What Is Good Faith
Good faith is a legal obligation requiring both franchisor and franchisee to act honestly, deal fairly, and avoid deceptive practices in their relationship. In franchise law, this means the franchisor cannot arbitrarily withhold consent for territory transfers, unreasonably deny renewal, or enforce franchise agreement terms in a discriminatory manner. The franchisee must also operate in good faith by maintaining agreed-upon standards and not deliberately breaching contract terms.
Good Faith in FDD Review
When evaluating a Franchise Disclosure Document (FDD), good faith obligations appear across multiple items. Item 19 of the FDD specifically requires franchisors to disclose whether they reserve the right to modify the franchise agreement. A franchisor claiming they can modify territory rights, renewal terms, or fee structures "at their discretion" may violate good faith standards in certain jurisdictions if those changes are applied selectively or without reasonable notice.
Review whether the FDD acknowledges the franchisor's duty to act in good faith. Some franchisors explicitly state this commitment. Others omit it entirely, which suggests they may interpret their rights more broadly than courts in states like California, New York, or Wisconsin would allow.
Franchise Fees and Renewal Decisions
Good faith becomes critical when a franchisor decides whether to renew your franchise agreement at the end of the term. If renewal depends on paying substantially increased franchise fees (tracked in Item 5 of the FDD), a franchisor acting in bad faith might condition renewal on fees that are unreasonable or dramatically inconsistent with the original agreement without legitimate business justification. Courts have found bad faith when franchisors increased renewal fees by 200% or more without corresponding increases in support or territory expansion.
Similarly, if your FDD discloses franchise support services, technology access, or marketing assistance, and the franchisor cuts these services mid-term to force renewal on worse terms, that constitutes bad faith conduct. Document all communications about renewal discussions and any changes to franchisor obligations before renewal negotiations begin.
Territory Rights and Good Faith Limits
Good faith restricts how a franchisor can enforce territory clauses. If your agreement grants an exclusive territory and the franchisor subsequently opens a competing unit nearby without justification, or allows another franchisee to encroach on your defined territory, you may have a bad faith claim. The franchisor's actions must align with what both parties reasonably understood when signing the agreement.
If the FDD states the franchisor "reserves the right to modify territories," that doesn't automatically permit arbitrary changes. Courts examine whether modifications serve a legitimate business purpose or reflect retaliatory conduct (such as punishment for filing a complaint or refusing an unreasonable request).
What Franchisor Obligations Require
- Provide accurate information in the FDD without material omissions, especially regarding Item 3 litigation history and Item 20 financial performance representations.
- Process renewal applications and territory modification requests within reasonable timeframes, typically 30 to 60 days, rather than delaying indefinitely to pressure franchisees into accepting unfavorable terms.
- Apply franchise agreement enforcement consistently across all franchisees in similar circumstances, not selectively targeting certain operators.
- Support franchisees with training, systems, and marketing assistance as promised in the FDD and franchise agreement, not withdraw support to reduce franchisee profitability.
- Notify franchisees of material changes to the franchise system, supply chain, or franchisor policies that affect operations.
Common Questions
Can a franchisor deny renewal for any reason? No. While franchisors have renewal discretion, they cannot deny renewal based on bad faith reasons like retaliation for complaints, race, gender, or other protected characteristics. However, they can decline renewal if you failed to meet agreed-upon performance standards or violated material terms of the franchise agreement. Your state's franchise relationship laws and the specific renewal language in your agreement determine the exact standard applied.
What evidence shows a franchisor acted in bad faith during FDD disclosure? Inconsistencies between Item 19 financial performance representations and what franchisees actually earn, omission of known litigation from Item 3 that materially affects franchise viability, or provision of an FDD with outdated information that was not refreshed per regulatory requirements all suggest bad faith. Additionally, if Item 6 lists franchise fees significantly lower than what you're quoted verbally, that discrepancy is a red flag.
How do I protect myself against bad faith practices? Obtain a complete FDD at least 14 calendar days before signing anything. Have an attorney licensed in your state review it, focusing on Items 5, 6, 7, 19, and 20. Document all conversations with the franchisor's sales team, request renewal terms in writing well before expiration, and maintain records of all support services you received versus services promised in the FDD.
Related Concepts
Franchise Relationship governs the legal framework within which good faith obligations operate. Relationship Laws establish specific good faith duties and remedies available in your state.