Franchisor Litigation History: What 259 FDDs Disclose in Items 3 and 4

Twelve numbers from FDD Items 3 and 4

Each figure below comes from reading Item 3 (Litigation) and Item 4 (Bankruptcy) in full in 259 franchise disclosure documents (FDDs) filed with the Minnesota Department of Commerce (CARDS) and issued between 2025-01-24 and 2026-08-18. Shares are of all 259 FDDs unless a different base is named.

1. 57.1% of 259 FDDs list at least one Item 3 action; 42.9% state that no litigation is required to be disclosed.
2. 43.2% list an action against or by the franchisor entity itself; 13.9% list only parent, affiliate, predecessor or officer matters.
3. 25.5% list a franchisee suit or arbitration against the franchisor (66 FDDs).
4. 20.8% list a franchisor suit or arbitration against a franchisee (54 FDDs).
5. 31.3% list a government action of any kind; 15.1% list one against the franchisor itself.
6. 15.1% list a class, collective or representative action.
7. The median disclosing FDD lists 3 actions; 42.6% of disclosing FDDs list only 1 or 2.
8. 606 own-system actions (each franchisor counted once): 45.4% franchisor suits against franchisees, 32.2% franchisee suits, 9.9% government actions.
9. 75.3% of franchisor suits against franchisees are pending, against 27.2% of franchisee suits.
10. 69.9% of 163 settled own actions state the amount; the median stated amount is $147,500.
11. 9.3% disclose an Item 4 bankruptcy; 19 of those 24 FDDs include a Chapter 11 case.
12. 95.5% of franchisor entities with 500 or more franchised outlets list an Item 3 action, against 31.1% of entities with 1 to 24.

How common a franchisor litigation history is in FDD Item 3

A majority of the sample discloses something, but the franchisor’s own docket is usually smaller than the headline suggests. 57.1% of the 259 FDDs (148) list at least one lawsuit, arbitration or government action in Item 3; 42.9% (111) state that no litigation is required to be disclosed, the wording the NASAA 2009 Commentary recommends.

Item 3 reaches beyond the franchisor. Under 16 CFR 436.5(c), it also covers predecessors, parents or affiliates that guarantee the franchisor or sell under its mark, and the officers listed in Item 2. Counting only actions against or by the franchisor entity itself, 43.2% of FDDs (112) have an own-system record. 13.9% (36) list only parent, affiliate, predecessor or officer matters, such as a parent company’s securities suit.

By who brought the action: 25.5% of FDDs list a franchisee suit or arbitration against the franchisor, 20.8% list a franchisor suit against a franchisee, and 31.3% list a government action of any kind (15.1% against the franchisor itself). 40.9% of FDDs disclose neither litigation nor a bankruptcy.

Item 3 disclosure by sector

Lodging and retail FDDs disclose most often and entertainment FDDs least. 77.8% of lodging FDDs and 77.8% of retail FDDs list at least one action, against 33.3% of entertainment and recreation FDDs. Each sector has 17 to 27 FDDs, so one FDD moves a sector’s share by several points; treat the ranking as indicative.

Sector also stands in for structure. Several hotel franchisors in the sample run more than one brand from one legal entity, so a single Item 3 docket appears in several hotel FDDs. The size analysis below handles that by counting each franchisor entity once.

Who sued whom: franchisor suits, franchisee claims and other cases

Across 606 own-system actions, with each franchisor entity counted once, franchisor suits against franchisees are the largest group at 45.4% (275). Franchisee suits and arbitrations against the franchisor follow at 32.2% (195), then government actions at 9.9% and customer or consumer suits at 7.8%.

The franchisor-suit total is concentrated. One franchisor’s Item 3 holds 140 own actions (23.1% of the pool), 132 of them collection or enforcement suits against franchisees. Without that one docket, franchisee suits (188) outnumber franchisor suits (143). System by system the picture is the same: of 106 FDDs with any franchise-relationship suit, 57 list more franchisee-filed than franchisor-filed suits and 38 the reverse.

Two rule details shape these counts. Franchisor suits against franchisees enter Item 3 only for the last fiscal year (FTC staff FAQ 5), while franchisee claims stay in while pending, and for 10 years if the franchisor was held liable or settled for money. Franchisors may also list their own suits under one heading such as royalty collection suits (16 CFR 436.5(c)(4)), which makes them easy to count. By claim type, collection or contract enforcement is 45.0% of own actions and franchisee claims of fraud, disclosure violations, breach or wrongful termination are 30.2%. 43.6% of own actions are arbitrations.

Pending versus concluded cases

Half the own-system docket is open: 51.0% of own actions (309) were pending at the FDD date. The split differs sharply by direction. 75.3% of franchisor suits against franchisees are pending, against 27.2% of franchisee suits and 3.3% of government actions.

That gap is mostly a product of the disclosure rules, not of how disputes end. Franchisor suits appear only in the year they are filed, and 187 of the pending own actions sit in lists of suits filed in the last fiscal year, usually without a stated outcome; this study coded those as pending. Concluded franchisee and government matters stay disclosed for years when money changed hands or an order was entered. Of 297 concluded own actions, 54.9% ended in a settlement, 19.2% in a consent or agency order, 15.2% in a dismissal or withdrawal, 6.1% in a judgment or award for the franchisor side and 3.4% in one for the other side. The FTC Compliance Guide notes that dismissals of prior actions need not be disclosed, so concluded cases lean toward settlements by design.

