Franchise Fee and Royalty Disputes

Overcharges, hidden fees, marketing fund misuse, and undisclosed charges that undermine your unit economics.

Franchise fees are supposed to be clearly disclosed. When franchisors impose undisclosed charges, miscalculate royalties, or misuse marketing funds, franchisees have legal remedies - but must act strategically to preserve them.

Check your FDD: Items 5, 6, and 7 must disclose all fees. Any fee not properly disclosed may be grounds for rescission or refund.

Types of Franchise Fees

Fee Type Description Common Disputes
Initial Franchise Fee One-time payment for franchise rights (FDD Item 5) Promised services not delivered, refund on termination
Royalties Ongoing % of gross sales (FDD Item 6) Calculation errors, definition of "gross sales"
Advertising/Marketing Fund Contribution to system-wide marketing (FDD Item 6) Misuse, administrative bloat, no local benefit
Technology Fees POS systems, software, website (FDD Item 6) Undisclosed fees, systems that don't work
Supply Chain Markups Required purchases from approved suppliers Undisclosed rebates, above-market pricing
Transfer/Renewal Fees Fees for selling franchise or renewing (FDD Item 6) Undisclosed fees, arbitrary increases

Legal Framework

FTC Franchise Rule - Fee Disclosure Requirements

Item 5: Must disclose initial franchise fee and conditions for refund.

Item 6: Must disclose all other fees (royalties, advertising, technology, audit, training, etc.) including amount, due date, and whether refundable.

Item 7: Must disclose estimated initial investment range.

Failure to disclose material fees can support rescission claims.

California Franchise Investment Law (Corp. Code § 31300)

Franchisee may rescind within one year of signing if franchisor made material misrepresentations or omissions. Undisclosed fees are material omissions.

Common Fee Disputes

1. Royalty Calculation Errors

2. Marketing Fund Misuse

3. Undisclosed Fees

4. Initial Fee Refund Disputes

Evidence Checklist

Franchise Disclosure Document (all versions you received)

Franchise Agreement and amendments

All invoices and fee statements from franchisor

Your sales records (POS data, bank deposits)

Marketing fund contribution history

Evidence of marketing spending in your area (or lack thereof)

Correspondence disputing fees

Audit reports if franchisor audited you

Invoices from required vendors showing markups

FDD Item 21 (audited financial statements) showing marketing fund

Don't just stop paying: Withholding royalties without proper legal basis can be used as grounds for termination. Consult an attorney before offsetting or withholding payments.

Strategic Considerations

Audit Rights

Many franchise agreements give franchisors the right to audit you - but you may also have rights to audit the marketing fund or challenge their calculations. Check your agreement.

Collective Action

Fee disputes often affect all franchisees. Coordinating with other franchisees through a franchisee association can provide leverage and share legal costs.

Statute of Limitations

Don't wait too long. Rescission claims under California law must be brought within one year of discovery or four years of the violation, whichever is earlier. Contract claims have a four-year limitation.

Demand Letter Templates

Royalty Overcharge Refund

"I am writing to dispute royalty charges and demand a refund for overpayments. Under Section [X] of the Franchise Agreement, royalties are calculated as [X]% of "Gross Sales," defined as [quote definition]. This definition excludes [taxes / returns / tips / other exclusions]. My review of royalty statements for [period] reveals the following discrepancies: Month Reported Gross Sales Correct Gross Sales Overcharge [Month] $[amount] $[amount] $[amount] [Month] $[amount] $[amount] $[amount] [...] TOTAL OVERCHARGE: $[amount] The overcharges result from [describe error - e.g., inclusion of sales tax in gross sales, failure to credit returns, POS system reporting errors]. I demand: 1. Refund of overpaid royalties: $[amount] 2. Correction of the calculation methodology going forward 3. Credit memo confirming the adjustment Please respond within 14 days. If this dispute is not resolved, I will offset future royalty payments by the amount owed and pursue additional remedies as necessary."

Marketing Fund Demand

"I have contributed $[total amount] to the [Brand] Marketing Fund over the past [X] years. Despite these contributions, I have serious concerns about how these funds are being used. The FDD Item 6 states that marketing fund contributions will be used for [quote disclosed purposes - e.g., "advertising and promotion for the benefit of franchisees"]. I request the following information pursuant to my rights under the Franchise Agreement and applicable law: 1. Audited financial statements for the Marketing Fund for the past 3 years 2. Breakdown of expenditures by category (media, production, administration) 3. Breakdown of expenditures by geographic region 4. Specific advertising placements in my market (DMA) for the past 12 months [If information is known, add:] Based on available information, it appears that: - [X]% of the fund was spent on "administration" rather than actual advertising - No advertising was placed in the [your city/region] market despite my contributions of $[amount] - The fund was used to recruit new franchisees, benefiting the franchisor rather than existing franchisees If marketing fund contributions are not being used for the disclosed purposes, this constitutes a breach of contract and potentially fraud. I demand [refund of contributions / accounting and reformation of marketing program / reduction in contribution rate]. Please respond within 21 days."

Undisclosed Fee Challenge

"I am in receipt of your invoice dated [date] for $[amount] for [describe fee - technology platform fee, mandatory training, etc.]. This fee was not disclosed in the Franchise Disclosure Document provided to me prior to signing. I have reviewed: - FDD Item 5 (Initial Franchise Fee): No mention of this fee - FDD Item 6 (Other Fees): No disclosure of [fee type] - FDD Item 7 (Estimated Initial Investment): Not included Under the FTC Franchise Rule (16 C.F.R. Part 436) and the California Franchise Investment Law, franchisors must disclose all fees that franchisees are required to pay. The failure to disclose this fee is a material omission that may entitle me to rescission under Corporations Code § 31300. I refuse to pay this undisclosed fee. If you believe this fee was properly disclosed, please identify the specific FDD item and page number where it appears. Additionally, I reserve all rights regarding potential rescission claims based on this and any other disclosure violations."

Initial Fee Refund Demand

"On [date], I paid an initial franchise fee of $[amount] for a [Brand] franchise at [location]. [Choose applicable scenario:] Scenario A - Never Opened: Despite payment over [X] months ago, my franchise has never opened due to [franchisor's failure to approve location / delays in providing required training / failure to deliver promised build-out assistance]. Under Section [X] of the Franchise Agreement, the initial fee is refundable if the franchise does not open within [X] months due to franchisor's failure. Scenario B - Terminated Without Cause: You terminated my franchise on [date]. The termination was wrongful [or: even if the termination was proper], I am entitled to a pro-rata refund of the initial franchise fee under Section [X] of the Franchise Agreement / general principles of equity. Scenario C - Services Not Delivered: The initial fee was consideration for [quote what it covered per FDD Item 5 - e.g., initial training, site selection assistance, opening support]. The following promised services were never provided: - [Service 1]: Never delivered - [Service 2]: Partially delivered, inadequate This constitutes a material breach entitling me to refund. I demand refund of the initial franchise fee: $[amount] [If partial:] Or, at minimum, refund of $[amount] representing the pro-rata value of undelivered services. Please respond within 14 days."

Franchise Fee Dispute?

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Email: owner@terms.law