98% of Franchise Lawsuits in China Are Filed by Franchisees — What This Means for Your Due Diligence Process

In August 2026, the Supreme People’s Court of China (SPC) released seven typical cases on commercial franchise disputes — a rare, high-level judicial signal directed squarely at the franchise industry. The message was unambiguous: courts across China will no longer tolerate the kinds of deceptive recruitment practices, contract splitting, and phantom business data that have become endemic in food & beverage franchising.

For overseas law firms, accounting practices, and advisory firms with clients considering a Chinese franchise partner — or already in dispute with one — this is not abstract legal news. It is a pivotal moment that restructures how due diligence must be conducted before a franchise agreement is signed, and how evidence must be collected after a dispute arises.

This article unpacks what the 98% plaintiff statistic — drawn from three years of court data — really means for your practice, and outlines the documentary foundation any serious cross-border franchise due diligence or litigation support package must rest upon.

1. A Landmark Judicial Warning from the Supreme People’s Court

On August 12, 2026, the SPC published seven guiding cases spanning civil, administrative, and criminal dimensions of commercial franchising. The release was notable not only for its content but for its explicit framing: the Court described a marketplace in which “franchisors exaggerate returns and expand blindly, while franchisees ignore risk and follow investment trends,” producing a rising tide of disputes.

The cases establish five doctrinal points of immediate relevance to overseas counsel:

• Substance over form. Splitting a franchise relationship into multiple contracts labelled “technical service,” “brand licensing,” or “joint operation” will not defeat franchise-law protections. Courts will examine the actual rights and obligations exchanged.
• Mandatory statutory rights cannot be waived. The “cooling-off” period, the “two stores, one year” qualification, and disclosure obligations apply regardless of contract language.
• Review extends across the full lifecycle. Liability is not limited to the moment of signing; recruitment advertising, post-signing support, and ongoing supply chain practices are all within judicial scrutiny.
• Administrative-civil coordination is strengthened. Failure to meet statutory operating conditions triggers both administrative penalties and civil remedies.
• Criminal liability for “trap franchises.” Schemes that fabricate brand systems, collect fees and abscond will be prosecuted as contract fraud — closing a long-standing gap between civil and criminal enforcement.

For overseas counsel, the implication is direct: if your client is being shown slick pitch decks, celebrity endorsements, or state-affiliation claims, those are precisely the representations you must independently verify. A Chinese company’s marketing materials are not, and never have been, self-proving.

2. The 98% Number: What Three Years of Court Data Reveal

In April 2026, the Beijing Dongcheng District People’s Court — a court with specialized jurisdiction over many IP and franchise disputes in the capital — released its own white paper covering 144 food & beverage franchise cases heard between 2023 and 2025. The headline finding is now cited across Chinese legal commentary:

Let that second figure land. Across three years and 144 decided cases — all at a sophisticated, urban court familiar with commercial disputes — franchisees were the plaintiffs in roughly 98% of matters. Their primary remedies sought were rescission of the franchise contract and refund of franchise fees and deposits.

The most commonly alleged franchisor failings, in order of frequency, were:

1. Operational support not delivered after fees paid
2. False or misleading advertising during recruitment
3. Failure to meet the statutory “two stores, one year” qualification
4. Non-compliant operating qualifications
5. Unregistered or defective trademarks
6. Non-standard contract terms that strip franchisee rights

3. Six Recurring Dispute Categories in Chinese Restaurant Franchising

Synthesizing the Dongcheng Court white paper and the SPC’s seven guiding cases, six categories of dispute dominate the current F&B franchise litigation landscape. Understanding each is a prerequisite for building a due diligence checklist and a litigation evidence plan.

The single largest category — false advertising and disclosure failures — is also the most important for overseas investors, because it is the category most amenable to preventative due diligence. If you can verify a franchisor’s representations against official government records before signing, you can typically prevent the dispute entirely rather than litigate it.

4. Why Franchisors Almost Never Sue

It is worth pausing on a question many overseas observers ask when they first see the 98% figure: if franchisees are also breaching agreements — operating outside brand standards, sourcing ingredients independently, underreporting royalties — why are franchisors not bringing their own claims?

The answer lies in the economics and structure of the franchise relationship, and it reframes how you should think about risk:

In short, franchisors do not sue because they do not need to. The franchise fee is collected before any operational support is delivered; supply chain mark-ups continue regardless of individual unit performance; and a failed franchisee is simply replaced by the next recruited investor. The entire business model — particularly for what Chinese courts now term “trap franchises” (taolu jiameng) — is designed such that the franchisor’s profit is realized at signing, not at successful store operation.

5. The Information Asymmetry Problem for Overseas Counsel

If you are a lawyer in London, Sydney, Toronto, or Singapore advising a client on a Chinese franchise opportunity, you face structural barriers that domestic Chinese counsel do not:

• Language barriers. The National Enterprise Credit Information Publicity System (Guojia Qiye Xinyong Xinxi Gongshi Xitong) is fully in Chinese, requires navigating localized verification codes, and does not accept international business email addresses.
• Access barriers. MOFCOM’s franchise filing database, the China Trademark Office (CNIPA) database, local court judgment databases, and administrative penalty records are distributed across multiple government silos.
• Verification barriers. Confirming the existence of two directly-operated stores that have been operating for more than a year — the statutory “two stores, one year” requirement — requires cross-referencing business registrations, branch licences, and shareholder structures.
• Evidentiary barriers. Documents obtained from Chinese government systems must be properly notarized, legalized or apostilled before they are admissible in foreign courts or arbitration proceedings.
• Enforcement barriers. Understanding whether a favourable judgment is realistically enforceable against a Chinese franchisor requires knowing the company’s actual paid-in capital, asset base, and outstanding enforcement orders — information that does not appear on pitch decks.

