Buying a Franchise: Check the Network’s Legal Disputes

Even a compelling brand can carry legal risks, such as a dispute over essential usage rights or a business practice challenged by a regulator. If you are considering joining a franchise network, you should therefore examine not only the offer but also relevant legal disputes involving the network. What matters is not whether there has ever been a dispute, but whether a conflict could affect the business you plan to run.

Which legal disputes matter when joining a franchise

Not every dispute involving the franchisor is a warning sign. A single unpaid supplier invoice says little about the viability of the business model. The position is different if proceedings concern core elements of the concept or similar disputes arise repeatedly.

Focus your checks on four categories:

• Proceedings concerning the business model: Are key sales practices, services or advertising claims being challenged on legal grounds?
• Disputes over rights essential to operations: Could the use of a name, software or other core elements be restricted?
• Recurring disputes with franchisees: Do disputes repeatedly concern the same promised services or contractual provision?
• Proceedings with significant financial consequences: Could payment obligations or court orders affect the support available to your business?

Concluded proceedings can also be revealing. What matters is how the network has responded. A problem that has demonstrably been resolved should be assessed differently from an unchanged practice that continues to generate disputes.

Also ask about specific threatened claims and formal legal warnings, where these could affect your future business. Asking is a sensible part of due diligence, but it does not mean that every legal disagreement must automatically be disclosed.

What German law requires on disclosure

Germany has no specific franchise act and no national franchise register. The legal requirements arise primarily from general civil law. During contract negotiations, the key provisions are the pre-contractual duties to have regard for the other party’s rights and interests under sections 311(2) and 241(2) of the German Civil Code (BGB), together with the principle of good faith under section 242 BGB.

The franchisor must disclose material circumstances that are recognisably significant to the decision to enter into the agreement. These may include ongoing legal disputes if they could affect the prospective franchisee’s business. The scope of this duty depends on the circumstances; there is no blanket obligation to provide every litigation file or details of every past dispute.

The key question is: could the dispute influence your decision to join? A potential restriction on a core product or service, for example, is different from a minor dispute unrelated to the business.

There is no statutory disclosure deadline specific to franchising. However, information must be provided sufficiently far in advance of a binding decision to allow a proper assessment. Where the relevant legal conditions are met, a culpable failure to provide accurate or adequate information may give rise to a claim for damages. Not every shortcoming in disclosure automatically entitles you to end the agreement.

What information and evidence to request

Ask for a written overview of proceedings that could affect your planned business. A focused, factual enquiry is more useful than a blanket demand for confirmation that the network is ‘free of legal risks’.

Your questions should cover the following points in particular:

1. Subject matter: Which specific service, practice or contractual provision is affected?
2. Stage of proceedings: Are there only demands at this stage, has a claim been filed, has the court issued an interim ruling, or is there already a final, binding judgment?
3. Scope: Does the dispute concern individual locations or a concept used throughout the network?
4. Operational impact: What changes might be needed to products or services, equipment or working procedures?
5. Contingency planning: What alternatives and organisational measures have been prepared?

Where necessary and available, request suitable supporting evidence. This might include redacted court decisions or a clear summary of the current stage of proceedings. Data protection and legitimate confidentiality interests must be respected, but they do not, in principle, prevent a meaningful explanation of the risks.

Your own research can supplement the information provided. Published court decisions and reputable reporting may offer useful clues. However, they do not provide a complete picture: not every case is published, and decisions are often anonymised. Finding no search results is therefore not proof that there are no disputes.

How to use the information to make a purchase decision

Do not assess the number of cases alone. Evaluate each significant dispute in terms of potential business interruption, additional costs and available alternatives. Distinguish between a party’s allegations and the court’s findings, and between interim rulings and final, binding outcomes.

For example, if essential software is subject to a legal challenge, ask whether a working replacement is available, what switching would involve and how the costs would be shared. Reassurances that the case will be won are no substitute for a robust plan.

Have significant risks assessed by a lawyer experienced in franchise law. Discuss whether the agreement needs specific commitments on replacement services and costs, or whether you should delay joining until the position is clear. If important questions remain unanswered, that is a reason to postpone signing.

Practical takeaway: Before joining, ask for a clear explanation of relevant legal disputes. Make your decision only once the potential operational consequences, mitigation measures and remaining risks have been sufficiently clarified.