Franchise litigation: what to assess before you buy

A lawsuit against a franchisor does not, in itself, mean that the brand is a poor choice. Equally, a sales presentation that makes no mention of disputes is no guarantee of security. To make an informed decision about joining a franchise network, prospective franchisees need to understand what disputes exist, what is at issue and how the potential outcomes could affect their future outlet.

1. Understand what the Franchise Law requires franchisors to disclose

In Brazil, Law No. 13,966/2019, known as the Franchise Law, requires franchisors to provide a franchise disclosure document, the Circular de Oferta de Franquia (COF). Article 2, item IV, requires disclosure of franchise-related lawsuits that challenge the system or could jeopardise franchise operations in the country.

This obligation covers proceedings involving the franchisor, its controlling companies, the sub-franchisor, and the owners of trade marks and other intellectual property rights. Your review should therefore extend beyond the trading name presented at the sales meeting.

The legal requirement does not amount to a list of every court case involving the company. A debt recovery claim with no significant connection to the franchise may have different implications from a dispute that could prevent use of the brand. A lawyer should assess whether each case falls within the disclosure requirement, considering its subject matter and potential effects.

The COF must be provided at least ten days before you sign a contract or preliminary agreement, or pay any fee to the franchisor or a person or company connected with it. This is a minimum advance disclosure period, not a requirement to complete your investigation within ten days.

2. Cross-check the network’s disclosures against independent searches

Start with the full details of the franchisor and any other relevant legal entities identified in the documentation. Record each company’s registered name, CNPJ (Brazilian corporate taxpayer registration number), previous names and relationship to the franchise offering. Searching only for the brand may produce incomplete results or confuse unrelated businesses.

With legal assistance, search the relevant courts’ official portals. Depending on the company’s activities and the risks being investigated, this may involve state, federal and labour courts. Court-issued certificates can also help, but their geographical scope, time coverage and the identifying details used in searches may be limited.

Organise the results in a simple table:

• Identification: case number, court and parties involved.
• Subject matter: the obligation, conduct or right in dispute.
• Status: the stage of proceedings and any significant rulings already issued.
• Potential impact: consequences for opening or continuing to operate the outlet.
• Outstanding information: any documents or explanations still needed.

Public searches may not reveal proceedings held under seal or provide all the documents needed. An absence of results should therefore not be treated as a guarantee that no litigation exists. Request documented explanations for any significant gaps.

3. Assess patterns and consequences, not just numbers

Counting cases is not enough. Networks of different sizes and with different histories cannot be compared solely on the raw number of lawsuits. It also matters whether the franchisor is seeking to enforce an obligation or defending an allegation, without assuming that either position means it is in the right.

Pay particular attention to three situations:

Disputes that could interrupt operations. A dispute over the right to use an essential asset calls for an assessment of interim measures, appeals and operational alternatives. The mere fact that an application has been made does not mean it has been granted.

Repeated similar allegations. Claims by different franchisees concerning information supplied during the offer process or unfulfilled obligations warrant closer scrutiny. Check whether they concern comparable facts, the same period and the same version of the contract.

Gaps between statements and documents. If the network says a problem has been resolved, look for the corresponding ruling, settlement or other record. A case being closed, a settlement and a judgment on the merits are not the same thing.

An initial claim sets out one party’s account, not conclusively established facts. Examine the defence and any available rulings as well.

4. Turn your findings into criteria for your decision

Send clear questions in writing: what exposure does the network face, is there any ruling currently in force that affects its outlets, and what steps have been taken to prevent the problem recurring? Request documents supporting the answers, subject to confidentiality restrictions.

Ask your lawyer to assess the risks relevant to your purchase, distinguishing between legally required disclosures, useful supplementary information and contractual consequences. Omitting required information or including false information in the COF may trigger consequences under the Franchise Law, with its application depending on the circumstances of each case.

Do not treat a verbal explanation as automatically concluding the review. If an essential question remains unanswered, postpone your decision rather than assume it will be resolved after signing.

In practice: proceed only when you can explain which disputes matter, how they could affect your outlet and which documents support your assessment. Investigating disputes does not eliminate risk, but it helps you avoid buying without recognising it.