Common Issues In Franchise Litigation & Best Practices For Mitigating Risks In Your Business

Legal Challenges & Effective Risk Mitigation Strategies in Arizona Franchise Businesses

If you are looking into purchasing a franchise business, you may be wondering how it works and what entering into a franchise agreement entails. Before your purchase, it is a good idea to consult with an Arizona franchise lawyer to ensure comprehension.

There are many common legal issues when it comes to franchise arbitration and litigation. There are also ways to avoid these issues with the right knowledge and Arizona franchise lawyer. 

Franchise litigation lawyer working, gavel on table symbolizing legal authority at Denton Peterson Dunn

Top Legal Challenges in Franchises & How to Avoid Them

Franchise litigation can encompass a wide range of legal issues. It is helpful to understand where potential issues could happen in order to avoid them. Some of the most common ones include:

  • Breach of Contract: Disputes often arise when one party alleges that the other has violated the terms of the franchise agreement. This can include failure to pay royalties, failure to adhere to the brand, or unauthorized use of trademarks. 
  • Misrepresentation or Fraud: Claims of misrepresentation or fraud may occur if either party provides false or misleading information during the franchise sale process. This could involve misrepresentations about potential earnings, market conditions, or the level of support provided by the franchisor. 
  • Violation of Franchise Laws: Franchise laws vary by jurisdiction, but both federal and state laws regulate the franchising relationship. Allegations of violations of these laws, such as failure to provide required disclosures or unfair trade practices, can lead to litigation.
  • Encroachment: Encroachment is when a franchisor opens a new location in close proximity to an existing franchisee, potentially cannibalizing their business. In some circumstances, franchisees may sue for damages if they believe the franchisor’s actions unfairly compete with their own business. 
  • Termination of Franchise: Arizona franchise lawyers often see disputes arise when a franchisor terminates or chooses not to renew a franchise agreement. Franchisees may claim that the termination was unjustified or that proper procedures were not followed, while franchisors may allege that the franchisee breached the agreement or failed to meet performance standards.
  • Intellectual Property Disputes: Franchise litigation may involve disputes over intellectual property rights, including trademarks, trade secrets, and copyrights. Franchisees may allege that the franchisor has improperly enforced its intellectual property rights, while franchisors may sue for infringement or unauthorized use of their intellectual property.
  • Supplier & Distribution Disputes: Franchise agreements often specify requirements for purchasing goods and services from approved suppliers. Disputes may arise if the franchisor or franchisee alleges that the other party has breached these requirements or engaged in unfair or anti-competitive practices related to suppliers or distribution.
  • Failure to Pay Royalties or Fees: Franchise agreements typically state a specific fee that must be paid regularly. These fees could be royalties, advertising fees, or other types of fees. Litigation can ensue when fees are not paid as agreed upon. 
  • These are just a few examples, and the specific issues involved in franchise litigation can vary widely depending on the circumstances of each case. It is wise to contact an Arizona franchise lawyer to determine if litigation is your only course of action or if there might be another way.

Mitigating Franchise Litigation Risks

If you are purchasing a franchise, mitigating franchise litigation requires careful attention to the terms of the franchise agreement, proactive communication with the franchisor, and diligent compliance with operational standards. Here are some strategies to mitigate franchise litigation:

  • Thorough Due Diligence: Before signing a franchise agreement, conduct thorough due diligence on the franchisor, including its financial stability, reputation, and litigation history. Review the franchise disclosure document (FDD) carefully, and consider consulting with an Arizona franchise lawyer to ensure you fully understand the terms and obligations.
  • Compliance with Franchise Agreement: Adhere strictly to the terms and conditions of the franchise agreement, including operational standards, branding requirements, and payment obligations. Failure to comply with these terms can provide grounds for the franchisor to terminate the agreement or initiate litigation.
  • Effective Communication with Franchisor: Maintain open and transparent communication with the franchisor regarding any concerns, challenges, or operational issues. Promptly report any issues or disputes to the franchisor and work collaboratively to find solutions before they escalate into legal disputes.
  • Training & Support: Take advantage of the training and support programs provided by the franchisor to ensure you understand the operational procedures and brand standards. Well-trained franchisees are better equipped to comply with franchise requirements and minimize the risk of litigation.
  • Documentation & Record-Keeping: Keep detailed records of all communications, transactions, and interactions with the franchisor. Document compliance with operational standards, financial transactions, and any correspondence with the franchisor. These records can serve as evidence in the event of a dispute.
  • Compliance with Laws & Regulations: Stay informed about relevant laws and regulations governing franchising at the federal, state, and local levels. Ensure that your business operations comply with all applicable laws, including employment laws, health and safety regulations, and consumer protection laws.
  • By following these strategies, you can mitigate the risk of franchise litigation and maintain positive relationships with your franchisors while operating a successful franchise business.

Best Ways to Resolve Franchise Disputes

There are several ways to resolve a franchise dispute: mediation, arbitration, and litigation. However, some offer more benefits than others and some are more time-consuming.

When you have a dispute, mediation is considered the best way to resolve it, provided the parties can come to an agreement with assistance of a mediator. Mediation is confidential, typically between you, a neutral third party mediator, and the franchisor. It tends to be more cost-effective than litigation or arbitration and it is much quicker. It lets both parties work together to create a solution which can aid in preserving the relationship. It is not uncommon for the parties to resolve a dispute in mediation and for them both to be unhappy with the result–but much less unhappy than they would be if they had to endure a lawsuit.

We believe that when disputes happen, mediation with an Arizona franchise lawyer is almost always the best way to resolve disputes. However, if mediation is not possible, arbitration is another option. It is a middle ground between mediation and litigation. A neutral third party will hear out both sides of the issue and make an executive and binding resolution. If neither mediation or arbitration are possible, taking the dispute to court and resolving it through formal litigation must happen. 

Seek Professional Help with Our Arizona Franchise Lawyers

When considering buying into a franchise in Arizona, our lawyers at Denton Peterson Dunn have you covered. Their expertise can help you navigate complex legal issues, protect your interests, and ensure that you make informed decisions before entering into any binding agreements. 

Contact us today and mitigate the risk of disputes and litigation down the line, setting a strong foundation for a successful franchise adventure. 

Brad Denton, Business Lawyer
 – Denton Peterson Dunn

1930 N Arboleda #200
Mesa, AZ 85213

Office: 480-660-3249
Email: [email protected]

7272 E Indian School Rd #540-132
Scottsdale, AZ 85251

Phone: 480-690-3283
Email: [email protected]