Franchise Litigation

Franchise litigation refers to legal disputes between franchisors and franchisees that are disclosed in Items 3 and 4 of the FDD. Item 3 requires disclosure of pending lawsuits, and Item 4 requires disclosure of material litigation from the past 10 years. Common franchise disputes involve encroachment, termination without cause, deceptive revenue claims, advertising fund mismanagement, mandatory vendor requirements, and territory disputes. A high volume of litigation — especially similar complaints from multiple franchisees — is a significant red flag. Prospective franchisees should review litigation details with a franchise attorney and compare the litigation history against the size of the franchise system (5 lawsuits across 1,000 locations is less concerning than 5 lawsuits across 30 locations).