What Drives Risk in Franchise Disputes Today?

New York General Business Law Section 681 requires franchisors to provide a detailed FDD at least fourteen days before a franchisee signs any agreement or pays any money. This statute also prohibits termination or non-renewal of a franchise without good cause, and it mandates that the franchisor provide written notice and an opportunity to cure any alleged breach. The practical significance of this framework is substantial: a franchisor cannot simply decide a franchise is underperforming and terminate it without documentary evidence of breach and a reasonable cure period. In New York Supreme Court, franchisees have successfully challenged terminations where the franchisor failed to follow statutory notice procedures or where the stated reason for termination was pretextual. From a practitioner's perspective, I have seen disputes resolved far more favorably for franchisees when the franchisor's termination letter lacks specificity about the breach or fails to provide adequate cure time.

New York courts treat franchise termination disputes as contract interpretation issues, but they apply a heightened scrutiny to the franchisor's conduct. The New York Court of Appeals has held that franchise agreements, despite being negotiated commercial contracts, carry an implied covenant of good faith and fair dealing that cannot be waived by the parties. When a franchisee sues for wrongful termination in New York Supreme Court or federal district court in the Southern District of New York, the court will examine not only whether the franchisee breached the agreement but also whether the franchisor acted in good faith and followed its own procedures. Discovery in these cases typically focuses on communications between franchisor and franchisee, compliance records, and evidence of whether the franchisor treated similarly situated franchisees consistently.

Franchisors must be meticulous about any financial performance representations (Item 19 of the FDD). If a franchisor claims that the average franchisee earns a certain income, that claim must be substantiated, and it must include appropriate disclaimers and caveats. Courts and the Federal Trade Commission have penalized franchisors who inflated earnings claims or failed to disclose that only a subset of franchisees achieved those results. A franchisee who relied on an inflated earnings claim to make the investment decision may have grounds to sue for fraud or rescission. In practice, these cases hinge on what the franchisor knew at the time and what disclosures were made or withheld.

New York courts enforce non-compete covenants in franchise agreements, but only if they are reasonable in scope, duration, and geographic area. A non-compete that prevents a former franchisee from opening a competing business anywhere in the state for ten years will likely be struck down as overbroad. However, a restriction that bars competition within the franchisee's territory for one to two years after termination is generally enforceable. Courts apply a balancing test: does the franchisor have a legitimate business interest (protecting its brand, customer relationships, and system integrity), and is the restriction narrowly tailored to protect that interest? Franchisees often challenge non-competes as unreasonable, and the outcome depends heavily on the specific language and the franchisor's documented business justification. Disputes over non-compete enforceability frequently arise in the context of corporate disputes, where the franchisee argues the restriction is punitive rather than protective.

Renewal disputes often center on whether the franchisor exercised good faith in deciding whether to renew. A franchisor cannot refuse renewal simply because it wants to operate the location itself or because a family member wants to take over the franchise. New York courts have held that a franchisor must have a legitimate business reason for non-renewal, such as the franchisee's failure to meet performance standards, breach of operational requirements, or the franchisor's decision to exit that market entirely. The franchisor bears the burden of proving good faith, not the franchisee. If a franchisor's stated reason for non-renewal is inconsistent with how it has treated other franchisees, that inconsistency can be powerful evidence of bad faith. Real-world outcomes depend heavily on how thoroughly the franchisor documented performance issues before making the non-renewal decision.