Litigation from Franchisees Against Franchisors

Opening up your own franchise business is exciting, but if you get caught up in that excitement and fail to carefully review all legal documents and understand your obligations, you could find yourself in court down the road. Franchise agreements have been carefully drafted and reviewed by the franchisor's lawyers and you should assume that the document reflects the franchisor's best interests.

The obvious goal in franchising is to run a successful business where you make significant

money. Occasionally things do not go as planned. Maybe the industry is not a good match for your skills and background or you are not making the money you thought you would or did not start out with enough working capital to get you through those first couple of years. You may feel that the franchisor is not fulfilling its obligations. For instance, maybe it did not provide adequate training or disclose "hidden" fees and expenses or is not doing as much advertising as it said it would. If your reason for taking a franchisor to court is the latter, you have a stronger case. If you decide you do not like franchising or are struggling financially you may end up in even deeper financial woes.

The law requires franchisors to divulge all material information about their company in writing, including litigation the company or its executives have been involved in and why. Before you buy a franchise you should scrutinize the franchisor's legal history. If you divide the number of court cases listed for the most recent year into the total number of franchisees in the system you will be able to find out the percentage of franchisees that ended up in litigation. Starting out you want to stay away from franchisors with a strong litigious history.

Most franchisors, however, follow the letter of their agreements, although this is not always the case. There are no laws that stipulate a franchisor must ensure franchisees' happiness or financial success. If you are making good money and just want out of the business, litigation may not be the best solution. Your franchise agreement may contain a buy-out clause or you may be able to resell your business to another franchisee. If you feel that you have been wronged by the franchisor and that legal action is the only way, the franchisor may suggest arbitration or mediation first. In fact, some franchisors write an arbitration clause into the franchise agreement that mandates arbitration before pursuing a lawsuit.

The key to avoiding litigation is by doing due diligence from the start, speaking to existing and even former franchisees, knowing your market, reviewing and understanding the franchise agreement and having enough working capital to make it through the first two or three years. If you must go the legal route, be sure to hire a franchise attorney who specializes in your area of the law. Check out the legal directory at sites like Lawyers.com to find attorneys in your area who specialize in franchise litigation.