Franchisee Lawsuits Are at a Record High — Here's Why
Franchisee-initiated litigation against franchisors has surged to record levels between 2022 and 2024. Earnings misrepresentation, encroachment, and one-sided contract enforcement are driving the wave. Here is what every franchise buyer needs to know before signing.
Franchisee-initiated litigation against franchisors reached record levels between 2022 and 2024, according to legal industry analysts and franchise law practitioners. The surge reflects growing franchisee sophistication, the proliferation of franchisee advocacy organizations, and a pattern of franchisor conduct that courts have increasingly been willing to scrutinize.
Sources: American Bar Association, Franchise Law Journal, Vol. 43 (2024); Bloomberg Law, "Franchise Litigation Trends: 2022–2024" (2024).
The Three Biggest Drivers of Franchise Litigation
1. Earnings Misrepresentation
The most common allegation in franchisee lawsuits is that the franchisor — or its sales representatives — made earnings representations that were materially misleading.
The FTC's Franchise Rule requires that any earnings claim made in connection with a franchise sale must be included in Item 19 of the FDD. But the rule does not prohibit franchisors from making informal representations — in sales presentations, in conversations with prospective buyers, or in marketing materials — that are not reflected in the FDD.
Franchisees who purchased based on verbal earnings projections that were never achieved have increasingly turned to litigation, arguing that the informal representations constituted fraud or negligent misrepresentation.
What courts have found: Several courts have allowed these claims to proceed even when the franchise agreement contained a merger clause stating that the written agreement superseded all prior representations. Courts have found that fraud claims can survive merger clauses when the misrepresentation was intentional.
What buyers should do: Never rely on verbal earnings projections. If a franchisor's sales representative tells you that "franchisees in your market typically earn $X," ask for that representation in writing and in the FDD. If they will not put it in writing, treat it as unreliable.
2. Encroachment
Encroachment — the approval of new franchise locations that compete directly with existing franchisees — is the second most common source of franchise litigation.
Most franchise agreements do not grant exclusive territories. Item 12 of the FDD is required to disclose the franchisee's territorial rights — or lack thereof. But even when the FDD clearly discloses that no exclusive territory is granted, franchisees have successfully argued that the implied covenant of good faith and fair dealing was violated when the franchisor approved a competing location in bad faith.
Courts in several states have found that franchisors have an implied obligation not to exercise their contractual rights in a manner that destroys the franchisee's ability to earn a reasonable return — even when the contract technically permits the conduct.
What buyers should do: Read Item 12 carefully. If the agreement does not grant an exclusive territory, model your unit economics assuming a competing location opens within your trade area. If the numbers do not work under that scenario, reconsider the investment.
3. Contract Enforcement Disputes
The third major category of franchise litigation involves disputes over how franchise agreements are enforced — particularly termination, renewal, and transfer.
As documented in the 7-Eleven case, franchisors have broad contractual authority to terminate for compliance violations. Franchisees have increasingly challenged terminations as pretextual — arguing that the stated grounds were manufactured to justify a termination that was actually motivated by the franchisor's desire to reclaim a valuable location or retaliate against franchisee advocacy.
Transfer disputes are also common. Most franchise agreements require franchisor approval for any transfer of ownership, including sales to third parties and transfers to family members. Franchisees have alleged that franchisors have unreasonably withheld transfer approval to prevent franchisees from realizing the value of their investment.
The Role of Franchisee Advocacy Organizations
The surge in litigation has been accompanied by the growth of franchisee advocacy organizations that provide legal resources, coordinate class actions, and lobby for stronger franchisee protections.
Key organizations include:
- American Association of Franchisees and Dealers (AAFD) — publishes franchise relationship ratings and provides legal resources
- Coalition of Franchisee Associations (CFA) — coordinates advocacy across multiple franchise systems
- National Coalition of Associations of 7-Eleven Franchisees (NCASEF) — system-specific advocacy
- McDonald's Operators Association — system-specific advocacy
These organizations have made it easier for franchisees to find attorneys, share information about franchisor conduct, and coordinate legal strategies.
What the Litigation Trend Means for Buyers
The surge in franchisee litigation is both a warning sign and a resource.
As a warning sign: High litigation rates in a franchise system are a red flag. Before buying, search for lawsuits involving the brand you are considering. PACER (the federal court records system) is publicly accessible. State court records are available through each state's court website.
As a resource: Published court decisions in franchise cases provide detailed factual records of how franchisors have treated franchisees. Reading the complaints and decisions in cases involving your target brand can reveal patterns of conduct that are not disclosed in the FDD.
Protecting Yourself Before You Sign
- Search for litigation. Use PACER and state court records to find lawsuits involving the brand.
- Read Item 17 of the FDD. It lists all pending litigation involving the franchisor.
- Hire a franchisee-side attorney. Not a broker. An attorney who represents franchisees in your state.
- Talk to former franchisees. Item 20 lists them. Ask specifically about their experience with contract enforcement, support, and exit.
- Use FDD Score™ to analyze your FDD and flag litigation risk factors before you sign.
The franchise model is built on a contract. Understanding that contract — and the litigation history around it — is the most important due diligence you can do.
Sources: American Bar Association, Franchise Law Journal, Vol. 43 (2024); Bloomberg Law Franchise Litigation Trends Report (2024); PACER federal court records; American Association of Franchisees and Dealers (AAFD); Coalition of Franchisee Associations (CFA).
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