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Managing 'Perfect Storm' Litigation for a Franchise System
A “perfect storm” is a detrimental or calamitous situation or event arising from the powerful combined effect of a unique set of circumstances. A confluence of events, including major litigation against the franchisor, can create a “perfect storm” setting for a franchise system. In this setting, the franchise system may find itself in a no-win situation in which all potential solutions or avenues of escape lead to a result that is tantamount to death of the system: bankruptcy, closure of the system, or a dramatic change in the system's business and sources of revenue. When the litigation cannot be settled or otherwise resolved, management of the franchise system and counsel must take extraordinary steps to manage and solve the problems.
A hypothetical example of perfect storm litigation is a system that relies on a group of patents that provides franchisees with a competitive advantage in the system's market. Patent litigation is instigated by a national competitor that asserts infringement claims based on its own patents and also seeks to invalidate the system's primary patents based on inequitable conduct when the patent applications were first filed. While there is often significant uncertainty in patent litigation, the franchise system being sued might be facing a perfect storm if it cannot settle. A jury trial that results in a judgment in favor of the plaintiff and invalidity of the system's patents may be a risk the system cannot take.
Below are 10 litigation management measures that outside counsel and the system should take to manage perfect storm litigation.
1. Identify that the confluence of the litigation and other events creates a perfect storm environment. Management's recognition that the litigation is extraordinary is key. The perfect storm will be apparent in some circumstances, such as when the system is suddenly confronted with an unpredictable judgment large enough to be fatal to the system. The crisis will be less obvious and unpredictable in other circumstances, such as when the perfect storm is the confluence of litigation and multiple, exogenous forces, such as dramatic changes in the system's market or new governmental regulations.
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