all about relationships that continue and that’s where mediation has real benefits.”

Mediation: the choice of auto makers and dealers

Twenty years ago, a major U.S. automaker started mediating disputes with dealers rather than go to court or even arbitration. A few years later, a high-end foreign automaker followed the same path. Neither has ever looked back.

Mediation has long been the mainstay of the automobile sales industry, which recognized it as the fastest and least expensive way to resolve disputes and preserve long term business relationships. Companies and dealers came to appreciate the way it avoids all-out war and all the frayed relationships that come with the time and expense of litigation and arbitration, said Nancy Connelly of Mediation Works Inc., a Boston agency whose mediators handle disputes between dealers and the automakers.

What motivates both the companies and the dealers and propels them toward mediation is the understanding that neither side will make money unless vehicles are sold. Their common interest and mutual disinterest in bad publicity has made a beautiful marriage between mediation and the automobile industry, Connelly said.

“First of all, if you go to court, you let everyone know there’s a problem,” she said.

Connelly cannot share the details of the remarkable mediations that have gone on in the auto industry, but she has had a bird’s eye view on how seemingly intractable disputes get worked out. Long-term contracts are the norm in the world of franchising– the smallest is 5 years, and Dunkin’ Donuts is 20. “What is the value of dragging somebody into court?” Connelly asked. “You might stumble 20 times – do you want to litigate all that?

Michael Webster, a Toronto attorney who deals with franchise relationships, said that many contracts are written to react to the past.

“Franchise contracts are drafted by franchise counsel to worry about the last franchisee legal win and try to draft around that,” Webster said. “But that may have nothing to do with the business problem; in fact it’s likely that it has nothing to do with the business problem.”

Most franchise contracts did not contemplate what would happen if the Dow fell in half and banking became frozen, he said. But such stark changes make negotiating skills essential.

And they highlight the fact that traditional methods of resolving them are not the best.

“If you want to maintain a relationship between the franchisor and the franchisee you simply do not have the luxury of litigation or arbitration,” he said. “Those are relationship-ending moves. If you are going to use them it means you are going to terminate this relationship.”

Legal and business experts often liken franchise relationships to marriages. And everyone knows that messy divorces that drag on in the courts often lead to bankruptcy and lasting acrimony. “With litigation and arbitration, communication is disrupted or markedly changed between the two sides, creating problems for the ongoing business relationship,” said Webster.

“All that litigation does is create a winner and a loser and assign a dollar value to the outcome,” he said.

Mediation, in contrast, is an airing of the viewpoints of the business parties and a negotiation that is managed by a third disinterested party.

No matter how smart a judge or an arbitrator is, “They have no interest in making sure you have the best deal possible,” he said. “They are interested in getting the case off and moved,” said Webster.”

With the auto dealers, the business relationships improved as soon as mandatory arbitration was off the table, said Connelly and Webster. According to Webster, the best part was removing attorneys from the driver’s seat. The role change is more conducive to improving the business relationship. No longer are the attorneys running the show, they are involved only to assist the business people.

“The beauty of mediation is that it allows the parties to deal with issues beyond money damages, the only kind that courts and arbitrators decide,” Connelly said.

Nothing but mutual

“With mediation, anyone can walk away from the table at any time,” said Connelly, whose Boston-based firm keeps 15 mediators busy and only uses mediators who are highly trained and experienced in franchising. That voluntary nature is freeing for the participants. Nothing happens without their agreement.

In fact it is not the mediator that makes a decision. The mediator is the person who assists in the negotiation but does not make a judgment.

“You can craft something that a judge could never address,” she said.

“The benefits of mediation, aside from the savings in time and legal fees, are that each side learns something they didn’t know before. The process brings together top people on each side because mediation by nature is a process conducted between peers. A lot of good is done when one side gets to hear the other say something out loud,” Connelly says.

“Often times what they learn makes them go back and re-evaluate,” she says.

Connelly asks businesses that are considering mediation, “Do you want to win or do you want to get it resolved? There is a huge difference.”

Mediation lets the parties vent. It is a safe forum where no one is taking notes that could come back to haunt either side and no one loses or makes money without the other side agreeing.

“Nothing is printed ever,” she says.

Confidentiality and sharp elbows

That confidentiality has cut both ways with Dunkin’ Donuts. The Dunkin’ brand apparently welcomed the confidentiality of the mediation process in an age discrimination claim that Warren DeLuca brought in New York and which was unsuccessfully mediated before the federal Equal Employment Opportunity Commission. During settlement negotiations, in which DeLuca said he would drop his complaint in exchange for a franchise, Laudermilk said “We’re not in the process of giving out franchises to people that are suing us or made complaints.”

DeLuca tried to use the remark in a 2003 lawsuit as evidence of retaliation, and Laudermilk acknowledged making the remark to the judge. But the judge refused to consider the remark as evidence because mediation proceedings are by definition completely confidential.

“The confidentiality is, however, a fundamental part of mediation that allows all parties to be on equal footing, and which often leads to a more honest and productive exchange,” Connelly said.

“Some franchise systems are not ready to give up the kind of control that has been relinquished for mediation,” Connelly said. But once they realize how satisfying the process can be, they like it.

“They control the outcome because they control the substance of the jigsaw puzzle,” she says. “When you are embroiled in a dispute you aren’t thinking outside your own interests. You get caught in the labyrinth.”

“The auto industry mediations have been very successful,” she says, “because sometimes the dispute is not what it appears to be on the surface. In one case, a dispute that seemed to be about money was aired in a mediation which drew a high-ranking executive to the table. After the issues were thoroughly aired, the manufacturer offered the dealer an apology, which is what he was really looking for. And no one had a gun to anyone’s head — either side could walk out at any time with no record of the meeting that could come back to haunt them in court or arbitration.”

“With mediation, there’s no downside; no risks,” says Connelly. “It’s wonderful.”

Purvin said that the only thing stopping many brands and franchisees from embracing mediation in earnest is a lack of education and understanding.

“I have heard many criticisms of mediation aired by attorneys, ranging from a belief that mediation is a waste of time, to a fear that mediation is a show of weakness, or that the process of mediation exposes ‘secrets’ of the case,” Purvin said in a posting on the AAFD website. He said that many attorneys become impediments to the client taking advantage of mediation because of the attorney’s advice against mediation.

“Clients pay good money for legal representation, and most clients will trust advice of counsel,” Purvin wrote.

That is why, he said, the AAFD is now spending resources on training attorneys about the benefits of mediation – more than it spends on educating franchisees.

Mediation, he said, “is the only facilitative device that we have. It’s about bringing the parties back together.”