Franchise relationships start with optimism. Both sides sign the agreement expecting success. But things don’t always go as planned.
In this post, I’ll go over five common circumstances in franchising that can lead to franchise litigation.
Key Takeaways
Franchise legal litigation rarely comes out of nowhere. It usually builds from unmet expectations, unclear contract language, or communication breakdowns between franchisor and franchisee.
The most common things that can turn into a dispute and/or lawsuit include broken sales promises, territory conflicts, termination disputes, royalty disagreements, and encroachment issues.
Buyers who read their FDD carefully, ask direct questions before signing, and keep detailed records throughout the relationship put themselves in a much stronger position if problems arise.
That said, none of this replaces smart legal advice from an experienced franchise attorney.
Experience shows that disagreements can turn into disputes. Disputes turn into lawsuits.
With that in mind, take a look at five things that can lead to litigation with your franchisor.
1. Broken Promises During the Sales Process
The fact is that franchise sales reps and franchise brokers sometimes oversell. They’re sometimes a bit too enthusiastic.
From break-even times to the support you’ll supposedly receive to the franchisor’s flexibility when it comes to certain things, overselling has been known to happen.
Fact: Franchisors are required to give buyers a Franchise Disclosure Document, or FDD, before any money changes hands. That document is meant to set the factual expectations. But verbal promises still happen.
For instance, a franchise representative might say something in a meeting that isn’t backed up in writing. So, when reality doesn’t match what was promised, franchisees feel misled. That feeling can often turn into a legal claim.
The lesson here is simple. Get everything in writing. If a claim that’s been verbalized to you by anyone in the franchise organization or by a franchise broker isn’t in the FDD or the franchise agreement, don’t count on it.
2. Territory Disputes and Franchise Litigation
Territory protection matters a lot to franchisees. As it should.
That’s because they invest real money expecting a defined area to build their customer base. And they want as much territory as possible, so they can make money.
Problems start when franchisors sell a new unit too close to an existing one. Sometimes it’s an oversight. Sometimes it’s a deliberate business decision. Either way, the existing franchisee feels the impact immediately. Sales drop. Frustration builds.
Territory disputes also happen because of the increased use of online sales.
In this particular case, a franchisor might allow national e-commerce that competes directly with a local franchisee’s brick-and-mortar store. That gray area causes real friction.
That’s why territory language in the franchise agreement needs to be crystal clear before signing your franchise agreement. Vague terms that aren’t in writing create room for disagreement later. And franchise litigation.
3. Termination and Non-Renewal Conflicts
Franchise agreements typically run for a set number of years (10 years is the most common term). What happens next depends heavily on the terms of the agreement.
It should be noted that some franchisors choose not to renew. Others terminate their agreements early, citing breach of contract.
Common reasons include missed royalty payments, failure to follow operational standards, or unauthorized changes to the business.
Franchisees often see it differently. They might argue the termination was unfair or that they weren’t given a real chance to fix the issue. When both sides dig in, franchising litigation often follows.
Fact: Many states have franchise relationship laws that limit how and when a franchisor can terminate an agreement. Those laws vary widely by state.
Importantly, this is one of the most common triggers for legal disputes in the franchise world. Both sides tend to feel wronged when a relationship ends badly.
That’s why it’s crucial to have expert legal representation by your side.
4. Royalty and Fee Disagreements
Franchisees pay ongoing royalties, usually a percentage of gross sales. They also pay into marketing funds and sometimes technology fees. And those costs add up quickly.
Disputes crop up when franchisees believe they’re being overcharged. Or when they think marketing funds aren’t being used the way they were told they’d be. Or when new fees get added that weren’t part of the original deal.
That said, money disagreements are emotional.
Franchisees who are already struggling financially may feel like every fee is squeezing them further.
That resentment can build into a legal fight, especially if the franchisee believes the franchisor isn’t being transparent about where the money is going.
Clear financial reporting from the franchisor goes a long way toward preventing this kind of conflict.
Tip: When you’re on the phone with existing franchisees as part of your due diligence, be sure to ask them about fees collected by the franchisor. It’s a great way to get a consensus on whether those fees are worth it.
5. Encroachment and Brand Standard Disputes
Encroachment happens when a franchisor’s decisions hurt an existing franchisee’s business.
To clarify, it could mean opening a new location nearby, launching a competing brand, or expanding delivery zones into another franchisee’s territory.
Brand standard disputes happen for the opposite reason. The franchisor believes the franchisee isn’t following required standards. Maybe it’s cleanliness. Maybe it’s signage. Maybe it’s product consistency.
Understandably, franchisors have a strong interest in protecting brand uniformity.
On the flip side, franchisees have a strong interest in running their business the way they see fit, especially once they’ve built a loyal local following.
That tension is common. It doesn’t always end in court, but it frequently does when neither side is willing to compromise.
The Bottom Line on Franchise Litigation
Franchise litigation is often preventable. Most disputes trace back to expectations that weren’t clearly documented or communicated from the start.
As a franchise buyer, you need to do proper due diligence before you ever sign your name.
That means asking the hard questions.
Reading every page of the FDD and hiring a franchise lawyer to explain it.
Talking to current and former franchisees.
Because investing time upfront is almost always less expensive than spending time and money in court later.
