Buying a US Franchise: Check Litigation and Dispute Terms

A disagreement with your franchisor can consume time and money even when your outlet is trading well. Before joining the US franchising community, investigate both the brand’s disclosed litigation and the contractual process for resolving disputes. Together, these reveal potential warning signs and the practical obstacles you could face when enforcing your rights.

1. Use FDD Item 3 to identify patterns

The Federal Trade Commission’s Franchise Rule, at 16 CFR Part 436, requires covered franchisors to provide a Franchise Disclosure Document (FDD). Item 3 addresses specified litigation involving the franchisor and certain related entities and people. Its requirements include particular pending cases, certain historical proceedings and material civil actions involving the franchise relationship brought by the franchisor against franchisees during the last financial year.

It is not a complete record of every disagreement. Disclosure depends on the parties, subject matter, materiality and applicable reporting periods. An empty Item 3 does not establish that franchisees have never raised complaints.

Read the disclosures with three questions in mind:

• What keeps recurring? Repeated allegations about misleading sales representations, fee calculations or contractual obligations deserve closer investigation.
• Who initiated proceedings? Actions brought by franchisees and actions brought by the franchisor may reveal different sources of friction.
• What happened? Distinguish allegations, judgments, dismissals and settlements. A settlement does not necessarily establish wrongdoing, and a pending allegation is not a proven fact.

Consider the size and age of the network. A raw case count means little without context. Look for recurring facts and outcomes rather than assuming either that all litigation is disqualifying or that disputes are simply unavoidable.

2. Verify the cases that could affect your decision

Create a short litigation register recording each relevant case, its date, the parties, the issue, its status and your unanswered questions. Prioritise matters connected to obligations you would accept under the proposed agreement.

Ask the franchisor for a written explanation of any recurring issue and whether it has changed its contracts or practices in response. Compare that explanation with the FDD and the version of the agreement you would sign.

An independent US franchise lawyer can help locate and interpret relevant court records. Check the identity of the defendant carefully: a similarly named business may be unrelated, while a disclosed case may concern an affiliate rather than your prospective contracting party.

Useful follow-up questions include:

• Is the case still active, and has there been a significant development since disclosure?
• Did the dispute concern wording that remains in the current agreement?
• Does a judgment or injunction affect how the franchise operates?
• Are the underlying documents publicly available?

Some settlement terms and arbitration records may be confidential. Treat missing information as a limitation on your assessment, not as proof of misconduct or reassurance that nothing happened.

3. Map the contractual route to resolving a dispute

FDD Item 17 summarises important dispute-resolution provisions, but the attached agreements contain the operative wording. Ask your lawyer to map the route from an initial complaint to a final decision.

Check whether you must first give formal notice, negotiate or attend mediation. Identify the required recipient, delivery method and deadlines. An informal conversation with a field representative may not satisfy a contractual notice requirement.

Then examine these provisions:

• Arbitration: Which disputes must be arbitrated, under whose rules, and how are arbitrators appointed? Review fees, confidentiality and limits on appeal.
• Venue: Where must proceedings take place? Travel and retaining lawyers elsewhere can make a claim harder to pursue.
• Governing law: Which state’s law does the agreement select? This is a separate question from where proceedings occur.
• Cost allocation: Could the losing party have to pay the other party’s legal fees?
• Restrictions: Are there shortened claim periods, jury-trial waivers, class-action waivers or limits on damages?

Also identify exceptions. An agreement may direct most disputes to arbitration while allowing specified court applications for urgent relief. Ask whether those exceptions operate equally for both parties.

4. Check which protections the contract cannot override

The FTC Franchise Rule is principally a pre-sale disclosure rule, not a comprehensive code governing franchise disputes. It does not itself give franchisees a private right to sue for damages under the Rule. Other legal grounds may nevertheless support a claim.

State franchise registration, disclosure and relationship laws can provide additional protections where applicable. General contract and fraud law also matter. Some state protections cannot simply be waived through contractual wording, and a choice-of-law clause does not necessarily resolve which mandatory protections apply.

Have your lawyer assess the relevant states, any state-specific addendum and the enforceability of disputed clauses. Neither delivery of an FDD nor state registration amounts to a government endorsement of the investment.

Practical takeaway: Before signing, obtain a written assessment of significant litigation, the steps and likely costs of pursuing a dispute, and the state-law protections relevant to you. Decide whether you could realistically enforce the rights you are buying.