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last updated 18/04/2023

Causes of franchise discord – some pointers from the USA

last updated 18/04/2023

17 April 2023 - A search through the disclosure documents of the top 10 franchise brands in the US reveals some common causes of franchise disputes. And although the numbers look large, the percentage of lawsuits in the traditionally-litigious US is actually low.

As Jeremy Clarkson would say, ‘What could possibly go wrong?’ The sometimes complicated relationship between franchisors and franchisees doesn’t always run smoothly, despite everyone’s best intentions. Sometimes, problems develop if there is miscommunication before the franchise agreement is even signed; at other times, changing circumstances or the actions of one party or another can lead to disagreements.

In New Zealand, the level of significant disputes is commendably low. According to the 2021 Franchising New Zealand Survey from Massey University, only 1.33 percent of franchisees had been involved in a substantial dispute in the last 12 months. This is an impressively low figure although, given the number of franchise units in New Zealand, this would still mean that there are a few hundred disputes every year. Of this 1.33 percent figure, only 6 percent (0.08 percent) ended up in litigation.

While the survey showed that most disputes arise from compliance (or rather, non-compliance) with the franchise system, it understandably divides the causes of disputes into fairly broad categories. An article by Beth Ewen in the USA's Franchise Times therefore makes interesting reading, giving some specific examples of where things can go wrong – not just between franchisees and franchisor, but customers and governments too.

Causes of disputes

In the highly-regulated US franchise sector, a franchisor is required to disclose certain current and past lawsuits, or “actions,” that the franchisor or its predecessors, affiliates, parents, or individuals disclosed in Item 2 were involved in or subject to under Item 3 of the Franchise Disclosure Document (FDD). In a large franchise system with thousands of units, that can amount to a lot of information for prospective franchisees (and their legal advisors) to wade through.

In her article, Beth looks at the top 10 brands in the US ranked by systemwide sales representing some 250,000 franchised units (almost 8 times as many as the total number of units in New Zealand). She finds not only a wide range in the number of lawsuits per system, from just 1 at KFC to 125 at Subway, but, interestingly, a wide range of causes from discrimination against Black franchisees, to territorial disputes, to a failure to provide gift cards in Braille. It’s not only franchisor/franchisee disputes that have to be listed.

And she describes 10 lawsuits listed as ‘pending’ by convenience store franchise 7-Eleven as reading ‘like a laundry list of what can go wrong between franchisor and franchisee, involving franchisees suing the franchisor and variously claiming breach of contract, undue influence and wrongful termination, fraudulent misrepresentation and unjust enrichment, tortious interference, defamation, misclassifying employees as independent contractors and vice versa, and more.’

Lessons to learn

It should be noted that 7-Eleven states in their Item 3 that it intends to vigorously defend the cases – and this is only 10 cases out of 78,413 franchise units. Similarly, the 125 cases listed by Subway represent just 0.9 percent of the franchisees operating Subway restaurants globally.

So although serious disputes leading to lawsuits are actually quite rare, they do happen – and they can happen for a wide range of reasons. The lesson for franchise buyers is to do your due diligence and take good professional advice before buying a franchise to ensure that you have a clear understanding of what you are getting into. Franchisors also need to be careful to ensure that their franchise is built upon firm foundations from the outset, and that it is constantly updated to keep abreast of current – and ever-changing – legislation.

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