Buying a Franchise

Why Are Franchisees Suing Franchisors?

Lots of reasons, actually. Every day, it seems, there’s a new lawsuit against a franchisor… and as often as not it’s the franchisees bringing the complaint. If you’re considering investing in a franchise business opportunity, you have to be wondering:

  • Should I avoid franchises that have been sued?
  • Are these lawsuits a sign that the franchise model is a problem?

We are a litigious society, and most large companies have been sued repeatedly. Money is often set aside in the company budget to handle the occasional lawsuit. The larger the company, the more likely it is to be sued. Subway, for example, has been sued for having footlong sandwiches come up at 11 inches and a bit. The main office says that the freshly-baked loaves will turn out 12″ long if all the procedures are followed perfectly, but apparently some franchisees have missed the mark by a centimeter or so.

And some people carry measuring tapes.

The point here being that the first question should be, just what was the cause of the lawsuit? A surprising number of franchisee to franchisor lawsuits are about the franchisee’s not making as much money as they wanted or not liking the terms of the contract they signed. Head into your franchise investment with your eyes open, having gone over the terms of your contract with a lawyer. Leave your get rich quick dreams at the door. Being in business for yourself is hard work and it’s risky. Just as with fresh-baked bread, there may be some variations and surprises along the way.

Lawsuits based on discrimination, fraudulent behavior, or criminal activities are something else entirely.

Several Puerto Rico McDonald’s franchisees filed suit against McDonald’s in 2007 when the company sold their franchises to an Argentinian company, Arcos Dorados (Golden Arches). Arcos Dorados, a company that owns more than 2,000 McDonald’s franchises and employs more than 90,000 people, was given exclusive rights to all McDonald’s locations in Latin America and the Caribbean.

Franchisees who had made a deal with McDonald’s suddenly found themselves dealing with an entirely different company. McDonald’s would no longer communicate with the franchisees whose contracts they had sold, and Arcos Dorados was, according the the franchisees, a completely different ball game.

Unlike McDonald’s, according to the complaint, Arcos Dorados opened new franchises just a couple of miles away from existing McDonald’s franchises and failed to offer the kind of support McDonald’s had offered. The franchisees had the rug pulled out from under them, and they sued McDonald’s under a Puerto Rican law that requires franchisors to notify franchisees when a change in terms takes place.

Arcos Dorados, whose first response was to defend their record as a great employer, counter-sued to terminate the franchises of the franchisees who had filed the suit. From their point of view, they bought a territory, only to discover that the franchisees were unwilling to work with them.

Both suit and countersuit are still unresolved. The franchisees, maybe feeling that eight years is long enough, recently filed a complaint with the FTC, pointing out that the Federal Trade Commission also requires advance warning of changes in the terms of a franchise deal.

We don’t know what the outcome will be, but the story raises some red flags. The concerns of the franchisees don’t appear frivolous. They don’t seem to be blaming their own failures on someone else. They’re not saying that they didn’t realize things would be this way. Their businesses were simply sold out from under them. Arcos Dorados, for their part, don’t seem to have been aware that they wouldn’t be welcomed by the franchisees. The differences between McDonald’s and Arcos Dorados might seem reasonable to both companies given the different business climates they face. There must be reasons that the case has dragged on so long, but at first glance there are legitimate concerns on both sides.

If you’re considering a franchise that has been sued, look up the information and ask the franchisor for their side of the story. Then determine whether the lawsuits should be a warning to you.

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