Before offering franchises, and before purchasing a franchise, a franchising business or a potential franchisee may consider legal disputes as a far-off and remote possibility. But the legal relationship between franchisors and franchisees can be complex, and both franchisors and franchisees need to be aware of the business and legal risks involved, including the potential for a dispute, litigation, and the time and expense involved in resolving the dispute.
This post summarizes three recent decisions by federal judges at the district-court level (the trial court in the federal judicial system). The purpose of summarizing these decisions is not to discuss binding decisions or precedents but to provide a brief sampling of a few issues that were litigated in the past couple of years. Hopefully, these very brief summaries will provide potential franchisors and franchisees with some context for the kind of legal disputes that can arise in the franchise industry and what’s involved in resolving them.
These summaries are based, in part, on: Andrew M. Malzahn, et al., Franchising & Distribution Currents, Franchise Law Journal (2026). For an introduction to The Franchise Rule and the franchise disclosure document, see my previous posts here and here.
Franchise Agreement Dispute: 360 Painting, LLC v. R. Sterling Enterprises, Inc., No. 1:20-cv-04919 (N.D. Ill. May 10, 2024).
In the 360 Painting case, the franchisor terminated the franchise agreement after audits allegedly discovered underreporting of gross sales and underpayment of royalties and other fees. The franchisor also sued a franchisee for breach of the franchise agreement based on the alleged underreporting and underpayment. Before trial, both parties filed motions disputing the interpretation of a contract addendum stating that the franchisor “waive[d] any obligation to pay unpaid and/or future royalty fees, national marketing fund contribution and/or other fees owed post-termination.” The franchisor argued that this language was not a waiver of monetary damages based on the franchisee’s misrepresentations discovered before termination but, instead, was only a waiver of certain fees that could arise after termination. The franchisee argued that the phrase “and/or other fees” was catch-all wording that waived all post-termination fees regardless of whether they arose before or after termination.
The court concluded that both the franchisor and the franchisee had offered reasonable interpretations of the addendum and that, as a result, the addendum language was ambiguous. The court denied the motions made by each party, stating that additional evidence (in addition to the contract language) could be introduced at trial to resolve the issue.
This case is an example of the significant role that contract language plays in the franchisee-franchisor disputes. The franchise agreement is a complex document that structures an ongoing relationship and bargain between the franchisor and the franchisee. No contract can anticipate or cover all possible situations, and contract language that seems clear when the contract is signed may later be interpreted in opposing ways.
Complex Antitrust Claims: Brave Optical, Inc. v. Luxottica of America, Inc., No. 1:23-cv-00793-DRC (S.D. Ohio June 26, 2024).
This case was filed in federal court as a class action suit by Pearle Vision franchisees against Luxottica, which is the “dominant player in the U.S. eyewear market” and the largest eyewear company in the world. Pearle Vision (a subsidiary of Luxottica) sells franchises that market eyewear through retail operations. Luxottica also owns EyeMed and VSP, which are competitors in the vision insurance plan industry. The franchisee plaintiffs alleged that Luxottica coerced franchisees by, first, requiring them to purchase overpriced, less fashionable frames through a program called “EyeCon”; and, second, tying participation in EyeCon to gaining in-network status with VSP (which pays below-market reimbursement rates to franchisees). The franchisee plaintiffs also alleged that the franchise disclosure documents failed to disclose or misrepresented facts about Luxottica’s control over inventory, pricing, and other matters. In other words, they alleged that Luxottica was enriching itself at the expense of franchisees.
Luxottica responded to the franchisees’ Complaint by filing a motion to dismiss for failure to state a claim. In June 2024, the federal district court issued a decision that declined to rule on the motion because the parties had agreed (in the franchise agreement) to engage in mediation before a lawsuit could be filed. The case was “stayed” (put on hold) until the parties attempted to mediate a resolution.
This complex antitrust, contract, and misrepresentation case suggests the need for protection of franchisee purchasers against potentially abusive practices by franchisors.
Enforcement of an Arbitration Clause with Unconscionable Provisions: Singh v. Batteries Plus, L.L.C., No. 2:24-cv-00223-KJM-DB (E.D. Cal. May 10, 2024).
In this case, the franchisee plaintiff alleged that the franchisor had understated the operating costs for a new franchise, provided inflated revenue projections, allowed another franchisee to infringe on the franchisee’s territory, failed to provide adequate support, and created a hostile work environment.
The franchise agreement included an arbitration provision, and the franchisor filed a motion asking the court to require that the parties engage in arbitration. In opposing the motion, the franchisee argued that the arbitration provision was not enforceable because it was procedurally and substantively unconscionable (an issue that often relates to an imbalance in bargaining power between parties to a contract). Procedural unconscionability involves statements or actions that induce the party with lower bargaining power to agree to the contract. Substantive unconscionability involves unfair contract terms and provisions that the party with lower bargaining power must accept if that party wants the opportunity to benefit from the contract.
The court rejected the franchisee’s argument regarding procedural unconscionability because the evidence to support the argument was insufficient. Second, the court concluded that two provisions of the arbitration clause were substantively unconscionable, but the unconscionable terms could be “severed” (deemed unenforceable) without affecting the enforceability of the other terms in the arbitration clause. The court then granted the motion to compel arbitration and dismissed the lawsuit while leaving open the possibility that it could be re-filed after the parties arbitrated their dispute.
This case shows that franchisors need to carefully consider the terms and provisions in their franchise agreements to avoid unfairly taking advantage of potential franchisees who have much less bargaining power. The case also serves as a reminder that franchisees need to review and understand a complex franchise agreement and the contractual framework for the business relationship with the franchisor, including dispute resolution provisions.
Conclusion
Franchise operations can be profitable business opportunities for both franchisors and franchisees, but like any business venture, they are not without risk. One risk is that a dispute and litigation will arise between the franchisor and the franchisee. The cases discussed above are presented as “real-life” examples of franchise-related litigation, which can involve a wide range of issues from contract interpretation to antitrust and misrepresentation claims to unconscionability of an arbitration clause.
It’s worth noting that, in two of the three cases, the trial court’s decision recognized that the franchise agreements contained an arbitration or mediation provision and required the parties to seek resolution through arbitration or mediation before proceeding with litigation. Franchisors and franchisees should be aware that courts will enforce mediation and arbitration provisions.
Attorney James D. Griffith at Endurance Business Law, PLLC, is an experienced business attorney who can review franchise disclosure documents and provide advice and guidance on the legal risk. To set up a consultation regarding a franchise matter, please call our office at (480) 997-2951 or use the Contact form on this website.