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AI is already in your franchise system, whether you have approved it or not. Franchisees are drafting marketing copy in ChatGPT, running customer service through AI chatbots, generating social media images with prompts, and feeding proprietary information into vendor platforms that quietly added AI features last quarter. Franchisors do not control who uses these tools, how, or with what data, but franchisors bear the brand, legal, and reputational consequences of every franchisee decision. The good news is that most of the risk is manageable with a well-drafted AI policy. The bad news is that franchise systems that wait to address AI will end up writing policy in response to a crisis, not ahead of one.

Artificial Intelligence (“AI”) is a computer technology designed to mimic tasks typically requiring human intelligence and problem solving. AI is embedded in many common tools and platforms beyond well-known examples like Chat GPT, including search engines, mobile devices, vendor platforms, and point of sales systems. The unique dilemma facing franchisors is balancing the genuine operational benefits of AI with the fact that franchisors do not directly control who uses AI, how, or with what data, yet franchisors bear the brand, legal, and reputational consequences of every franchisee decision.

Risks of AI Use

At risk in a franchise system without a proper AI Policy in place are (1) loss of privilege and confidentiality; (2) trade secret destruction; (3) brand standards erosion and liability; (4) IP ownership gaps; and (5) customer and data privacy exposure.

Loss of Privilege and Confidentiality

Courts have started addressing the evolving issue of AI use, and in a recent New York case, United States v Heppner (S.D.N.Y. Feb 17, 2026), the judge ruled that a user’s communications with a generative AI platform are neither protected by attorney-client privilege nor the work product doctrine, even when the user shares the content with counsel afterwards.

Trade Secret Destruction

Trade secret protection requires “reasonable efforts to maintain secrecy.” Inputting proprietary recipes, curriculums, pricing models, or operational know-how into generative AI tools trained on input may forfeit that status system-wide. AI platforms stating it does not train on input is not sufficient to cover the bases, as AI Providers can, and do, change terms of use, and different subscription tiers have different terms.

Brand Standards Erosion and Liability

Every AI-generated touchpoint (marketing copy, social media posts, customer emails, chatbot responses, FAQs, program descriptions) that runs under a franchise system’s mark creates exposure that the franchisor absorbs. AI-generated images, music in social media posts, or text derived from copyright sources.

IP Ownership Gaps

AI-outputs may infringe third-party rights. Franchisee-generated marketing assets created entirely by AI prompts may have no copyright protection at all. Trademarks face the same exposure as AI may generate marks too close to existing registrations.

Customer and Data Privacy Exposure

As the development and use of AI increases, states are increasingly enacting data privacy and customer protection laws. Uploading data into an AI platform inadvertently may expose the Franchise Business to violating one of these rules.

How to Address AI

There are essentially four (4) AI Policy options for franchisors to choose:

Implementing an AI Policy

How AI is defined in a system’s solution matters, as narrow definitions can age poorly as AI features are increasingly embedded in everyday software, and expansive definitions may include tools the franchisor may not wish to prohibit. Where the AI Policy lives matters. An AI policy that lives in a brand standards or operations manual provides for a flexible, unilaterally amendable policy; however, the manual is limited in its binding capacity. Including AI housed in the Franchise Agreement provides for a more durable and enforceable solution, but any amendment requires consent from both franchisor and franchisee. A third option is a standalone agreement which is useful for splitting the difference between the two, especially regarding existing franchisees, but a combination of the three provides the most robust and uniform standards.

To roll out a successful new AI policy, communication strategy matters. Heavy-handed rollouts breed resistance, while light-touched rollouts get ignored. It is important when rolling out an AI Policy to lead with the “Why,” and framing the Policy as protection not prohibition. Franchisees who understand the risk to their own business and the system’s trade secrets are more likely to comply.

As a franchise system decides how to use AI, it is important to remember the potential FDD implications associated with such use. AI restrictions or mandated AI tools may trigger changes to the FDD including required vendor costs under Items 6, 7, and 8, and disclosures regarding a franchisor’s obligations regarding computer systems and technology and training under Item 11.

Questions About AI in Your Franchise System?

The time to address AI is now, while your system still has options. Franchisors who act ahead of a crisis get to choose their approach; those who wait get to draft policy under pressure. The attorneys at Fahey Schultz Burzych Rhodes PLC regularly counsel franchisors on AI policy design, FDD implications of AI mandates, and the intersection of AI and franchise-specific drafting. Contact our team to discuss your system’s approach.

This article is for general informational purposes only and does not constitute legal advice. Contact our office to discuss your specific situation.

By Kaitlyn Harries