US Franchise FDD Item 3: Preparing Your Litigation History

When you turn an existing US business into a franchise, its legal history needs careful attention. A dispute you regard as resolved may still matter to prospective franchisees. Item 3 of the Franchise Disclosure Document (FDD) addresses specified litigation involving the franchisor and other covered entities and individuals. Preparing it is not simply a matter of listing every disagreement: it requires a structured evidence-gathering exercise and specialist legal judgement.

Understand what Item 3 is designed to disclose

The Federal Trade Commission’s Franchise Rule, found in 16 CFR Part 436, requires covered franchise offerings to use an FDD containing 23 disclosure items. Item 3 concerns litigation. Its requirements distinguish between pending proceedings, certain historical proceedings and currently effective orders.

Depending on the parties and allegations involved, disclosure can cover criminal proceedings, civil actions concerning fraud or franchise law, certain other business-related claims, and litigation material to the operation of the franchise system or the franchisor’s financial condition. Certain franchisor-initiated actions involving the franchise relationship also require disclosure. Different categories have different reporting requirements and time periods.

This means neither “we have never lost a case” nor “the case was settled” answers the disclosure question. A pending allegation may be reportable without any finding of wrongdoing. Equally, not every ordinary commercial dispute necessarily belongs in Item 3.

The federal rule generally requires delivery of the FDD at least 14 calendar days before a prospect signs a binding agreement with, or makes a payment to, the franchisor or an affiliate in connection with the proposed franchise sale. State registration and disclosure laws can impose additional requirements. There is no general federal FDD approval process, so do not mistake document preparation for regulatory clearance.

Build a litigation inventory before drafting

Start with the legal structure your franchise solicitor will review. Identify the proposed franchisor, relevant predecessors, parents and affiliates, and the people whose backgrounds require examination. The coverage rules differ between these groups; let counsel determine the final scope rather than assuming every related company or employee is covered.

Gather information from company records, existing legal advisers and confidential questionnaires completed by relevant individuals. Do not rely solely on the founder’s recollection or a search under the business’s current trading name.

For each potentially relevant matter, record:

• The parties’ full legal names and their connection to the business.
• The court or agency, case reference and filing date.
• The allegations and the role of each relevant party.
• Whether proceedings remain pending or have concluded.
• Any judgment, settlement, injunction or other order.
• Where the supporting documents are held and who can explain them.

Ask counsel how to handle arbitrations, demand letters, threatened claims and regulatory correspondence. These are not all automatically reportable under Item 3, but collecting them for review helps avoid decisions based on incomplete information.

Turn the inventory into accurate disclosure

Give your franchise solicitor the underlying documents, not just a management summary. A description such as “supplier dispute, resolved” may conceal allegations or continuing obligations that change the legal analysis.

Ask counsel to document which matters require disclosure, which do not, and the basis for those decisions. Keep that assessment separate from the prospect-facing FDD and manage legally privileged material on counsel’s advice.

For reportable matters, check the proposed disclosure against the original records. Confirm names, dates, procedural status and outcomes. Distinguish allegations from findings: defending your reputation should not lead to minimising a claim, while concise disclosure should not imply that an unproven allegation was established.

Do not assume a confidentiality clause in a settlement removes a disclosure obligation. Flag the clause for legal review before anyone promises that the dispute will never be mentioned.

Finally, check consistency across the FDD. Litigation information may affect other disclosures, including financial statements or information about leadership. Avoid treating Item 3 as an isolated drafting task.

Keep legal developments visible after launch

Appoint one person to maintain the litigation inventory and route developments promptly to franchise counsel. Relevant managers and covered individuals should know whom to notify when proceedings begin, allegations change, a settlement is signed or an order is issued.

Counsel should assess whether developments require an FDD update, state filing or changes to planned sales activity. Do not leave that decision until the next annual drafting exercise.

Give recruitment staff approved guidance for questions about disclosed cases. They should not contradict the FDD, speculate about outcomes or describe disclosure as proof that regulators endorse the offering. Straightforward handling of difficult questions supports trust within the franchise community.

Practical takeaway: Before your first franchise sale, create a documented litigation inventory, have specialist counsel apply the Item 3 rules, and establish a reporting route for new developments.