Every business and legal disclosure that is covered in the Franchise Disclosure Document (FDD) is in great detail and must be evaluated with care. Specifically, Item 3 requires franchisors to disclose information regarding litigation. Read on to discover what Item 3 of the FDD consists of and how one of the seasoned franchisee litigation attorneys at FortmanSpann, LLC can assist you.
What is the purpose of an FDD?
The FDD is a legal document and a prospectus that includes content regulated by federal and state franchise laws. The Federal Trade Commission requires that franchisors establish this document so that prospective franchisees are well-informed on the benefits and risks of buying into the franchise.
What does Item 3 of the FDD include?
In Item 3 of the FDD, franchisors are required to disclose information regarding lawsuits involving any of the following individuals:
- The franchisor themself.
- The franchisor’s predecessors, who have been affiliated with the franchisor in the last 10 years.
- The franchisor’s affiliates, who have guaranteed the franchisor’s performance or offered or sold franchises in any line of business in the last 10 years.
- The franchisor’s parents, who have guaranteed the franchisor’s performance or offered or sold franchises in any line of business in the last 10 years.
- The named parties in Item 2, including the franchisor’s directors, trustees, general partners, principal officers, and individuals with management responsibilities.
With that being said, the specific types of lawsuits that must be disclosed in Item 3 include the following:
- All current and pending criminal, administrative, or material civil lawsuits alleging a violation of antitrust, securities, or franchise law, along with unfair practices, fraud, etc.
- All current and pending material actions involving the franchise relationship (i.e., between the franchisor and franchisee) within the last fiscal year.
- All current and pending effective injunctions, restrictive orders, or decrees by a government agency related to a violation of federal or state franchise law.
- All prior actions against the aforementioned individuals within the 10 years prior to the FDD issuance date.
- All formal settlement agreements after the commencement of franchise sales, regardless of whether it was confidential.
- All mediations that result in the settlement of an ongoing lawsuit.
- All foreign litigations, regardless of whether they occurred in arbitration or a foreign court.
How can a franchisee litigation attorney help me?
For one, a franchise litigation attorney will help you determine whether the information included in Item 3 is thorough and accurate, along with helping you decipher its contents. Also of note, a franchisor must disclose the FDD at least 14 days before they sell their franchise to you or before receiving any fees from you. If this does not occur, then you must immediately contact one of the competent franchisee litigation attorneys from our firm. We await your phone call.