Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchise Mediation Clauses Are Under Fire in 2026
Transcript
- Lucas: Luna, I want to start with a number: in 2024, roughly 78 percent of new franchise agreements in the U.S. included a mandatory mediation clause. That's up from about 52 percent a decade ago. And yet, franchisee advocates are starting to argue these clauses aren't neutral at all. Luna: Okay, that's a big shift. So the idea is mediation is supposed to be cheaper and faster than going to court, but if the deck is stacked, what's the point? Lucas: Exactly. And we've got a concrete case to talk about. A Midwest-based quick-service brand — I'll call it 'Burger Quick' — is facing a class-action right now. Franchisees claim the mediation clause was used to stall legitimate claims about underperforming locations. The franchisor would agree to mediate, pick a mediator from a short list they'd pre-approved, and then mediation would drag on for months. By the time it failed, the franchisees were out of money or time to file a lawsuit. Luna: Right, because the franchise agreement usually has a statute of limitations clause, too. You miss that window, you're done. Lucas: And you know, a quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. If these conversations have moved your work forward in some small way, that's the only reason they keep coming. Luna: Yeah, it's a small group, but it means we stay ad-free and focused on the stuff that actually matters for franchise owners. Lucas: So back to Burger Quick. The mediation clause in their contract required a 50-50 split of mediation costs, which sounds fair on paper. But the franchisor maintained a list of approved mediators — all retired judges from a single regional firm. Franchisees could request someone else, but only if that person agreed to the franchisor's fee cap. And guess what? Most independent mediators wouldn't touch it. Luna: So effectively, the franchisor controlled the mediator pool. That's not a neutral process. Lucas: Right. And the data backs up the frustration. A 2025 study from the American Arbitration Association looked at over 1,200 franchise mediations. They found that franchisees prevailed in only 12 percent of mediated outcomes. Now, mediation isn't supposed to have a 'winner' — you're looking for settlement — but when one side consistently gets less than what they'd get in court, the process isn't working. Luna: Twelve percent. That's brutal. And I imagine the costs are still high, even in mediation. What's the typical spend? Lucas: The AAA study pegged the average franchisee cost for a mediation at around $18,000, including legal fees. For a single-unit owner, that's a serious chunk of working capital. And the median time to resolution was seven months. Compare that to a small claims case that might take three months and cost five thousand. The mediation clause is supposed to save money, but for many franchisees, it's just a speed bump. Luna: So what's the proposed fix? I know the FTC has been looking at this. Lucas: There's a proposed FTC rule that would require franchise agreements to offer a cost-neutral mediator selection process. Basically, both sides would submit a list of five potential mediators, and the final choice would be random or by a neutral third party. The idea is to remove the franchisor's thumb from the scale. The rule would also require that mediation not extend beyond 90 days unless both parties agree. That would prevent the stall tactic. Luna: Ninety days seems reasonable. And cost-neutral selection — does that mean the franchisor can't impose a fee cap that excludes qualified mediators? Lucas: Exactly. The fee would be split, but both sides would have equal say in who mediates. Some franchise systems are already moving ahead voluntarily. There's a large fitness franchise — I won't name them — that removed their mandatory mediation clause entirely last year. They said it was part of an effort to attract better franchisee candidates. They found that experienced multi-unit owners were specifically asking about dispute resolution clauses during the discovery process. Luna: That makes sense. A sophisticated franchisee knows that the fine print matters. If your clause is designed to bury them, they'll go to a brand with a cleaner contract. Lucas: And that's the emerging counter-narrative. Some franchisors are starting to see mediation clauses as a liability, not a protection. When a franchisee feels trapped, they're less likely to invest in growth. They're also more likely to organize. The Burger Quick class action now has over 80 franchisees signed on. That's a lot of discovery, a lot of bad press. Luna: What's the status of the FTC rule? Is it likely to pass? Lucas: As of May 2026, the comment period closed in February. It's sitting in the rulemaking pipeline. There's bipartisan support for the general idea of fairness in arbitration and mediation, but the franchise industry lobby is pushing back hard. They argue that mediation clauses reduce litigation costs overall and that the current system works for 88 percent of disputes that settle. Luna: But if those settlements are skewed, that's not really a win for franchisees. It's just a win for franchisors who avoid paying fair compensation. Lucas: Right. And here's a detail from the lawsuit filing: one franchisee alleged that after mediation failed on a claim about misrepresented sales data, the franchisor demanded a confidentiality clause as part of the mediation agreement — before mediation even started. The franchisee would have been barred from discussing the claim publicly even if mediation broke down. The court struck that provision down, but it shows how far some franchisors are pushing the process. Luna: So if you're a current franchisee or considering one, what should you look for in a mediation clause? Lucas: Three things. First, who picks the mediator? If the franchisor has a list, ask if you can add names. Second, is there a time limit on mediation? If it's open-ended, you could be stuck for a year. Third, what happens to your right to sue after mediation? Some clauses require mediation as a condition before any litigation, but they don't extend the statute of limitations. So if mediation takes eight months, you might only have four months left to file a lawsuit. Luna: That third one is huge. A franchisee might not even realize the clock is ticking while they're 'negotiating in good faith'. Lucas: Exactly. And that's why some franchise lawyers now recommend a 'carve-out' clause — if mediation doesn't resolve the dispute within 60 days, the franchisee can proceed directly to arbitration or court. A few progressive franchise systems are offering that voluntarily. Luna: So the smart franchisees are voting with their feet. I wonder if the FTC rule will accelerate that trend or if the industry lobby will water it down. Lucas: That's the open question heading into the second half of 2026. If the rule passes, it could reshape how franchise agreements are written for decades. If it stalls, franchisees will have to rely on their own due diligence — and that might mean walking away from brands that won't negotiate on mediation terms. Luna: And honestly, for a brand like Burger Quick, that lawsuit might cost more in legal fees and reputation than any mediation savings they ever had. Lucas: Yeah. It's one of those things where the short-term protection becomes a long-term liability. We'll keep an eye on the FTC rule and the Burger Quick case. But for now, the takeaway is: if you're signing a franchise agreement, read the dispute resolution section as carefully as you read the financial disclosures. It might matter more than you think. Luna: Good advice. And if listeners want to dig deeper, we'll have links to the AAA study and the FTC proposed rule in the show notes. Lucas: Absolutely. That's it for this episode of Franchise Conversations. We'll be back next week with another angle that affects how you buy, run, or scale a franchise business.