Legal proceedings involving the franchisor: what to assess before buying

Before buying a franchise in Brazil, it is worth investigating not only what the brand promises, but also which disputes could affect your business. A lawsuit does not automatically make a network unsuitable, just as the absence of disclosed proceedings does not guarantee safety. For prospective franchisees, these checks help turn concerns into specific questions and clear conditions for making a decision.

1. Understand which proceedings must appear in the COF

Law No. 13,966/2019, Brazil’s current Franchise Law, replaced Law No. 8,955/1994. Article 2, item IV, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to identify franchise-related legal proceedings that challenge the system or could jeopardise franchise operations in Brazil.

This obligation covers proceedings involving the franchisor, its controlling companies, the sub-franchisor, and the owners of the trade marks and other intellectual property rights. Checking only the network’s trading name is therefore insufficient: a relevant dispute may involve another legal entity connected with the business.

The legal requirement does not amount to listing every lawsuit involving these companies. The test is whether proceedings relate to the franchise and could challenge its system or jeopardise operations. A short list of proceedings should therefore not, on its own, be taken as evidence of an omission.

Ask for written clarification if the COF mentions a dispute without providing enough information to understand its significance. Request the case number, court, parties, subject matter, current stage and any rulings affecting the network. These details are practical due diligence requests, not a list of information expressly required by item IV.

2. Check the parties involved and consult official sources

Start with the company details provided in the COF. Compile a list showing each participant’s registered company name, CNPJ (Brazilian corporate tax identification number) and role: who will sign the agreement, who controls the franchisor and who owns the rights used by the network.

With a lawyer’s assistance, consult the relevant courts’ official websites. Searches using CNPJ numbers help reduce confusion between companies with similar names. Depending on the circumstances, it may also be useful to request court certificates and copies of key documents from the cases identified.

Organise the results in a simple record:

• Identification: case number, court and parties involved.
• Dispute: what is being sought and what events gave rise to the dispute.
• Status: whether there is an interim ruling, judgment, appeal or closure of the case.
• Potential impact: the specific consequences for the outlet you intend to open.
• Outstanding information: any documents or clarification still needed.

No single search provides complete coverage. Confidential proceedings, system limitations and differences in the scope of court certificates can restrict access. Record the date and scope of each check, and do not treat a search that returns no results as a guarantee that no litigation exists.

3. Assess the substance, not just the number of cases

Counting lawsuits is less useful than understanding their nature. A larger or longer-established network may have more disputes simply because it has more business relationships. Conversely, a single case may warrant particular attention if a ruling could halt an essential activity.

It is also vital to distinguish allegations from judicial findings. The initial claim sets out the claimant’s version of events; it does not, by itself, prove wrongdoing. An interim ruling may be changed, while a judgment may still be subject to appeal.

Focus on three questions:

1. Is there a pattern? Disputes involving similar accounts of pre-contractual information or the network’s obligations warrant closer investigation, even without a final ruling.
2. Is there an operational impact? Check whether any court order could restrict an activity necessary to run your future outlet.
3. Can the explanation be verified? Compare the franchisor’s response with documents and rulings, rather than simply accepting descriptions such as “an isolated case”.

The amount sought in a lawsuit does not automatically represent an established debt either. Ask your lawyer to assess the stage of the proceedings and their possible effects, rather than treating the sums claimed as certain losses.

4. Use the analysis to decide before making commitments

Send the franchisor a consolidated list of questions and request documented answers. For each significant risk, ask how it would affect your outlet and what steps the network would take. General assurances that “nothing will happen” are no substitute for a substantiated explanation.

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

If a material concern remains unresolved, postpone making a commitment. If your decision depends on a specific contractual safeguard, ask your lawyer to assess its wording and feasibility; a sales discussion does not provide the same protection as a formally documented obligation.

In practice: proceed when you can explain, with supporting documents, which disputes matter, how they could affect your outlet and why the remaining risk is acceptable to you.