What Franchisors Sue Franchisees For: Claims & Remedies

Franchisors sue franchisees for a short, predictable list of things: unpaid royalties and fees, continued use of the trademarks after termination, breach of system standards, violation of non-compete covenants, misuse of confidential information and trade secrets, abandonment of the business, and underreporting of gross sales. Most of these claims sound in breach of contract, because the franchise agreement is the rulebook — but trademark and trade secret claims add federal statutory remedies, including injunctions, that contract law alone doesn’t provide. Here is what each claim looks like, what you can recover, and what you should do before you file anything.

Unpaid Royalties and Fees

The most common franchisor claim is simple collection: the franchisee stopped paying royalties, advertising fund contributions, or technology fees required by the agreement. Well-drafted agreements strengthen this claim with a no-offset clause — language stating that royalties are due without setoff or deduction, so the franchisee can’t withhold payment as self-help leverage in an unrelated dispute. Courts frequently treat the payment obligation as independent of the franchisor’s own performance, which means “you breached first” is rarely a complete defense to a royalty collection claim. Past-due amounts typically accrue contractual interest and late fees, and most agreements add attorney’s fees for collection.

Underreporting Gross Sales

Underreporting is a royalty claim with a fraud problem attached: the franchisee reports less revenue than the business actually earned, shrinking the royalty base. This is why franchise agreements contain audit clauses — the franchisor’s right to inspect the franchisee’s books, POS data, and tax returns. Audit clauses commonly shift the cost of the audit to the franchisee when the understatement exceeds a stated threshold, and a material or repeated understatement is usually listed as a default justifying termination. If you suspect underreporting, exercise the audit right before suing; the audit builds the damages record your complaint will need.

Trademark Misuse After Termination

A terminated franchisee who keeps operating under the brand — the “holdover franchisee” — is no longer a licensee but an infringer, and the Lanham Act is the franchisor’s strongest weapon. Federal courts regularly grant preliminary and permanent injunctions ordering holdover franchisees to de-identify: take down signage, stop using the marks, and cease the trade dress. Since the Trademark Modernization Act of 2020, a trademark owner who shows a likelihood of success on infringement is entitled to a rebuttable presumption of irreparable harm, which makes preliminary injunctions easier to obtain — though courts have denied them where the franchisee successfully rebutted the presumption, so the motion still has to be built carefully. Monetary remedies can include the infringer’s profits and damages.

Breach of System Standards

System standards claims arise when a franchisee operates outside the brand’s required specifications — unauthorized products or suppliers, failed quality inspections, ignored remodel obligations, or health and safety violations that put the brand at risk. These breaches matter beyond the single unit because inconsistency damages every other franchisee’s goodwill. The usual sequence is a notice of default with a cure period, then termination if the franchisee doesn’t cure, then suit for damages and (if the franchisee holds over) trademark relief. Documentation wins these cases: inspection reports, photographs, mystery-shop results, and written warnings.

Non-Compete Violations

Franchise agreements typically contain two covenants: an in-term covenant (no competing business while the franchise operates) and a post-term covenant (no competing business for a period — often one to two years — within a defined area after termination or expiration). In-term covenants are widely enforced. Post-term covenants are enforceable in many states if reasonable in scope, time, and territory, but state law varies significantly — California, for example, is broadly hostile to post-term non-competes — so enforceability has to be assessed jurisdiction by jurisdiction.

One important update: the FTC’s 2024 rule banning most non-competes never applied to franchisor–franchisee covenants (it expressly excluded them, though it covered employees of franchisors and franchisees), and the rule itself was set aside nationwide by a federal court in August 2024. The FTC dismissed its appeals in September 2025 and formally removed the rule from the Code of Federal Regulations in 2026. Franchise non-compete enforcement therefore remains a matter of state law.

Trade Secret and Confidential Information Claims

When a departing franchisee takes the operations manual, recipes, customer lists, or pricing data to a competing business, the franchisor can sue under the federal Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1836, in addition to contract and state-law claims. The DTSA provides a federal civil cause of action for misappropriation of trade secrets used in interstate commerce, with remedies including injunctive relief, actual damages, unjust enrichment, and — for willful and malicious misappropriation — exemplary damages and attorney’s fees. The claim depends on the franchisor having taken reasonable measures to keep the information secret, so confidentiality provisions and manual-control practices matter long before any lawsuit.

Abandonment

Abandonment — the franchisee walks away and the unit goes dark — is typically defined in the agreement as an incurable default permitting immediate termination. The franchisor’s damages claim usually includes unpaid amounts plus, where the agreement and state law allow, lost future royalties for the remaining term. Abandonment cases often travel with trademark claims (signage left up) and non-compete claims (the franchisee reopens independently nearby).

Claims and Remedies at a Glance

Before You Sue: Notice, Cure, and ADR

A lawsuit filed before the contractual preconditions are met is a lawsuit that can be dismissed. Work through these first:

1. Send a proper default notice. Most agreements — and many state franchise relationship laws — require written notice of default and a cure period before termination. Get the termination notice right; a defective notice can convert your termination into the franchisee’s wrongful-termination claim.
2. Honor the cure period. If the franchisee cures, the default is resolved and your litigation leverage resets.
3. Check the dispute resolution clause. Franchise agreements commonly require mediation or arbitration before (or instead of) court. Filing in court when the agreement mandates arbitration wastes months. Note that injunctive relief — especially for trademark misuse — is often carved out so you can go straight to court for it.
4. Preserve the record. Default letters, audit results, inspection reports, and payment histories are the evidence the case will run on.

Frequently Asked Questions

Can a franchisor sue a franchisee for future royalties?

Sometimes. Where the agreement supports it and state law permits, franchisors have recovered lost future royalties as damages after a termination caused by the franchisee’s breach. The outcome is jurisdiction- and contract-specific.

Does a franchisor have to send a default notice before suing?

Usually, yes — the agreement’s notice-and-cure provision and, in some states, franchise relationship statutes require it before termination. Skipping it risks turning a strong claim into a liability.

Can a franchisor get a court order to stop a terminated franchisee from using the brand?

Yes. Lanham Act injunctions against holdover franchisees are a well-established remedy, aided since 2020 by a rebuttable presumption of irreparable harm once likely infringement is shown.

If a franchisee has stopped paying, gone rogue on brand standards, or kept your name on the door after termination, the sequence you follow now determines what you recover later. Reidel Law Firm represents franchisors in enforcement and dispute strategy with flat-fee pricing on defined matters — start with our franchise law services.