Franchisee Class Action Says Burger King Cannot Have It Their Way

The National Franchisee Association (NFA), which has represented franchise owners since 1988, filed the two separate complaints in U.S. District Court, Southern California, as a class action on behalf of all franchise owners, whether or not they are members of the independent association. The NFA contends that the members of the class are so numerous that joining all members of the lawsuit as plaintiffs is impractical. Non-franchised restaurant owners are not part of the litigation. There are approximately 6300 Burger King restaurants in the U.S., owned by 850 franchisees, and approximately 90 percent are represented by NFA.

Burger King soda dispenser recommends drinks, photo/Flickr

According to the complaints, at a collective cost of hundreds of millions of dollars, U.S. Burger King franchisees have over the past decade substantially relied on and performed under the terms of the Soft Drink Agreement (SDA), entered into between BKC and Coca-Cola and Dr Pepper, separately. The beverage companies have made semi-annual payments of the Restaurant Operating Funds (ROFs) directly to the franchise owners. Those funds are calculated per each gallon of syrup manufactured and sold by the drink companies and then sold to the franchisees to make Coke and Dr Pepper products.

The Soft Drink Agreements’ terms end on the date the restaurants have achieved a purchase commitment of 600,000,000 gallons of syrup from Coke and 100,000,000 gallons from Dr Pepper, from and after the effective date of the agreements. The suit states that based on BKC’s Uniform Franchise Offering Circular projections the SDA purchase commitment will be met in 2033.

The association asserts that they are bringing this action on behalf of the franchisees, named in the soda drink agreements as Restaurant Franchise Owners (RFOs), to preserve and protect their rights under the contracts.  NFA alleges that it has standing to maintain the legal action, that the interests sought to be protected are germane to the NFA’s purpose.  It declares, “The purposes of the NFA shall be to function as an association to foster and coordinate the activities of independent Burger King franchisees and to serve as the official voice of the Burger King franchisee community,”

The complaints also stress that the franchise restaurant owners are the intended third party beneficiaries of the Soft Drink Agreements, including beneficiaries of the payment of the Restaurant Operating Funds. It further explains that the franchisees also had a prominent role in the written provisions of the agreements and were involved throughout the entire negotiation process of the SDAs. NFA states that from the inception of the SDAs in 1999, and since the inception of its predecessors since at least 1990, the restaurant owners have met their obligations under Burger King’s agreements with Coke and Dr Pepper, and up until its announcement on April 6 to dramatically revise the agreements, the franchisor and drink companies have confirmed and reinforced that the franchisees are owed the SDA funds.

Burger King soda dispenser in a Denver, Colorado restaurant/Sparks

The Rules Have Changed

But when Burger King, Coca-Cola and Dr Pepper announced their intention to divest the franchisee owners of the Restaurant Owners Fund, effective February 10, 2010, diverting the 40 percent to itself, it showed its calculations to be approximately $25 million in 2010, increasing it to almost $40 million in 2012 and beyond. BKC claimed it intended to use the appropriated funds from franchisees to increase national advertising. But the NFA asserts in its lawsuit that franchisees already contribute a percentage of their sales to the franchisor for advertising, a requirement of their franchise agreements. It argues that most states require franchisors to disclose such an obligation to franchisees in advance of entering any agreement upon an occurrence of any material change in that obligation. BKC has also said that Coke and Dr Pepper are in its camp for using the proposed divestiture of the franchisees’ fund.

NFA Seeks Relief

The dispute is over whether franchise owners are the intended beneficiaries under the soft drink agreements, and in particular, the obligation of Coke and Dr Pepper to pay the funds to franchisees; and whether BKC and the drink distributors can arbitrarily change the agreement to divest the franchisees of their rights in order to qualify for full entitlement of the soda funds. NFA is hoping for a judicial declaration in the matter. It is asking the court for a judgment in its favor and against Burger King, Coca-Cola and Dr Pepper. It is seeking relief of legal costs and it seeks a trial by jury.

Frank Capaldo, chief executive officer of the National Franchisee Association, did not wish to make comment. He only stated, “The complaint speaks for itself, but it is our desire as it was before filing the action that we would like to amicably resolve this.”

Burger King could not be reached for comment prior to publishing but will be contacted next week.