These are not theoretical obstacles. Overseas investors routinely enter into Chinese franchise agreements based on English-language marketing brochures, unverified management presentations, and signed contracts that — as the SPC’s typical cases now demonstrate — may have been deliberately structured to avoid the protections of Chinese franchise law.

6. Building an Evidentiary Record: Documents That Win (or Lose) Your Case

Whether your client is at the pre-investment due diligence stage or already in dispute, the following categories of official documentation form the backbone of any serious franchise risk assessment or litigation file. Each is obtainable directly from Chinese government sources through a properly instructed local retrieval service.

• 1
  Business Registration Archive (工商登记档案 / 企业信用信息公示报告)
  From the State Administration for Market Regulation (SAMR) via the National Enterprise Credit Information Publicity System. Establishes the company’s legal name, unified social credit code, registered capital, paid-in capital, establishment date, registered address, legal representative, business scope, and — critically — all recorded changes to registered items, shareholder structure, and capital contributions.
• 2
  Shareholder and Ultimate Beneficial Owner Structure
  Discloses the actual individuals behind the brand, identifies shell-company structures, and reveals whether the contracting entity is itself owned by another entity that holds the actual IP — a common arrangement used to shield assets.
• 3
  Administrative Penalty Records (行政处罚记录)
  From SAMR and local market regulation bureaus. Reveals prior fines for false advertising, unlicensed franchising, food safety violations, consumer fraud, or failure to meet “two stores, one year” requirements — strong evidence of a pattern of conduct.
• 4
  Trademark Registration Status (商标注册状态)
  From CNIPA. Confirms whether the brand’s word mark, logo, and trade dress are actually registered to the contracting entity, whether registrations are valid/cancelled/opposed, and whether competing claims exist. Many disputes arise when a franchisor signs franchisees for a mark it does not legally own.
• 5
  MOFCOM Franchise Filing Record (商业特许经营备案)
  Filed with the Ministry of Commerce. Confirmation that the franchisor has met the “two stores, one year” requirement, submitted its standard franchise contract, and is legally permitted to recruit franchisees. Absence of a filing is a powerful indicator of non-compliance.
• 6
  Judgment and Enforcement Records (裁判文书与被执行人记录)
  From China Judgements Online and the National Enforcement Information Publicity System. Reveals prior franchise litigation, frequency of disputes, judgment amounts, and whether the company or its legal representative is on the national “dishonest judgment debtor” (失信被执行人) list — a status that severely limits the company’s ability to operate bank accounts, bid, or travel.
• 7
  Social Insurance Contribution Records (社保缴纳记录)
  Headcount data from the social insurance authority is a reliable proxy for real operational scale — a company claiming hundreds of employees but showing five social-insurance enrollments is almost certainly misrepresenting its size.

Together, these documents allow you to answer the questions that actually determine franchise risk: Does this company legally exist? Does it own the brand it is licensing? Is it legally permitted to franchise? Has it been punished for lying to other franchisees? Are there enforceable assets behind the contractual promises?

7. From Discovery to Admissibility: The Apostille Solution

For overseas law firms, obtaining the document is only half the battle. A Chinese company registration record printed from a Chinese government website is not, by itself, admissible in a court in New York, London, or Singapore. Two additional layers of authentication are typically required.

Since China acceded to the Hague Apostille Convention on November 7, 2023, documents issued by Chinese authorities for use in other Hague Convention member states no longer require the traditional multi-step consular legalization (notary → Ministry of Foreign Affairs → embassy/consulate). Instead, a single apostille issued by a competent Chinese authority is sufficient to authenticate the document for use in any member state — dramatically reducing both time and cost.

ChinaBizInsight supports overseas counsel across the full documentation lifecycle:

All reports are delivered in English with clear section mapping to the source government record, making it straightforward to attach them as exhibits to affidavits, expert reports, or arbitration submissions.

8. A Workflow for Cross-Border Franchise Due Diligence

The SPC’s August 2026 guidance makes one thing unmistakably clear: Chinese courts expect both parties — but particularly the stronger party, the franchisor — to act in good faith from the earliest recruitment stages. For overseas investors and their advisors, this means that the window for effective risk mitigation is before money changes hands.

The following workflow, built on the documentary foundation outlined above, provides a structured path from initial brand identification through to signed investment, and into dispute resolution if necessary.

For overseas counsel, the shift signalled by the SPC’s August 2026 typical cases is ultimately a positive one: Chinese law is moving, decisively, toward protecting franchisees from deceptive conduct and invalidating contract structures designed to evade mandatory protections. But substantive legal rights are only as valuable as the evidence you can assemble to prove your case. Official Chinese government records — properly retrieved, translated, and authenticated — are that evidence.

Relying on an English-language pitch deck or a brand representative’s verbal assurance is not due diligence. It is the exact posture that produces the 98% plaintiff rate: investors who did not independently verify, and who only discovered the truth after the franchise fee had left their account.