Restaurant Woes in the Down Economy Increase Franchise Litigation

Franchisee-franchisor relations are getting tense in the down economy. Several companies such as Wendy’s, Burger King, and Quiznos have been in the headlines because of franchisee unrest, including charges of racketeering and corruption and complaints about food costs, supplies, and the use of marketing and advertising funds.

“When your profits are gone, the first place you look is to see who is taking the most money off you,” said Kevin Tackett, the president of the Quiznos Franchisee Association (QZFA).

With less people going to restaurants, franchisees start to look around the store for answers. Is it new food that is cutting into profits, forced advertising campaigns, or upgrade costs, for example? When a franchisee feels that their part of the franchise agreement is not being upheld, they should present their concerns to a franchise attorney, allow him or her to review the terms of their agreement, advise on those terms and potentially seek to initiate negotiations or litigation against the franchisor. Resolving a franchise dispute quickly is essential to making sure the business can run smoothly and be profitable.

Wendy’s recently settled with its largest franchisee, the WendPartners Franchise Group, after it wanted stores to install new toasters for an up-and-coming cheeseburger that would increase sales by more than two percent. Big costs like new toasters across many stores can be tough when profits are not as plentiful as they were in the past.

Burger King settled a lawsuit with its franchisees in the spring after store owners were required to sell a double cheeseburger for $1 as part of a promotion. Franchisees said they were losing at least a dime per sandwich, and when you add it up, it hurt their bottom line. The Burger King National Franchisee Association says the settlement has been a positive step that allows franchisees to have more input in future promotions. The restaurant is also hoping that a menu makeover will also drive more profits to the franchisees.

Quiznos survived a slew of franchisee lawsuits back in 2009 too. Franchisees were in disputes over royalties, marketing funds, and food and supply issues. The QZFA seeks to work with Quiznos Corporate in an open way so that business decisions are more transparent and profit concerns are addressed more efficiently.

And even over at KFC, the franchisee-led KFC National Council and Advertising Cooperative (NCAC) won a recent battle against the corporate office over advertising. Advertising strategies and promotional dates should be a discussion between both sides to have the most impact.

In the end, franchisees are wise to have a franchise lawyer on speed dial and open lines of communication with their fellow stores. The downturn in the economy is too severe to go it alone against the corporate office.

Anthony Spotora is a Los Angeles business lawyer, Los Angeles franchise lawyer, and Los Angeles business litigation attorney. To learn more, visit Spotoralaw.com.

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