Franchisor Expectations

Why Would a Franchise Sue a Franchisee?

In a high profile move, global fast food chain Wendy’s is suing one of its largest franchisees. At issue is the franchisee’s refusal to make changes required by the franchisor:

  • A uniform point of sale (POS) system was chosen by Wendy’s in 2012, and all franchisees were required to switch to the new system by March of 2014.
  • Wendy’s announced in October 2014 that 60% of its restaurants would have to be upgraded by 2021. The franchisee who is being sued was asked to develop a timeline for making the required changes.

When the franchisee wouldn’t cooperate with the changes, Wendy’s declared that this franchisee was endangering the reputation of the brand as a whole, including other franchisees. They said that they had tried to work with the franchisee, and that they were moving to legal action as a last resort.

Why is Wendy’s taking legal action instead of just terminating the agreements? In this case, the franchisee is DavCo, which owns 152 Wendy’s restaurants. They are the fourth largest franchisee in the Wendy’s empire. They may seem too big to close, since they own all the Wendy’s restaurants in the Baltimore/ D.C. region, and they may also feel that they’re too big to listen — Wendy’s says that they just don’t think the rules apply to them.

DavCo has been running Wendy’s franchises since 1975, less than a decade after the first Wendy’s restaurant opened in Ohio and just a few years after Wendy’s began franchising. The Davenport family bought the rights to all the Wendy’s restaurants in their area, and they’ve done some wheeling and dealing since then. Their franchise agreement isn’t quite the same as the typical franchise agreement.

And DavCo may be having some other problems. Dave Norman, president of the company, was quoted January 2 as saying that Maryland’s new minimum wage increase will make DavCo lose money. “With every cost increase, every time the minimum wage goes up,” Norman told local reporters, “we’ll lose more money and we’ll shut more restaurants.”

The upgrades Wendy’s is requiring will cost quite a bit. The upgrades to the restaurants are expected to cost $450,000 to $650,000 and to bring increases in revenue of 10 to 20 percent. DavCo made $220,000,000 in 2013, according to Business Journal reports.

The cost of the new POS system has not been reported, but Wendy’s has offered to pay licensing fees and help with financing for all franchises that make the switch by July. The POS system is not a proprietary system designed by Wendy’s, but is one of the leading restaurant-oriented systems. Wendy’s points out that this system allows mobile ordering, loyalty cards, and other advantages consumers now expect, but which individual franchise locations can’t handle separately.

The case may be making news mostly because of the size of combatants, but it contains a lesson for franchisees and people considering investing in a franchise business. A franchisor has the right to ask its franchisees to follow uniform requirements, including upgrades and improvements beyond what was in place when the franchise agreement was signed. Wendy’s appears to be trying to help and work with franchisees (though DavCo hasn’t yet told their side of the story in the media), but their franchisees are having to make significant investments to keep up.

Pending Request