QSR franchisees sue parent companies

A glance at the headlines of late might convince QSR franchise shoppers that the industry is in the middle of a litigation war. Just this year alone, there have been more than a dozen suits filed against franchisors of major brands.

 

In February, a woman filed against McDonald's claiming the company falsely advertised its french fries were gluten- and milk-free. Last month, a woman made a case against Wendy's for the chili being too hot. And

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who can forget about the Center for Science in the Public Interest suing Kentucky Fried Chicken for trans-fats? (Read the editor's opinion on the CSPI case, click here)

 

In addition to consumer-oriented lawsuits, franchisees are suing franchisors.

 

Last week, the North American Association of Subway Franchisees Inc. filed suit against Doctor's Associates Inc. (DAI), the franchisor of the privately held quick-service restaurant chain. The plaintiffs claim Subway did not follow the franchisor-franchisee advertising agreement. That lawsuit comes on the heels of another filed against DAI June 26 by the Subway Franchisee Advertising Fund Trust (SFAFT).

 

The week prior, Dairy Queen franchisees filed a suit claiming the parent company is trying to force its franchisees out of business. The franchisees believe the proposed upgrades to the traditional Dairy Queen restaurants are too expensive for small business owners who have been loyal Dairy Queen operators for years.

 

And then there's the suit against Quiznos. The Denver-based sub chain is facing a pair of proposed class-actions over delays in location approvals for its franchisees.

 

Chief executive of FranChoice, Jeff Elgin, toldEntrepreneur.comthat these suits occur when: One party to the franchise agreement believes the other is violating the terms of the agreement; or when either party believes the other is conducting itself in a manner injurious to its business.

 

 

Franchisee lawsuits are red flags for potential buyers, said franchise attorney Jeff Letwin, and companies cannot hide pending litigation from franchise shoppers. By law, franchisors must foreclose current and past litigation in their Uniform Franchise Offering Circular or UFOC.

 

"If you see a lot of litigation in there, you have to wonder about the relationship between the parent company and the operator," Letwin said. On the other hand, Letwin believes multiple lawsuits with a single operator can be ignored. He said lawsuits like Subway's, where franchisees system-wide are suing, that might keep people from purchasing.

 

Yet despite two active lawsuits, Subway is ranked No. 1 on Entrepreneur's Franchise 500 list. That's because the sub-sandwich chain has produced more millionaires than any other business system, said Mark Roden, chairman of the national Subway Franchisee Advertising Fund Trust (SFAFT).

 

"It's a successful model and there is room to grow," Roden said. Subway reported sales of more than $9 billion in 2005 and operates 26,017 restaurants in 84 countries. Roden contends that in the case of Subway, litigation is a good thing for operators.  

 

"The litigation itself is designed to make it better for future franchisees by protecting the franchisees' piece of the profits," he said.

 

From a buying standpoint, franchise consultant Thom Crimmans said potential operators should look for companies that work together with franchisees.

 

"A good franchise concept is one that all of the franchise owners and the company gang up together on the competition instead of each other," he said.

 

In the case of Subway, the competition may very well be corporate. According to the news release announcing the most-recent lawsuit, Subway franchisee's goal is to prevent DAI from changing their national advertising benefits program, guaranteed under a 1990 Trust Agreement signed by their franchisor and the Trustees of SFAFT. DAI introduced an amendment to the agreement earlier this year, which franchisees contend contradicts the original agreement. The amendment usurps control of the national advertising program from the franchisee-elected trustees.

 

Prior to DAI's amendment, advertising monies were turned over to elected franchisees. "From the time we signed the original agreement to now, we have opened 23,000 stores," Roden said. This model balances the power between franchisees and corporate, he said. "I'm confident the company will come around and negotiate, and we can get back to selling sandwiches."