Law suits between franchisors and franchisees happen regularly. The outcome of the litigation, however, is rarely known if a settlement occurs. As a condition of settlement, franchisors usually require the franchisee to sign a statement admitting liability. In exchange, the franchisor will pay a premium settlement. With the signed admission of liability, the franchisors can claim victory in the matter and possibly scare away other law suits.
Franchisors are required to accurately and clearly disclose litigation events with past and present franchisees. 16 C.F.R. §436.1(a)(4)(ii). Of course, disclosures will usually be technically accurate but, whenever possible, will put a positive spin for the franchisor. One way this is accomplished is with the liability admission mentioned above as a requirement of settlement. Even when the franchisor was clearly at fault, the “admission” of liability by the franchisee can shade the actual events. More info here.
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-715-8115.
How do I know if one the lawsuits with a franchisee listed on the franchise document is a what you described above?
I represent franchisees and practice in Toronto, Ontario. The usual practice is to have a confidential settlement agreement in which neither party admits liability. But more worrisome to the prospective franchisee is the existence of arbitrations, which may not be required to be disclosed.
Mr. Webster -
How can an arbitration clause be enforeceable if the franchisee did not affirmatively agree to it or it wasn’t disclosed? I think you are right that most settlements are confidential, but I think Franchise Pundit’s point was right too. He said that the franchisor will commonly pay a premium to settle when the other party will sign an admission of liabitily. The advantage to the franchisor is intimidation of franchisees and disclosure of litigation facts in a more favorable light.
I’d bet that franchisees, if given a choice, would take a larger monetary settlement and admit liability most of the time. I’ve seen other pizza franchisees do that, but they were minor disputes.
Ryan! How will the New Rule, effective July 1st, impact disclosure of settlements?
Will this mean that the franchisors will have to admit when they have committed wrongs against franchisees?
Carol