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This article deals with what is necessary when a lawyer is considering becoming the attorney for multiple franchisees in a dispute resolution mode -- litigation, arbitration, mediation. It does not discuss being the lawyer for a franchisee association in any non dispute resolution mode. It is addressed primarily to other lawyers. The need for this became obvious from a case which an otherwise apparently good general business lawyer got involved with a group of franchisees and did not know how to address what was required. The result was unfortunate. That kind of result does not need to happen. Here's how to avoid it.
It is secondarily addressed to franchisees who may be shopping for a lawyer for group representation in a dispute, and who don't know what to expect. This will enable them to recognize when a lawyer under consideration knows how to establish and manage the professional relationship.
The two primary events in which a lawyer may have an opportunity to represent multiple franchisees arise when the lawyer already represents one franchisee and others having the same problems wish to be represented by the lawyer who already has a head start on the issues, and when a group of franchisees goes lawyer shopping for someone who understands their situation and has a reputation for focusing on that area of practice.
Every time you represent groups of franchisees there are two ever present undercurrents. The first is positive in the sense that group, common fund representation provides resources sufficient to wage the good fight against the well-endowed opponent that a single franchisee will probably not be able to support. By many joining in a common fund agreement, the franchisor cannot simply 'buy the pot' by doing the kinds of work-multiplying things that wealthy litigants so frequently try to do, and that judges so frequently allow them to get away with. The second is negative in that, no matter the benefit to the client group, the lawyer is going to have a really substantial war chest that will not only enable the best work that may be needed, but will also be seen by any jury or disciplinary panel as another instance where the lawyer is 'getting rich' off the poor clients. If you don't put the retainer agreement together properly in the beginning, you can expect to hear a tirade of invective should the project not turn out positively for everyone who wrote you a check. Since it is not likely to turn out the same for all the clients, accounting for that contingency in the retainer agreement goes a long way to establishing you as a real professional by having pointed that out in writing in the beginning and having that acknowledged in writing in the seminal agreement. It's no crime to make money. It's also not a crime to achieve less than optimal results for some folks, if that is not attributable to a shortcoming on your part. But others who may not have ever had the opportunity to enjoy your good fortune can be counted on to second-guess you at every turn if you have not been both competent and prudent.
In both primary event situations there are many opportunities for conflicts of interest to arise, and great sensitivity for the instances when they will arise is required. Most potential conflicts may be dealt with at the outset. They may be accounted for by adequate disclosure of their likelihood of occurrence and by providing specifically for how they will be handled. Representation of groups of franchisees cannot be effectively managed without all the franchisee clients being signed on to a master retainer agreement that applies to every one of them. In fact, in my opinion, no client should ever be accepted without having first signed a written retainer agreement that sets out the terms of representation in very clear and specific detail. This includes what the lawyer will do; what the lawyer will not be called upon to do; and what the compensation and payment terms are. There are other terms that must be in any retainer agreement, but a basic single client retainer agreement's terms are outside the scope of this article. Every ethics and client relationship management seminar teaches this lesson.
In my opinion, multiple franchisee client representation on contingent fee agreements is simply foolish for the reason that the risks are too high. There are too many unknowns. Too often resolution of the dispute on acceptable terms may not include a cash component that can be used to pay the lawyer. You can put in a direct client pay provision to deal with that, but expect unpleasant surprises when you try to collect. If you do that, you deserve what will happen to you. Effective multiple franchisee representation is possible only when there is a clearly stated written retainer agreement that provides for up front substantial cash and backup resource provisions sufficient to fund the project. Anything else is merely an invitation to a bar grievance and a malpractice lawsuit, plus a terrible collection problem. If the potential clients won't come up with a resource pool of major substantiality, they don't qualify as clients. If you take them on as clients anyway, you are looking for trouble and will probably not be able to provide a positive or acceptable result for them.
