Claims by a window sales and installation franchisee against its franchisor were dismissed by a federal district court in Michigan because the franchisee did not comply with the prelitigation mediation procedure in the franchise agreement, requiring the franchisee to seek mediation prior to filing suit.

During the franchisee’s renewal term, the franchisor modified its financial reporting requirements. After the franchisee was terminated based on a failure to comply with the new reporting requirements, the franchisee sued asserting the franchisor wrongly terminated the franchise agreement, despite the franchisee’s attempts to comply.

The renewal franchise agreement required informal discussions with the franchisor and mediation, at the franchisor’s discretion, prior to the filing of a lawsuit. This provision also stated that the mediation requirement survived termination of the franchise agreement. Thus, the franchisor argued, the claims should be dismissed, because the franchisee failed to follow the required mediation procedure.

The court rejected the franchisee’s argument that the mediation requirement was unconscionable because it was only available to the franchisor. The court disagreed, finding that a one-sided mediation option did not rise to the level of procedural or substantive unconscionability.

Next, the franchisee asserted that because the franchise agreement was wrongfully terminated, the franchisor should not be able to require mediation. The court disagreed, explaining that the franchisee offered no support that alleged breach of contract by one party relieves the other of its contractual dispute resolution obligations.

The franchisee then claimed that the mediation requirement did not apply because certain intellectual property claims were exempted from the mediation procedure. The court rejected the franchisee’s attempt to fit its state law claims within an exemption regarding the franchisor’s need to seek judicial relief to protect its intellectual property rights.

Franchisor defaults and/or termination of a franchisee’s franchise agreements often lead to conflict. Franchisees should review contractual dispute resolution procedures with counsel to determine whether an alternative procedure can be lawfully bypassed prior to starting litigation.

CJ Consultants, LLC v. Window World, Inc., 2022 U.S. Dist. LEXIS 170201 (W.D. Mich. Sept. 20, 2022)