How to Check a Franchisor’s Litigation History Before Joining a Franchise in Japan

You may research a prospective franchisor’s shops and products without looking into its past litigation. Yet disputes between a franchisor and its franchisees can reveal weaknesses in contracts or pre-contract explanations. Before joining a franchise network, use litigation research to identify problems you could face yourself, rather than treating the presence or absence of lawsuits as a simple pass-or-fail test.

1. Understand the disclosure framework

In Japan, Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors operating a ‘specified chain business’ under the Act to provide prospective small and medium-sized retail franchisees with a written disclosure document before signing a contract, and to explain its contents. This document must cover matters such as an outline of the business and the main terms of the agreement. Japan’s Small and Medium Enterprise Agency also lists the number of lawsuits involving the franchisor among the main pre-contract disclosure items.

However, not every franchise agreement falls within this obligation. Coverage depends on whether the business meets criteria such as primarily serving small and medium-sized retailers as franchisees, providing ongoing supplies of goods or arranging sales under standardised agreements, offering management guidance, allowing the use of trade marks and collecting payments when a franchisee joins. Even a restaurant franchise may fall outside the scope if, for example, the supply of goods is not a contractual requirement.

Separately, the Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act apply to franchise chains in all sectors, not just retail and food service. Franchisors and franchisees are independent businesses, and their trading relationships are subject to the Antimonopoly Act. General laws, including Japan’s Civil Code, also govern matters such as contractual liability and damages.

Whether statutory disclosure rules apply is a separate question from whether you should request information needed for your decision. Even if you are told that the franchise falls outside those rules, ask for a written response about litigation with franchisees and how past problems have been addressed.

2. Check the scope of the figures and the issues in dispute, not just the number of cases

Answers such as ‘We have had no lawsuits’ or ‘There have been a few cases’ are not enough for a meaningful comparison. First, establish exactly what has been counted.

• Which legal entity does the figure cover, and over what period?
• Does it include both cases brought by the franchisor against franchisees and cases brought by franchisees against the franchisor?
• Are concluded cases distinguished from those still pending?
• Are cases concerning franchise agreements distinguished from disputes with other business partners?
• How are the initial proceedings and any appeal in the same case counted?

Some additional information you request may go beyond the statutory disclosure requirements. Do not assume that everything must legally be disclosed. Start by clarifying how the figures are defined and what information the franchisor can provide.

Next, ask about the issues relevant to your decision to join. The documents you need will differ depending on whether a dispute concerned, for example, a mismatch between pre-contract explanations and actual operations, the basis for charging fees, or the interpretation of the parties’ obligations. You do not need to request the other party’s personal information or trade secrets. An anonymised summary can be enough to take your research forward if it identifies the issues and relevant contract clauses.

A high number of lawsuits does not, by itself, establish that a franchisor is unsuitable. The number of franchisees, the years it has been operating and any circumstances in which it brought proceedings to protect its rights also matter. Equally, the absence of lawsuits does not prove there have been no complaints or disagreements. Looking for recurring types of problems is more useful than turning case numbers into a score.

3. Cross-check the franchisor’s answers against public information

Use the full legal name of the company that will be party to your agreement, not just the brand name. If the company has changed its name, check its former name too. Compare addresses and the dates of cases to avoid confusing it with another company of the same name. It is also important not to assume that a case involving a group company involved the franchisor you will be contracting with.

Court decisions published by Japan’s courts, news reports and the franchisor’s own public statements can provide supporting information. However, published decisions represent only a proportion of all court cases. Finding nothing in a search does not justify concluding that there is no litigation history.

When you find relevant material, record the following three elements separately.

• The parties’ allegations: What did each party claim was wrong?
• The court’s findings: Which facts or legal liabilities did the court accept, and which did it reject?
• Subsequent developments: Was there an appeal? Is the judgment final? Was there a settlement or withdrawal?

The fact that a company has been sued does not mean that unlawful conduct has been established. Nor should a judgment allowing some claims be read as accepting every allegation. Similarly, the fact that a settlement was reached does not, on its own, establish which party was responsible.

If the franchisor’s explanation differs from public information, do not immediately assume it is false. Ask for clarification, specifying the dates of the documents, the legal entity concerned and the reporting period. If you are unsure what an important judgment means, ask a lawyer to review it alongside your proposed franchise agreement. This can help clarify its relevance to your own terms.

4. Check whether past problems have been addressed in the current agreement

Reviewing litigation history should not end with an assessment of past responsibility. For a prospective franchisee, the key question is whether the same underlying causes remain today.

For example, if a case concerned how fees were explained, do not settle for an assurance that ‘We explain them carefully now’. Check the current fee schedule, contract clauses and the forms used to record explanations given to prospective franchisees. If the dispute concerned inconsistencies between explanatory materials and the contract, ask when the materials were revised and whether the version supplied to you is the latest one.

You can organise your findings under four headings: ‘Past issue’, ‘Franchisor’s response’, ‘Current documents’ and ‘Outstanding questions’. In particular, the following situations call for further checks.

• Similar issues have arisen repeatedly, but the improvements described are vague.
• A clause said to have been improved remains unchanged in the agreement you have been given.
• Case numbers or explanations vary depending on who answers or when the response is given.
• Confidentiality is cited as a reason for withholding details, and neither an anonymised summary nor information about corrective measures can be obtained.

There may be legitimate reasons, including confidentiality obligations, why some information cannot be provided. Rather than treating this as evidence of wrongdoing, discuss what alternative information can be checked. If questions about your financial commitments or operational responsibilities still remain, treat them as unresolved risks and keep open the option of postponing your decision to join.

Practical takeaway: Do not judge a brand by lawsuit numbers alone. Consider three questions together: ‘What was disputed?’, ‘What has changed since?’ and ‘Can I verify those changes in my own agreement?’ Keeping dated copies of the responses and supporting documents will help you make a well-informed decision.