Legal proceedings: what to disclose before offering a franchise

Before turning a business into a franchise, you need to check whether any legal proceedings could affect what you will offer prospective franchisees. A dispute over the trade mark or the franchise system itself cannot simply stay in the solicitor’s file. In franchising, transparency starts before an agreement is signed: prospective franchisees need to understand the relevant risks, and franchisors need a process for identifying and communicating them properly.

1. Understand which proceedings the law requires you to disclose

Brazil’s Law No. 13,966/2019, known as the Franchising Law, governs business franchising in Brazil and repealed Law No. 8,955/1994. Article 2, item IV, requires certain legal proceedings to be disclosed in the franchise disclosure document, known locally as the Circular de Oferta de Franquia (COF).

The obligation covers franchise-related proceedings that challenge the system or could jeopardise its operation in Brazil, where the parties include the franchisor, its controlling companies, the sub-franchisor or the owners of the trade marks and other intellectual property rights.

This has two practical consequences. First, checking only proceedings linked to the future franchisor’s CNPJ — its Brazilian corporate taxpayer registration number — may not be enough. Second, the rule does not require an indiscriminate list of every case involving any company connected with the business.

Whether a case falls within the disclosure requirement depends on its subject matter, the parties involved and its potential impact on the franchise. This assessment should be made with legal advice, rather than using the value of the claim as the sole filter. A low-value dispute may involve a significant operational restriction.

2. Look beyond the future franchisor

Start by mapping out the legal structure that will support expansion. Identify who will offer the franchise, who controls that company and who owns the intellectual property rights used in the business. If there is a sub-franchisor, include it in your review.

A newly incorporated franchisor may have no proceedings against it, while the trade mark owner faces a dispute directly relevant to the operation of franchise outlets. Registering a new company with a new CNPJ does not remove that concern.

Create an internal record for each potentially relevant case, including:

• the case number, court and parties involved;
• the subject matter and remedies sought;
• the stage of proceedings and any rulings already issued;
• any measures restricting activities or the use of rights;
• the potential impact on the franchised business;
• the lawyer responsible and the date of the latest update.

This record is a management tool, not a list of fields expressly required by the Franchising Law. It helps you produce accurate, verifiable information.

Combine court record searches with information from the lawyers and legal entities covered by the requirement. A search alone may not clarify the scope of a ruling or provide access to proceedings subject to court confidentiality restrictions. In these situations, handling the information requires specific legal advice.

3. Explain the proceedings in terms of understandable risks

Prospective franchisees do not need complete copies of court submissions to understand a risk. They need an objective, accessible and accurate description, consistent with the legal requirement for clarity in the COF.

A practical way to structure the explanation is to answer: what is being disputed, what stage have the proceedings reached, and how could the case affect the franchise?

Consider a case concerning the right to use the trade mark offered to franchisees. The review should establish whether any ruling restricts its use, which rights are in dispute and what operational consequences are possible. It is not appropriate to present continued use as guaranteed simply because an appeal is still possible.

It is also important to distinguish allegations from rulings. The existence of proceedings does not mean that wrongdoing has been established. Equally, a favourable ruling that remains open to appeal should not be described as a final resolution.

Avoid vague phrases such as “an insignificant case” without a supporting legal assessment. Keep an internal record of the reasons for including or excluding each case from the mandatory disclosure. This reduces ad hoc decision-making and makes future reviews easier.

4. Update the information before each offer

The review does not end when the first COF is ready. New proceedings, interim injunctions and judgments can change the situation as the business expands.

Assign someone to receive updates from the lawyers and pass them on to whoever maintains the COF. Before giving the document to a prospective franchisee, confirm that the version being used reflects the relevant information available.

The law requires the COF to be delivered at least ten days before a contract or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. If a material change arises after delivery, ask your legal advisers to review the updated documentation and assess the applicable waiting period before proceeding.

Omitting legally required information or providing false information may trigger the consequences set out in the Franchising Law, including challenges to the validity of the agreement and repayment of sums paid, depending on the circumstances.

In practice: before offering your first franchise, map out the relevant parties, review the proceedings with your legal advisers and establish a routine for keeping information up to date. Transparency depends on verified information, not general assurances.