Dairy Queen Franchisees Hope to Halt Mandatory Conversion

Michigan Association Draws A Line with Lawsuit 

GRAND RAPIDS, Michigan (Blue MauMau) -  When Warren Buffett's Berkshire Hathaway acquired International Dairy Queen and American Dairy Queen in 1998, he said that he loved the DQ product and the mom and pop entrepreneurs who make up the franchise system. But according to one franchisee group, tactics by the franchisor now seem to be headed toward the destruction of mom and pop operators in small towns and suburban communities, which could be detrimental to the Dairy Queen brand. In a lawsuit filed in the U.S. District Court in Western District of Michigan by The Michigan Dairy Queen Operators' Association, allegations state that the company is compelling franchisees to invest significant amounts of money into two new brand concepts, the DQ Grill & Chill and the DQ/Orange Julius.

Carmen Caruso, Schwartz Cooper Chartered, who is representing the Michigan franchisee group said they strongly wish the Dairy Queen companies much success with their new concepts, as they do for those who choose to invest in them. They don't feel it will hurt existing Dairy Queens to co-exist with the new DQ concept brands. But he added, "We are drawing the line when it comes to the company deciding to switch the voluntary program, introduced in June 2007, to one that coerces all franchisees to converting in." Caruso said that is what the lawsuit is about.

According to Caruso the new concepts are unproven in that the companies have not received the results they had hoped for. He said, "The proof is in the pudding." If the company had tested the new brands and people were lined up out the door waiting to get in, Caruso said that would be one thing. He said that hasn't happened and now DQ is turning to its captive market, their old DQ franchisees. "The free market should decide whether or not America is ready, willing and able to embrace this new concept and whether they are going to be successful."

Legal Issues and Relief

The legal action states that the franchisees are seeking declaratory judgment and injunctive relief on a variety of legal issues that threaten to bankrupt or destroy the profitability of franchisees. The companies'  attempts at forced conversion constitutes a material breach of the existing franchise agreements and the duty of good faith and fair dealing that is implied as a matter of law in every contract. Also its attempt to assess surcharges on franchisees for certain products without crediting the proper amounts to their license and sales promotion fees, where
franchisees will have no practical means of recovering these amounts is another issue.

The Michigan Dairy Queen franchisees are also asking for the award of attorney fees and costs, as well as other such relief as the court deems appropriate.

Michigan Operators Step Up on Issue of National Importance

Caruso said he feels the issues of the Michigan lawsuit are of national importance and the Michigan Operators' Franchisee Association stepped up to the plate. "The Michigan group, which consists of 90 members, was willing to lead it off and present the issue to a court without waiting for everyone else to join in."  Although there are a number of other associations out there, he said every state does not have one.  Caruso expresses, "I hope that over the next few months the landscape becomes a little clearer with other groups, but whether they join in remains to be seen."

Dean Peters, International Dairy Queen's director of communications, said, "We have received the complaint filed by the Michigan association and are currently looking at it. We are going to respond in connection to the litigation. We don’t agree with the allegations by any means. Our policy is, however, that we do not comment on any pending litigation."