Franchising | November 2010 | By Daniel P. Smith

Lessons Learned

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The Little Caesars Case:
Protecting the Brand’s Long-Term Health

On the heels of a 2001 class-action lawsuit settlement that afforded franchisees greater say over their individual operations and resulted in the establishment of a franchisee purchasing cooperative, Little Caesars’ corporate office turned from defense to offense in 2004.

Seeking a mandate to stop some operators from using ingredients that did not meet Little Caesars’ quality standards, the Detroit-based chain sued 40 franchisees operating about 300 stores with trademark infringement. While the operators’ cooperative insisted it used only approved ingredients and vowed to continue business as usual, Little Caesars’ complaint argued that the sale of “nonconforming products now and in the future” would weaken and taint the pizzeria’s “distinctiveness, effectiveness, and value.”

As the suit unraveled, the two sides traded ironically similar verbal jabs. While Little Caesars stated it was only protecting the brand’s long-term viability and image, operators cited the 2001 case settlement as proof that they, too, were only targeting future success with a high-quality product.

A Lesson Learned:
“Such disputes often rise from franchisees’ suspicions that the franchisor is getting kickbacks or other profits from approved supplies and suppliers. Much of this distrust can be prevented with complete transparency in all the franchisor’s business relationships and income streams. This includes, as much as possible, disclosure of off-the-books income of the franchisor’s executives.”
Richard Adams
Noble Roman’s Pizza & Raving Brands:
Feeling Duped

Eight former and two active Noble Roman’s Pizza franchisees felt so duped and discarded in 2008 that they filed a 29-page lawsuit calling the brand’s roll out of a complementary restaurant concept operationally flawed and too complicated to operate profitably.

The $6 million suit alleged that Noble Roman’s, an Indiana-based chain with more than 1,000 units, provided no support services or marketing push, let alone market testing, with its Tuscano’s Italian Style Subs concept, a dual-concept plan that required up to $400,000 in franchisee investment.

Noble Roman’s denied the grievances, saying it never turned its back on operators and threatening counterclaims to defend its name.

Also in 2008, the same fraudulent claims were levied against Raving Brands, the Atlanta-based operators of various quick-service players such as The Flying Biscuit Cafe and Doc Green’s Gourmet Salads.

A pair of franchise groups with the Doc Green’s concept in their portfolio filed a lawsuit against Raving Brands, alleging fraud and breach of contract. One franchisee litigant claimed that Raving Brands sold the Doc Green’s franchise as an established brand, when, in fact, the barely five-year-old brand remained unproven—a “mirage,” he termed it.

Raving Brands, the plaintiffs said, did not possess a comprehensive franchise business plan as it shopped Doc Green’s to potential operators and polished its one corporate-owned location to appear successful to would-be franchisees.

A Lesson Learned:
“Prospective purchasers of all franchise systems are entitled to expect that the franchisor will indeed at least ‘meet the basics’ as a franchisor, including having previously tested, and having a reasonable plan to implement and appropriately publicize an effective, uniform system for delivering goods or services to the consuming public. If the purchasers of the franchise opportunity believe they have not received that, legal challenges and other stressors within the system are indeed likely.”
J. Michael Dady
The Green Burrito Case:
Kickbacks and Competition

In December 1998, three Green Burrito franchisees sued the Santa Barbara Restaurant Group (SBRG), accusing the multichain operator of taking more than $1 million a year in cost-inflating kickbacks from vendors, as well as creating unfair competition as a result of recipe shortcuts made to accommodate cobranded units with Carl’s Jr.

A resolution came in May 2000, when the SBRG was forced to pay more than $1.2 million in loans to existing franchised restaurants to finance a new image, menu, and name change. In addition, the SBRG agreed to restructure its Green Burrito division leadership, which included the executive hiring of a former franchisee litigant.

Following the case’s conclusion, one SBRG executive said that food preparation and other operational aspects at cobranded locations differed from Green Burrito’s stand-alone units. The acknowledgment offered credence to the plaintiff’s claims that the divergent guidelines posed a threat to Green Burrito’s overall health and potential profitability.

A Lesson Learned:
“Prospective franchisees should inquire, before deciding whether to become a franchisee in a particular system, whether their prospective franchisor will commit to not take money from vendors based on their required purchases and whether the franchisor will in addition commit, in writing, to work with its franchisees to get the best possible pricing for the goods and services they are required to purchase. Absent those two assurances, prospective franchisees should consider looking elsewhere for opportunities with franchisors who will provide these two assurances.”
J. Michael Dady

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