Franchisees Sue Burger King over Mandatory Pricing

ATLANTA – On Tuesday, the National Franchisee Association (NFA) filed its second class action lawsuit this year against Burger King Corporation, this time for violating the terms of their franchise agreements by purporting to mandate maximum prices for certain products. According to the complaint filed in federal court in the Southern District of Florida, NFA is asking the court to declare that Burger King does not have the authority to set prices for its independently owned franchises.

At the center of the dispute is the BK Double Cheese Burger (DCB) that Burger King is now mandating franchisees to sell at “no more than the maximum price of $1.00,” which NFA states is below franchise owners’ cost. Burger King has recently taken the position that it has a right under the provision of “Standards of Uniformity and Operation” of its franchise agreement to make the pricing requirement. Although in recent years, Burger King inserted an update to its operational manual that requires “value menu” items priced at $1, franchisees allege the company’s action is improper. They argue that the franchisor’s decision is contrary to decades of practice, and is inconsistent with its duty of good faith and fair dealing because it is forcing owners to sell the DCB at a loss. And they declare, on October 9, 2009, Burger King admitted in writing that the sale of the cheeseburger product at $1 could lead to bankruptcy.

Burger King Corporation responded saying that it has been working with the NFA to try to resolve this dispute. The company says it is disappointed in NFA’s decision to file a suit regarding a value promotion that is allowing the brand to effectively compete in this difficult consumer environment by driving traffic and profitable sales.

But the NFA sees it differently. “Our franchisee community is united in protecting our entrepreneurial rights as independent business owners, but we are also disappointed that we need to take legal action against our franchisor,” William Harloe, Jr., NFA chairman said in a press release. “The mission statement of the NFA is to preserve the economic well being of all members. After attempts to compromise on maximum pricing were unsuccessful, we have been forced to pursue a judicial resolution of this issue.”

In May 2009, the NFA filed lawsuits against Burger King, Coca-Cola, and Dr Pepper on behalf of all franchisees. That action seeks a declaratory judgment from the court that the franchisees are the intended third-party beneficiaries under certain soft drink agreements and are entitled to receive their franchisee restaurant operating rebates, in full, as they had since 1990.

The NFA purports to serve as the official voice of the Burger King franchisee community. The organization consists of 19 regional franchisee associations, and represents more than 80 percent of US franchised Burger King restaurants.

NFA Leaders Speak Out

Steve Lewis, former NFA chairman, 1998 to 2001, expressed his disappointment in the direction of BKC’s relations with its franchisees. “As a former NFA chairman, I led ‘Project Champion,’ a franchisee-led initiative to turn Burger King into a publicly traded company. Unfortunately, the current management team has disregarded rights that Burger King franchisees have always had. I never imagined that we would be forced to take these steps.”

Previous chairman Julian Josephson chimed in, “Our franchisor has declared they have the right to set our menu board prices even though our franchise agreements do not give them this right. Despite franchisee profitability concerns with recent price-pointed initiatives, BKC decided to move forward and disregard franchisees’ best interests or their rights to set their own menu prices.” Josephson served as the NFA’s head from 2001 to 2004.

Harloe also stressed that the NFA and its member franchisees prefer to resolve the franchisee restaurant operating funds and maximum pricing lawsuits amicably, but that circumstances have left no alternative except to pursue legal remedies to questions concerning franchise agreements.

BKC Declares It Has Contractual Right

Denise T. Wilson, BKC’s senior analyst in communications, issued this statement:

Burger King Corp. (BKC) believes the National Franchisee Association’s (NFA) lawsuit regarding the addition of the dollar quarter Double Cheeseburger to the BK Value Menu is without merit. The dollar quarter pound Double Cheeseburger is simply an addition to the BK Value Menu, which has been in place since 2002. 

The U.S. Court of Appeals for the Eleventh Circuit decided in June of this year that BKC has the contractual right to require franchisee participation in its BK Value Menu program. In fact, the Court (an appellate court immediately below the US Supreme Court), could not have been clearer when it stated "[t]here is simply no question that BKC had the power and authority under the Franchise Agreements to impose the Value Menu on its franchisee."

Additionally, it was and has never been BKC’s intent to dictate prices across its menu. Other than setting a maximum price on a small group of items on the BK® Value Menu, BKC has never set price restrictions for franchisees. 

Burger King did not respond to these specific questions presented by Blue MauMau:

Do you feel this lawsuit fairly represents the position of the majority of franchisees in the BK system?

Is the $1 price of the DCB under cost to the franchisees, causing them to incur a loss on the sale of the product?

The complaint states that BKC on October 9, 2009, admitted in writing that sale of DCBs at the price specified by BKC could lead to bankruptcy. In what context did BKC make that statement? Why would Burger King make such a requirement, when it could be to the detriment of franchisees?

With two class action lawsuits filed against BKC this year, how would you describe the relationship with your franchisee community?

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