What settlement disclosures show

Most settled cases carry a dollar figure. 69.9% of 163 settled own actions state the amount, 12.3% describe non-monetary terms only (releases, terminations, store transfers), 4.3% call the amount confidential and 13.5% give no terms. The rule requires material settlement terms to be disclosed even when the agreement is confidential (16 CFR 436.5(c)(3)), with narrow exceptions.

Across 80 stated amounts, the median is $147,500. 48.8% fall between $50,000 and $249,999, 18.8% under $50,000, 16.2% between $250,000 and $999,999, and 16.2% at $1 million or more. The franchisor side paid 54 of the 80 stated amounts and received 26. These are disclosed settlement amounts, not damages claimed or a measure of any franchisor’s finances.

Regulatory and government actions

Government matters are common but mostly closed. 31.3% of FDDs (81) list at least one government action; 15.1% (39) list one against the franchisor itself. After counting each shared Item 3 once, the sample holds 184 government actions, of which 125 involve a parent, affiliate or predecessor and 95.1% are concluded. 112 were resolved administratively, without a court case. In the 20 hand-checked FDDs, the administrative actions were state orders over unregistered franchise sales or disclosure lapses, several with a rescission offer to the franchisees involved.

Item 3 must keep a government order in the FDD while it is currently effective (16 CFR 436.5(c)(2)), and the FTC Compliance Guide says FTC court orders with no end date are almost always treated as currently effective. That is why orders entered in the 1990s and 2000s still appear in 2026 FDDs, as two of the hand-checked FDDs show.

Item 4 bankruptcy prevalence

Bankruptcy disclosures are uncommon. 9.3% of FDDs (24) disclose at least one bankruptcy in Item 4. In 13 FDDs (5.0%) the debtor is the franchisor, a parent, a predecessor or an affiliate, and in 3 the franchisor entity itself. In 13 (5.0%) it is an officer personally or a company an officer ran. 19 of the 24 FDDs include a Chapter 11 case, which the U.S. Courts describe as reorganization, and 5 include a Chapter 7 case, which the courts describe as liquidation. 6 FDDs disclose a filing made in 2025 or 2026.

The window is 10 years and the net is wide: Item 4 covers every parent and affiliate, not only those that guarantee the franchisor (FTC Compliance Guide). The FTC consumer guide suggests that a buyer who sees an entity bankruptcy review the Item 21 financial statements, possibly with an accountant. 19 FDDs disclose both Item 3 actions and an Item 4 bankruptcy.

Franchisor litigation history and system size

Litigation rises with system size in prevalence and count, but not per outlet. Grouping the 248 franchisor entities by franchised outlets at fiscal year end (Item 20, from the site’s franchise closure rates dataset), 31.1% of entities with 1 to 24 outlets list an Item 3 action, rising to 55.9% at 25 to 99, 74.1% at 100 to 499 and 95.5% at 500 or more. The median own-action count is 0 below 100 outlets, 1 at 100 to 499 and 3 at 500 or more; the rank correlation between outlets and own actions is 0.52.

Per 100 franchised outlets the pattern reverses at the top. Own actions per 100 outlets are 1.74 for entities with 1 to 24 outlets, 2.85 at 25 to 99, 1.35 at 100 to 499 and 0.88 at 500 or more (0.43 without the single largest docket). The median entity is at 0 below 100 outlets, because most small systems list nothing. Treat the rates as indicative: Item 3 describes the franchisor entity, which may franchise brands outside the sample, while the denominator counts only sample brands’ franchised outlets.

How to read Item 3 and research a franchisor

Read Item 3 in four passes. First, whose case it is: the franchisor, a parent or affiliate, or an officer. Second, who filed: franchisor suits against franchisees are mostly fee collection and post-term enforcement, while franchisee suits allege misrepresentation, disclosure violations or breach. Third, status and outcome. Fourth, scale: a few cases in a system of thousands of outlets reads differently from the same number in a system of 20.

The FTC Compliance Guide presumes every franchise-relationship suit material because it may show problems in the relationship, and the FTC consumer guide notes that royalty collection suits can mean franchisees were not succeeding. The rule’s drafters added franchisor-initiated suits in 2007 after franchisee groups and the SBA argued they show how litigious a franchisor is (72 FR 15480). To go further, pull older FDDs from state databases such as Minnesota CARDS to see suits that rolled off, and check federal dockets on PACER ($0.10 a page, capped at $3 a document). Item 3 omits ordinary routine litigation and dismissed prior actions, so it is a floor, not a full history. Our guide to buying a franchise covers the rest of the FDD.

How this compares with other litigation counts

This report counts what franchisors disclose. The site’s franchise litigation report counts something else: federal court filings coded as franchise cases in the Federal Judicial Center Integrated Database, which covers federal courts only, so it leaves out arbitrations and state court cases. Item 3 includes arbitrations, which are 43.6% of own actions here. Government enforcement aimed at fraud is covered in the franchise fraud report.

A Franchise Times review published February 27, 2023 read Item 3 for 150 brands with 500 or more units and found 32 with no cases listed. In this sample, 95.5% of the 22 franchisor entities with 500 or more franchised outlets list at least one action. The two samples differ in years, unit definitions and brands, so the comparison is directional only.