There will be the occasional situation in which you feel that some small chance at amicable resolution may still be possible. Usually that is not the case, because the franchisees have already tried that approach and failed, which is why they are now on your doorstep. If you believe that some very short period devoted to one more try at peaceful resolution may have a chance, albeit a very small one, it is appropriate to handle retention in phases. In that event, which will be very rare, you take a smaller up front retainer that is a lump sum fee to cover that initial work. You have to be realistic about it. The initial lump sum fee will be all you get for this work. If what you do starts to look like it may bear fruit, you may be at it for several weeks and you may have to make a few trips. I suggest the fee be substantial in consideration of that possibility. If the franchisor tells you to go to hell right away and you have an obvious large windfall fee, you can always elect to be 'fair' and credit some part of it to future work -- include the credited portion in the common fund retention account for the ensuing litigation. The retainer agreement for this phase should provide that you are doing it on a flat lump sum fee, and will not be required to keep account of time spent or expenses incurred. If you are really smart, you will keep time and expense records anyway. A franchisor will probably see this as an opportunity to drag things out and stall. You have to be able to spot this, and a good way to keep it in check is always to put everything that is done on a drop dead schedule. You tell the franchisor's counsel that you are doing this only as a last resort prior to going to battle, and that if it doesn't bear fruit within a week or two, you will simply stop trying that approach. Every proposal should have an agreed response time. You never agree to give notice of suit before the fact. If you are going to go to war, let the process server be your messenger. This added pressure will work to your advantage if the franchisor seriously wants to get anything accomplished. If they are just stalling, your giving away any possible tactical advantage is adverse to your clients' interests. One of the dangers of this approach is that the franchisor may use it to take a week or so to beat you to the courthouse. You have to weigh this risk of losing your potential to frame the issues in the case according to your lights and to go first and make the first impression on the judge or jury should you have to try the case. That is one important reason why this phased approach is rarely worthwhile.
You want the opponents to know that you have a really big fund and can afford to deal with anything they can throw at you. They will know what you were paid. Franchisees cannot keep secrets. If they think they can run you out of money, they will target that as their first priority. You want this treasure trove resource in front. You won't get it if you lack credibility. If you try to 'make do' on insufficient funds, you will fail miserably, and the clients will tear your heart out. Letting them get to you on the cheap is simply stupid. You aren't helping them, and they will get you for it later. Especially if your client group has a significant number of marginal clients, you will not be able to go back for more money often. Every time you go back for more money you will be told by several or many of your clients that they simply can't afford it. If you let any of them skate without paying, no one will pay you ever again. Secrets do not exist among franchisees. I aint paying if Louie aint paying is the order of the day.
When the franchisor learns you have an appropriate retainer, you will get respect and a better chance at early settlement. If you don't get enough to get you through discovery cut off date, at least eight months, you haven't done it right. By that time, you will have completed your discovery and be in a position to give your clients a high quality 'here's where we are' report. You will be meeting by phone or in person with your leadership committee on a monthly or bi-monthly basis anyway, but your biggest report will be when discovery is complete. If you are in good shape by then, you will get enough to get you all the way through dispositive motion practice and through trial. Bear in mind that if there is a damage case to prove, you may spend $ 50,000 making your damages case, including the cost of really good forensic damage witness resources. Putting your bozo accountant cousin on the stand to put the jury to sleep with boring information that may not stand up on cross examination is the road to disaster. And if you don't know more about the damages issues and accounting and estimating issues that your expert witness, how on earth will you be able to prepare that witness to withstand cross examination? You have to know your damages case so well that if your expert can withstand your cross examination there will likely not be a large problem handling cross examination by opposing counsel. The jury probably won't be packed with accountants. If your expert can be made to look unsure of the testimony by being unprepared for really sharp questioning, they probably will reject everything you offer, leaving you with a 'take nothing' verdict.
Most lawyers think $ 100,000 is a lot of money in a business case. If that's all you have available to run the whole case, forget about it. Bear in mind that many judges won't let you withdraw from a case just because your clients have stopped paying you. If you don't have the guts and the credibility to get paid, your clients may have you over a barrel. Franchisees, like so many others, who think they can get you to work without being paid, will not hesitate to take the fullest possible advantage.
The lawyer must never forget that whatever s/he does, as well as what s/he does not do, is burdened with a fiduciary duty to the client. Whatever might be the leeway for error in any normal commercial relationship is simply not good enough here. The lawyer owes a trustee's duty of faithfulness to the client, and that will be the standard by which every dispute that may arise regarding the representation will be measured.
Be mindful as well that, while the clients benefit greatly from a well managed common fund retention, it means more money for the lawyer than most people, including lawyers, make, by a long shot. You have to be certain that your documentation shows you are worthy of it. You also have to be scrupulous in detailed billings to show with complete transparency how you earn it. After the fact nitpickers are always out there. Lawyers who represent your wealthy opponents may stay at the Four Seasons and fly first class. You stay where you won't be embarrassed having to admit it, and you fly tourist. If you believe you ought to fly first class, pay the difference out of your own pocket. It's perfectly acceptable to have $ 200 dinners, but you don't bill more than $ 50 to the clients -- you pay the rest. This is a very big stewardship issue. You can bet that the judge who is looking at your bills in any billing dispute does not stay at the Four Seasons and does not eat $ 200 dinners. The judge probably never saw retainers like this in the entire course of his or her practice. The judge is only human. Be frugal. If you want to do something to make life a lot easier out of town, stay at a very reasonable hotel, but get a large suite or a small conference room where you can work in your casual clothes with documents and clients and witnesses. When you have to dress up and go to local counsel's office to get anything done, it is much less efficient. That extra space at your reasonably priced hotel is worth its weight in gold.
