FDD Item 3 Explained: A Franchisor's Litigation History

Item 3 is the litigation section of a Franchise Disclosure Document. It covers specified actions involving the franchisor and other parties defined by the FTC Franchise Rule. It does not list every dispute connected to a brand.

Read it in three passes: who brought each action, what kinds of claims appear, and how the disclosures relate to the size of the system. Use it alongside the guide to reading an FDD, then bring questions to your franchise attorney.

What is FDD Item 3?

Item 3 is the required litigation disclosure under 16 CFR 436.5(c). Paragraph (c)(1) states:

(1) Disclose whether the franchisor; a predecessor; a parent or affiliate who induces franchise sales by promising to back the franchisor financially or otherwise guarantees the franchisor’s performance; an affiliate who offers franchises under the franchisor’s principal trademark; and any person identified in § 436.5(b) of this part:

(i) Has pending against that person:

(A) An administrative, criminal, or material civil action alleging a violation of a franchise, antitrust, or securities law, or alleging fraud, unfair or deceptive practices, or comparable allegations.

(B) Civil actions, other than ordinary routine litigation incidental to the business, which are material in the context of the number of franchisees and the size, nature, or financial condition of the franchise system or its business operations.

(ii) Was a party to any material civil action involving the franchise relationship in the last fiscal year. For purposes of this section, “franchise relationship” means contractual obligations between the franchisor and franchisee directly relating to the operation of the franchised business (such as royalty payment and training obligations). It does not include actions involving suppliers or other third parties, or indemnification for tort liability.

(iii) Has in the 10-year period immediately before the disclosure document’s issuance date:

(A) Been convicted of or pleaded nolo contendere to a felony charge.

(B) Been held liable in a civil action involving an alleged violation of a franchise, antitrust, or securities law, or involving allegations of fraud, unfair or deceptive practices, or comparable allegations. “Held liable” means that, as a result of claims or counterclaims, the person must pay money or other consideration, must reduce an indebtedness by the amount of an award, cannot enforce its rights, or must take action adverse to its interests.

Whose lawsuits have to appear?

Paragraph (c)(1) identifies the covered parties: the franchisor, predecessors, parents or affiliates that induce franchise sales by promising financial backing or otherwise guarantee performance, affiliates offering franchises under the principal trademark, and the people identified in Item 2. Read Item 2 alongside Item 3 to identify those people.

The scope changes for orders under paragraph (c)(2). That provision includes an affiliate that has offered or sold franchises in any line of business within the last 10 years, not only under the franchisor’s principal trademark. A lawsuit involving a party outside the applicable categories is not automatically an Item 3 disclosure.

What Item 3 has to disclose, and how far back

Pending actions. Paragraph (c)(1)(i) covers pending administrative, criminal, or material civil actions with the allegations specified in (A). Subparagraph (B) separately covers civil actions other than ordinary routine litigation incidental to the business that are material in the context of franchisee numbers and the system’s size, nature, or financial condition.

Franchise-relationship actions in the last fiscal year. Paragraph (c)(1)(ii) asks whether a covered party was a party to a material civil action involving the franchise relationship in the last fiscal year. This is not a rolling 12-month or 10-year window. The definition concerns contractual obligations directly related to operating the franchised business, such as royalty payments and training. It excludes supplier or other third-party actions and indemnification for tort liability.

Specified history in the 10-year period before issuance. Paragraph (c)(1)(iii) covers felony convictions or nolo contendere pleas and civil actions in which a covered party was held liable for the specified allegations. The Rule defines ‘held liable’ by the required payment, debt reduction, inability to enforce rights, or action adverse to the party’s interests. Do not substitute a general list of all concluded lawsuits for that definition.

Currently effective orders. Paragraph (c)(2) covers currently effective injunctive or restrictive orders or decrees resulting from pending or concluded public-agency actions and relating to the franchise or to Federal, State, or Canadian franchise, securities, antitrust, trade regulation, or trade practice law. The 10-year affiliate-history test identifies covered affiliates; it is not a 10-year expiration date for an order’s disclosure.

Paragraph (c)(3) requires the title, case number or citation, initial filing date, parties, forum, and opposing party’s relationship to the franchisor. It also requires claim summaries, relief sought or obtained, conclusions of law or fact, and the applicable status, judgment, settlement, order, or conviction details, subject to (c)(4).

