8 Tips Franchise Owners Need To Know To Avoid Lawsuits
If you run a franchise or you’re considering purchasing one, you must be aware of the types of litigation that franchisors typically file against their franchisees.
There’s no need to be alarmed, just aware.
As a franchisee, many of the responsibilities that are typically born by the franchisor get shifted onto you.
There are many reasons why a franchisee might be sued in today’s litigious society. A franchisee could be sued by the franchisor, an employee, or a customer.
Reasons for lawsuits could include violations of the franchise agreement, on-the-job injuries, wrongful termination, sexual harassment, or breaches in cyber-security.
Planning, preparing, and fully understanding the legal jargon in the franchise agreement and Franchise Disclosure Document (FDD) is the best insurance against litigation as a franchisee.
The FDD is a document that a franchisor is legally obliged to provide the franchisee at least 14 days before any money changing hands.
The FDD contains 23 sections or “items” which provide the franchisee all the information they need about the franchisor:
Item 1: The Franchisor
Item 2: Business Experience
Item 3: Litigation
Item 4: Bankruptcy
Item 5: Initial Fees
Item 6: Other Fees
Item 7: Estimated Initial Investment
Item 8: Restrictions on Sources of Products and Services
Item 9: Franchisee’s Obligations
Item 10: Financing
Item 11: Franchisor’s Assistance, Advertising, Computer Systems and Training
Item 12: Territory
Item 13: Trademarks
Item 14: Patents, Copyrights, and Proprietary Information
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
Item 16: Restrictions on what the Franchisee may Sell
Item 17: Renewal, Termination, Transfer, and Dispute Resolution
Item 18: Public Figures
Item 19: Financial Performance Representations
Item 20: Outlets and Franchisee Information
Item 21: Financial Statements
Item 22: Contracts
Item 23: Receipts
You must understand everything about this document before you part with any cash. Here are some tips to help you prepare against lawsuits.
1. Ask a franchise attorney to read the Franchise Disclosure Document
The best money spent when you purchase a franchise is what you pay an experienced franchise attorney to scour the whole Franchise Disclosure Document. Consider this a preventative measure.
A franchise attorney will know about hundreds of previous franchise lawsuits, and they will know exactly what to look for in the disclosure sections. They will also know if there is any information missing and they can request to make changes to the sections if required.
2. Use a franchise attorney to summarize each disclosure section and explain any legal jargon so that you have a complete understanding of the Franchise Disclosure Document.
It’s vital to completely understand the content of the FDD. Every section is important, although you should pay special attention to any areas regarding litigation.
Your attorney will also be able to clear up any confusion regarding periods of limitation so you’re forearmed in the case that you need to sue in the future.
3. Clarify training
Your franchise attorney should be able to clarify your position on where you stand in terms of training of staff and recommend any changes to the document for extra legal protection.
4. Ensure Your Franchise Agreement Clarifies Responsibility for Data Security
You must be clear on who is responsible for the security of your customer’s online data. Inadequate cybersecurity can cost you your business if you are sued for mishandling peoples’ sensitive data.
Your attorney will be able to clarify and advise on your responsibility for cybersecurity. Some franchisors may pass the whole responsibility to the franchisee.
Data breaches at UPS, Dominoes, Dairy Queen, and Goodwill have resulted in costly lawsuits. A franchisee is required by federal law to ensure the privacy of customer data.
Again, your attorney can explain the steps you need to take to ensure you don’t end up with a lawsuit for a data breach. The Federal Trade Commission sued Wyndham Hotels for failing to protect their customer’s personal information.
5. Ensure you have enough capital
If you have enough capital to fall back on you won’t need to cut corners which could also lead to an expensive lawsuit that could cost you your business.
Your attorney will be able to draw your attention to any potential hidden costs or request further information if the FDD isn’t clear.
6. Check for any previous litigation
The litigation section of the FDD should list any previous lawsuits filed by and against the franchisor. One or two lawsuits are pretty typical, but if there is a long list, take it as a sign and steer clear.
7. Speak to owners of other branches
Your franchisor may be selective in which other franchise owners they provide for a reference. Do some extra research and cold-call as many branches as you can.
If you hear many complaints about the company, you can walk away and hold onto your cash.
8. Be clear on what the legal jargon means in the FDD, agreement, and lease.
You must go through all legal documents meticulously and ask for clarification of anything you don’t understand.
For example, are you aware of the difference between litigation and arbitration? Litigation is where a legal case is fought in a court (like in the films) and settled by a judge.
Arbitration is more private and not conducted in court. Settlements are kept confidential and made by an independent arbitrator who is nominated by the parties concerned.
The key to protecting yourself legally is to seek the best legal advice and the best personal injury attorney you can find for your budget right at the start.
Taking a preventative approach is much better than having to fight a preventable lawsuit.
You do not have to accept the terms of the Franchise Disclosure Document, you can request to change some sections. You are also entitled to ask for more information.
Your attorney will explain everything that you need to know so that you may plan for legal contingencies for peace of mind.