One of the first tasks to be accounted for here is to assess the scope of the lawyer's knowledge and experience. One may be a very fine general business lawyer, but franchise issues don't always sort themselves out as business logic might suspect. In almost every franchise issue there is the pseudo antitrust problem. Almost every policy in franchising has competition limiting properties. Reductions in competition -- even putting people out of business -- may smell like antitrust, but they are practically never real antitrust problems or opportunities. Many lawyers who think they see an antitrust case in the client's fact pattern get carried away with delusions of triple damages and awards of attorney fees on top of that. Not knowing an antitrust case from a can of dog food, they start talking about millions in recovery opportunities. They induce clients to hire them with such nonsense. They can practically never produce the suggested/promised result. They get into big trouble. They deserve the trouble for not bringing in someone who does know the difference between an antitrust case and a can of dog food. Similarly, if the lawyer has no experience in representing multiple franchisees not in a class action mode, many of the critical representation issues will also be inadequately accounted for. It is critical to disclose to the clients at the outset that the completion of this project may require calling in experienced lawyers and other business and legal specialists to consult and possibly to testify as experts. These people have to be compensated, and that must be accounted for in setting the amount of the retainer. The retainer agreement must recite that it is expected that experienced professionals will be needed at various stages of the project, specifying if possible the areas of expertise in which assistance is expected to be needed. This eliminates the later complaint that if the lawyer had just told them of the limitations in experience, they would have retained someone else in the first place. If it is not in the retainer agreement, the claim that adequate disclosure was made will be disputed in a later contretemps between lawyer and clients.
Put it all in the one document to which every trier of fact will turn for reference to what was and what was not agreed to and what was and what was not disclosed. The encapsulation of everything in the one document is itself strong evidence of the lawyer's due diligence and professional conduct. It is the document by which the lawyer will be harshly or beneficently judged. If that document ever becomes an exhibit in an application for assessment of legal fees and expenses after having prevailed on the merits in the principal case, it's extreme level of professionalism will also make it easier to convince a judge or arbitrator that the lawyer is indeed worth what is being sought.
One of the decisions that must be made at the outset is whom to admit to the client group and whom to exclude. Triage is important. What I do is to tell the potential client group how I see things and how I think they should be addressed, and that if they select me they will have a stated financial obligation to be handled in advance. I tell them never to discuss their personal situations with other franchisees or in any group - not even this group of clients -- and that there will be individual private intake interviews at which they can discuss anything they like without fear of losing confidentiality. In that intake discussion -- one on one -- I learn about facts that pertain to individual franchisees that could potentially hurt the group if that person(s) were to be included in the group. In addition to excluding these negative issue people, I exclude those who are beyond help, usually for reasons of imminent financial collapse. They need a bankruptcy lawyer, and I am not a bankruptcy lawyer. I can consult on franchising issues with their bankruptcy lawyer, but they should not be in the group.
There are other things I tell them at that first meeting, before being retained. I tell them that the franchisor will always hear what we say in our group meetings, because some in the group will seek to curry favor by betraying group confidences. They should never have discussions among other group members about anything they don't want to get back to the franchisor. There is always the danger of the Judas franchisee.
They must also be told that common fund group representation means that everyone contributes to the group fund either in the same amount or the same amount per store or in some other agreed upon formula. They must accept that some may require more work than others and that equality of work from franchisee to franchisee is not required. What would not be covered is a separate suit between them and the franchisor. If the franchisor sues any of them in separate actions that cannot be consolidated by court order with this case, representation in that case is not covered by this retainer. We do what is needed without regard to trying to balance the fee and the work with proportionality. Some may have more problems than others. The franchisor may try to knock off one or more, but not all, through terminations and enforcement of attempted terminations. This gets handled within the scope of retention if it is a part of this main case. The economy of scale means that they each pay less than if they were going it alone and having to pay everything one case at a time, but they have to accommodate exigent circumstances.
They have to be told that there will not be any work done without funds on hand to account for what is needed. If they stop paying, we stop working. While some judges may keep you on the case anyway, it is important to have the agreement provide that the failure to provide funding when required constitutes termination of the attorney-client relationship. No one can be allowed to believe they have a shot at free legal work, or everything will fall apart. The agreement must at that point also contain a provision in which they covenant to obtain other counsel to represent them should funding not be provided as needed and that they consent to your withdrawal in that situation.