Settlement confidentiality does not by itself remove the disclosure obligation. Footnote 2 states:

If a settlement agreement must be disclosed in this Item, all material settlement terms must be disclosed, whether or not the agreement is confidential. However, franchisors need not disclose the terms of confidential settlements entered into before commencing franchise sales. Further, any franchisor who has historically used only the Franchise Rule format, or who is new to franchising, need not disclose confidential settlements entered prior to the effective date of this Rule.

Read for direction first: who is suing whom

Separate actions against the franchisor from actions it initiated. Then identify the opposing party’s relationship to the franchisor and the nature of each claim. A claim is an allegation; read the disclosed status and any conclusions rather than treating the claim as a finding.

Paragraph (c)(4) permits individual franchisor-initiated suits covered by (c)(1)(ii) to appear under one common heading serving as the case summary, for example, “royalty collection suits”. This is a summary allowance, not permission to omit the individual suits. Read the listings beneath the heading as well as the heading itself.

What real Item 3s look like (2026 FDDs)

Jimmy John’s: FDD issued March 26, 2026

Under “Pending Litigation”, the FDD states:

There are no actions pending against us, a predecessor, a parent or affiliate that guarantees our performance, an affiliate who offers franchises under the principal trademark, or a person identified in Item 2 that are required to be disclosed.

“Concluded Litigation and Related Matters” follows. It lists actions against the covered parties that concluded in the last 10 years, including a data-breach class action, wage-and-hour collective actions, a state attorney general action, and franchisee arbitrations. A separate section, “Disclosures Regarding Affiliated Programs”, lists actions against affiliates that offer franchises, including state actions concerning franchise agreement provisions.

Wayback Burgers: FDD issued February 12, 2026

Under “Claims Against Us”, the FDD states:

No litigation against us is required to be disclosed in this Item.

“Actions Initiated by Us” follows. It lists one action Wayback initiated against its former franchisee, the landlord, and the purchaser of the former franchisee’s business. The listed claim types are breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, and trademark infringement under the Lanham Act. The FDD states:

This matter is ongoing.

Read for direction in both examples. A no-pending-actions or no-claims-against-us statement is not the whole Item 3. Read the sections that follow before comparing the disclosures. The Jimmy John’s versus Wayback Burgers comparison places these disclosures alongside other FDD items.

Read for pattern and scale

After sorting by direction, group similar claim types and compare the disclosures with the system’s franchisee and outlet counts. Paragraph (c)(1)(i)(B) expressly places materiality in the context of franchisee numbers and the system’s size, nature, or financial condition. It does not give buyers a numerical safe-harbor count of lawsuits.

Use Item 20 for outlet and turnover information. Ask your attorney whether any disclosed action should also be considered alongside the Item 21 financial statements. Keep allegations, settlements, judgments, and ongoing proceedings distinct in your notes.

Why a blank Item 3 is not a clean bill of health

A ‘none to disclose’ statement addresses the Rule’s categories, covered parties, materiality standards, and time periods. It does not establish that the franchisor has never had a dispute. Nor does settlement automatically make a matter disappear: the Rule defines civil liability and expressly addresses settlement terms.

Use the questions to ask current and former franchisees to prepare conversations alongside your document review. Ask your attorney what additional records would help verify a specific disclosure.

Jimmy John’s FDD example above includes franchisee arbitrations. Review Item 17’s venue and arbitration provisions with counsel to understand the agreement’s dispute-resolution terms as well as the history in Item 3.

July 2024 FTC staff guidance: fee-disclosure context

The FTC’s July 2024 staff guidance addresses undisclosed fees, including fees imposed through changes to an operating manual. It states that failing to disclose required fees violates the Franchise Rule and Section 5 of the FTC Act, and that imposing or collecting a new fee not disclosed in the FDD and included in the franchise agreement may be an unfair practice. The guidance represents staff views and is not binding on the Commission; it says determinations are fact specific. Read it as fee-disclosure context alongside Item 3’s litigation requirements.

Questions to ask your franchise attorney about Item 3

• Which disclosed actions were brought against the franchisor, and which did it initiate?
• Which disclosure category and time period applies to each matter?
• How do the nature of the claims and the system’s size affect the materiality analysis?
• Does any currently effective order impose continuing conditions relevant to the franchise?
• What do the disclosed settlement terms require, and does a footnote 2 exception apply?
• Should any action be considered alongside Item 21, and what additional records would help verify the disclosure?

Item 3 is one line on a longer checklist

Our free due-diligence checklist covers Items 3, 4, 20 and 21 (litigation, bankruptcy, turnover and financials) in the order an attorney reads them. Plus the due-diligence kit.

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