Item 3 - LITIGATION
Here, you can review any relevant litigation involving the franchisor, both current and past, over the last ten years. In Item 3, franchisors disclose all lawsuits pertaining to the franchise relationship, including certain actions involving the franchisor, franchisee and other entities.
Litigation activity can be an important indicator of the state of franchise relations between the franchisor and its franchisees. For example, a franchisor may sue franchisees for failing to pay royalties, which might mean that franchisees are unsuccessful and therefore unable or unwilling to make their royalty payments. If the franchisor has numerous claims against it, it may indicate that it hasn't performed according to its agreements, or that franchisees have been dissatisfied with its performance.
Objective
- Review the disclosed legal actions to learn about the possible relationship you might be entering into as a franchisee.
Important Considerations
- What's the status of the litigation? Concluded vs. pending?
- Are there any patterns over the past 10 years?
- Has there been a decrease or increase in litigation frequency or volume?
- Has the franchisor or any of its executives been held liable for, or settled civil actions involving the franchise relationship?
- Are there any lawsuits associated with affiliates, or does all litigation pertain to the franchisor?
- Possible red flags: Take note of any allegations of fraudulent behavior. Also, pay special attention to class-action lawsuits involving multiple franchisees.