The Jack in the Box National Franchisee Association filed a lawsuit against its fast-food franchisor, the association announced Tuesday. It filed a breach of contract and implied covenant of good faith and fair dealing suit in Los Angeles. The dispute details Jack in the Box’s “failure to perform its contractual obligations, resulting in a negative impact on its franchisee financial business model as it pertains to the rights assured to franchisees under their current franchise agreements,” according to the NFA, which represents 95 franchise owners with about 2,000 of the brand’s 2,240 restaurants.
This is the third time in recent weeks the NFA has brought grievances with Jack in the Box’s management to light. It filed a complaint with the California Department of Business Oversight regarding Jack in the Box’s new financial restructuring strategy in November. The previous month, the NFA called for CEO Lenny Comma to step down and for the board of directors to replace the brand’s current leadership team. This came after the association had a majority vote of “no confidence” at its annual meeting in July.
In the chain's fourth-quarter earnings call, Comma said of the franchisee back-and-forth, "we appreciate the unwavering passion they have for the Jack in the Box brand. Even with the increase in franchise ownership over the past several years, the size of our franchise community is still modest compared to that of the larger competitors."
"Although we're currently managing through some issues raised by the Association representing most of our franchisees, we believe our mutual interests are very much aligned," he added. "We understand their concerns about issues our industry is facing such as rising labor costs, finding traffic, and market share in a hyper-competitive environment. We know that Jack in the Box cannot be successful if our franchisees aren't successful. We often have spirited debates with our franchise community about how we we'll achieve our goals and objectives; there has never been any question in our minds that our ultimate goals are fully aligned."
The association outlined Tuesday’s lawsuit:
- Breach of a 1999 settlement agreement with the NFA by refusing to provide franchisees with an audit of the marketing fund and documentation detailing the income and expenditures of the fund as required therein. Violation of the good faith and fair dealings provisions of the franchise agreements by Jack in the Box in inappropriately requiring franchisees to undertake major remodeling programs on stores where roofing and other structural work is required for which Jack in the Box took full financial responsibility while shifting some of the roofing repair costs to the franchisees.
- This lawsuit comes after nearly two years of failed negotiations between franchisees and Jack in the Box with franchise owners working to collaborate on solutions that would, amongst other issues, arrest declining transactions that are being seen system-wide. The NFA has engaged renowned franchisee attorney Robert Zarco, Esq., founding partner from the Miami law firm Zarco, Einhorn, Salkowski & Brito, P.A. to act as lead counsel in the proceedings.
“The NFA has acted in good faith for years when dealing with their franchisor partners, expecting that their passion for the brand would be matched and their investments protected,” Zarco said in a statement. “They have on multiple occasions made not only their concerns for the direction of the company known, but also their willingness to work in union with Jack in the Box to correct its course. However, their pleas to the franchisor have been ignored. They have been left with no other recourse than to pursue litigation to maintain the appropriate resources and focus that are vital to their continued success.”
The NFA said it is seeking a rule that would accomplish the following points:
- Legally enforce the franchisees right to an audit of the marketing fund under the 1999 agreement and provide a full accounting of the activity of the marketing fund from 2016 forward to continue annually.Financial reimbursement for roofing and other corporate mandated capital expenses without being required to simultaneously undertake unnecessary remodels in order to subsidize the franchisor for its acknowledged financial responsibility.
“The franchisee is the lifeblood of this brand and the key to its future success,” added Michael Norwich, chairman of the Jack in the Box National Franchisee Association Board of Directors, in a statement. “Many of us have invested a great deal in its future. Healthy franchisees are the key to brand success and we have been an undervalued stakeholder in the eyes of this management. We have been diminished as a result of the heavy G&A cuts whereas we believe prudent investment in the brand would have yielded better returns for all stakeholders. We can no longer sit back and allow decisions that greatly impact our businesses to be made without our interest in mind.”
This action taken by the NFA is far from uncommon and this filing is the latest in a long line of large brand franchisees who have become unhappy with the handling of their marketing, relationships and company structure, the NFA said. It cited the June 2017 event when Tim Hortons sued corporate head RBI for misallocation of marketing funds and is currently engaged in litigation regarding alleged price gouging.
Currently the Jack in the Box system of over 2,000 restaurants are 93 percent franchise owned and operated, 85 percent of which is represented by members of the Jack in the Box National Franchisee Association.
Just last week, reports surfaced that Jack in the Box started talks with potential buyers. According to Reuters, private-equity firms were among those interested in possibly acquiring the chain as it explores options.
Jack in the Box reported a mixed fourth quarter where adjusted earnings from continuing operations came in at 77 cents per share, which missed the Zacks Consensus Estimate of 83 cents. Total sales of $177.5 million beat the call for $174 million, but decreased 23.5 percent, year-over-year. Same-store sales gained 0.8 percent compared to the prior-year decline of 2 percent, driven by average check growth of 2.8 percent and offset by a 2 percent decline in transactions. Broken down, franchised units saw a 0.4 percent uptick in comps and company-run units climbed 0.8 percent. There were 276 corporate and 2,100 franchised units by quarter’s end as Jack in the Box continues to refranchise its system—an initiative that has taken it from an 80 percent split to more than 94 percent in the past 15 years.