They should also be told that it is normal for the biggest franchisees to try to drive the agenda to suit their needs. If the group is large enough for a liaison committee to be established, it should have a large franchisee and a small franchisee membership. The tendency for larger franchisees to try to drive the agenda is another reason for triage. Any small franchisee who feels relegated to second-class citizenship because of this tendency should simply decline to join the group.
In my opinion, it is an ultimate conflict of interest to suggest that any client in the group who receives a settlement proposal that s/he wants to accept defer or decline acceptance. Group loyalty does not extend to that level of sacrifice. You still have a fiduciary duty to each group member, and asking one to stay in a fight when there is a way out that s/he likes can entail major adverse impact on that person's financial condition and future. It simply should never be called for. It can only lead to trouble. What that signifies is that the larger franchisees may get an offer they like that is not extended to the smaller franchisees. If the big franchisees want to accept that proposal, that is their right. That may mean that more money to fund continuation of the representation will thereafter be needed from smaller franchisees who are less able to handle it. They have to know of this contingency before they get in with that first payment. If not, you can bet that they will later claim they would never have hired you if they had known this might happen, and they will demand return of everything they have paid. Even if they may not be entitled to the refund, you can forget about any positive relationship from that point forward. It will have been completely compromised.
You must inform the potential client group that prioritizing goals and agendas may save large amounts of money. If the goal is to terminate the franchise agreement without having to comply with a covenant not to compete, that is an easier and less expensive case to try. If they also believe they must recover damages from the franchisor, the case is made more difficult and more expensive. There must be damages expert witnesses. The franchisor may be willing to settle for relationship relief, but less willing to write a check in addition to that. Those who don't believe they have to go for money damages recovery may not wish to pay for the added burdens imposed by the other agenda. This must be discussed up front. It is usually tactically prudent to put a damages claim in the lawsuit, even if at the outset there is no real intent to underwrite the added burden unless there is no choice. Then, if the franchisor digs in his heals, and if there really are recoverable damages, that burden simply must be undertaken. If there is this kind of schism among the group, the franchisor will learn of it anyway. You don't, however, reduce the retainer just because it is not expected that damages may have to be proved. That will often come back and bite you.
It is imperative that you convince your franchisee client group that this is not a subject for idle discussion. They are not supposed to chat about it with social friends or with anyone other than in a proper communication with you concerning the case. They must understand that they will probably be pretext visited by apparachiks of the franchisor, seeking to get them to say things against their interests. These may include people pretending to be interested in buying their business. It may be people pretending to be journalists looking for an interview for a news article they are writing or a television report, concerning the franchisor or the business in general. It is extremely difficult for people to resist the temptation to be interviewed. It is electric -- they think they are about to become a celebrity. This has to be talked about by you in very explicit terms, so that they understand that anything they say may come back and bite them squarely in the ass. And that includes anything they say among each other. There will certainly be a Judas in their midst who will testify for the franchisor about any conversation, and that person's recollection about what was said will be skewed toward the franchisor's interests and against the interests of the franchisees. Then it just becomes their word against your client's. A judge or a group of jurors may just as easily decide to believe the testifying adverse franchisee. The risks are enormous. What must be told them -- and this should also go into the retainer agreement -- is that any and every inquiry about the business or the case or their relationships should just be referred to you as the lawyer, without anything else being said.
The clients must also agree that if any of them violates the terms of the retainer agreement in any manner that may have the potential to cause adverse consequences to the group or to the case, that person may be excluded from the group and denied further representation. They must agree in the retainer agreement to that protocol, and agree as well that they will not be entitled to any refund of any funds they paid into the common case retention fund in such event. When someone betrays the cause, a conflict arises in continuing to represent the traitor. That conflict can only be avoided by expulsion. This is deadly serious business, and consequences to such behavior must be contemplated and agreed to. Obviously, similar expulsion will be provided for in the event of non-payment of retention funds. In this day and age it might also be prudent for the clients to consent to your giving notice of expulsion to the other clients along with instructions that the expelled client no longer be treated as a group member for any purpose.
The retainer agreement requires several additional provisions that any agreement would require, including dispute resolution, choice of law, entireties and so on and so forth. Those provisions are not part of the scope of this article.
It is important to remember that you aren't there to help everyone. You are only there to help those who wish to be helped by subscribing to a management protocol that is adequately funded and clearly stated. In the end, they will or they won't. If you weasel out of a strong position hoping to get clients, you really do deserve everything that will probably happen to you.
Copyright 1997 - 2010 || Richard A. Solomon
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