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LOUISVILLE, KY – A Delaware court has ruled in favor of franchisees and their advertising cooperative against KFC Corporation. In a ruling Monday on a lawsuit brought by the franchisee-controlled KFC National Council and Advertising Cooperative, Inc. (NCAC) against KFC Corporation, the Delaware Chancery Court found in favor of the existing agreement that the advertising cooperative can develop and modify advertising over KFC’s objections. The 17-member council consists of four company officials and 13 franchisees, and is charged with giving input to KFC Corporation on advertising campaigns.
The lawsuit was filed in January 2010 when the franchisor began an aggressive advertising campaign, which shifted the brand to “grilled” instead of the traditional “fried.” The promotion was launched in 2008 by KFC’s newly appointed president Roger Eaton in an effort to promote a healthy alternative. Eaton’s strong tactics against council members did not sit well with franchise owners and ignited the litigation.
KFC has more than 15,000 KFC outlets in 109 countries and territories. It operates 5,200 restaurants in the US, and approximately 83 percent are franchised.
In the lawsuit, the franchisees asked the court to confirm that the cooperative had the authority to develop and approve its own advertising plans and strategy as well as to modify recommendations made by KFC, a division of Yum Brands (NYSE:YUM). The franchisor claimed it had the "sole authority" to recommend advertising plans and strategy.
Formed over forty years ago, the cooperative is licensed to serve as the advertising arm for the KFC brand in the United States. An agreement gives the cooperative authority to plan, evaluate and approve the brand’s advertising and promotion. There are also checks and balances. KFC develops new products and has sole authority to hire and fire a national agency to carry out ad campaigns. If the franchisor thinks in good faith that a campaign is harmful to the brand, it can terminate the ad agency.
The 65-page opinion (pdf) by Vice Chancellor Leo E. Strine, Jr. of the Delaware court declares that the ad council cooperative retains the authority to make advertising recommendations of its own or modify KFC’s recommendations by majority rule. In a statement the national ad council said, “The court held that the franchisees were entitled to a declaration that the NCAC's franchisee controlled Board of Directors has the authority to adopt the advertising program of the NCAC by majority rule, and to include in that program, amendments to KFCC's proposals approved by a majority of the NCAC Board. The Court also ruled that KFCC has a duty to implement that plan in good faith.”
The cooperative’s vice chair John R. Neal said, “With this ruling, the NCAC is not limited, as KFC contended, to a role of "up or down" votes on KFC's advertising proposals with no right to amend those proposals or make its own advertising recommendations. Rather, this ruling reaffirms KFC franchisees' rights to develop and approve advertising, publicity and promotion programs for the KFC system in the United States.”
KFC Declares Its Own Victory
KFC president Eaton gave his interpretation of the court decision, declaring victory for the company. “We’re very pleased with the vice chancellor’s decision (Monday) affirming that KFC Corp. has the exclusive authority to control the brand image and advertising. According to Vice Chancellor Strine, KFC Corp. has the exclusive authority to direct the national advertising agency, an authority that must include the ability to consider how KFC advertising positions KFC as a brand in its consumers’ minds.”
Eaton further explained that specifically, the vice chancellor found that KFC retains the right to hire, fire and direct the national advertising agency and to air only those commercials that KFC believes in good faith to be consistent with its brand image.
“This lawsuit was always about retaining rights, not gaining rights, and we are pleased the court has affirmed that the franchisees do not have authority to run ads which KFC Corp. deems to be inconsistent with its brand image,” Eaton declared.
But the judge described the lawsuit as a desire by KFC to block any advertising program proposed by the cooperative that the franchisor did not support. “The NCAC has never functioned in the rigid manner that KFCC advocates,” he declared.
Explaining his decision further, the judge also emphasized why he ruled on behalf of the franchisees. "KFCC has not demonstrated through extrinsic evidence that the Certificate means anything other than what it more likely appears to mean on its face - namely, that KFCC has primary responsibility to make recommendations to the NCAC for the Committee's approval but that the NCAC retains the authority to make recommendations of its own or modify KFCC's recommendations and then vote on those recommendations by majority rule."
Andrew Selden of Briggs and Morgan, attorney for the Association of Kentucky Fried Chicken Franchisees, Inc. (AKFCF), an independent franchise owners organization that is not part of the lawsuit, had this to say of the court opinion: “Yum tried to reverse a 1996 Settlement Agreement by usurping control of the board of the joint national advertising co-op, on which it holds four of 17 seats. Franchisees challenged that by asking the Delaware Chancery Court to interpret the co-op’s charter and bylaws, and the court ruled in favor of the franchisees on all issues, holding that the board decides advertising policy by a majority vote, and KFC has a duty to implement the board’s decisions.”
What will be the real-world consequences of all this squawking? Will KFC pull back from emphasizing grilled and put fried chicken front and center as franchisees instruct? Time will tell.
|KFC Memorandum Opinion.pdf||276.72 KB|