Franchise Owners Go to Court

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"An individual franchisee is generally in a much weaker position, financially and contractually, to negotiate," says Bruce Napell, partner of Sebastopol (Calif.)-based Singler, Napell & Dillon, a law firm that represents franchisees and franchisee associations. "A franchisee organization has a lot more leverage. It's a much larger piece of the franchise system telling [the franchisor], 'We have problems with what you've been doing.'"

Opening a Dialogue

Over the past few years, the number of these associations has grown, and many have stepped into the national spotlight for bringing their corporate parents into the courtroom. Franchisees of A&W, Pizza Hut, KFC (YUM), Denny's (DENN), Sonic (SONC), Little Caesar's, Domino's (DPZ), 7-Eleven, Burger King (BKC), Hooters, McDonald's (MCD), Hardee's (CKR), TCBY, Quiznos, Subway, and Dairy Queen among others, each have their own active independent associations. The AFA, which regularly acts as a strategic-planning consultant for newly formed franchisee groups, says the demand for such consultations has at least doubled over the past 10 years.

Though most associations have failed to win substantial cases, some have succeeded in opening up a dialogue in the franchise community centered on leveling the playing field for franchisees.

Take this example. The North American Association of Subway Franchisees (NAASF) alleged that an April 1, 2006, franchise agreement issued by Doctor's Associates Inc. (DAI), Subway's parent company, threatened to compromise franchisee control over a $400 million advertising fund. So the NAASF, an independent group representing about 67% of all Subway franchisees, along with the Subway Franchisee Advertising Fund Trust, filed lawsuits seeking to bar Subway from instituting these new terms. The groups claimed that if left intact, the agreement would give Subway the power to redirect franchisee advertising contributions to a separate entity at any time. DAI declined to comment on the ongoing litigation.

Switching Sides

Jim Hansen, CEO of NAASF, believes that when they're functioning properly, independent franchisee associations are a progressive step not just for franchisees but also for the corporate franchisors. "DAI doesn't own any restaurants, so the feedback mechanism they have has got to be through us," he says.

The organization also has the potential to facilitate communication the other way, Hansen adds. "We as a franchise association can explain to our membership how a policy or procedure might be beneficial, where from the outside looking in, that might not seem to be the right decision."

Harris Cooper has seen the franchise industry from both sides of the table. Between 1970 and 1987, he served as president of International Dairy Queen, but shortly after stepping down, he became the executive director of the independent associations Dairy Queen Operators' Assn. and the Dairy Queen Operators' Cooperative (DQOA/DQOC), posts he holds to this day. During the time that he ran the corporation, he says, the franchisees were given an active voice in its operation, feedback that was critical to a huge period of expansion for the system. But in recent years, the company has been at odds with its franchisees, chiefly over the supply of products, and over the company's desire to convert a large number of stores to a new concept called DQ Grill 'n' Chill.

Concessions Won

"I still think franchising is the greatest concept in the world. But more concern has to be focused on the abuses between franchisors and franchisees," Cooper says. "If the franchisees have to deal with a franchisor that doesn't respect their rights, there has to be an association that has the strength to litigate or arbitrate, or whatever it takes. There are certain rights a franchisor needs to execute their role, but [those don't] necessarily include total dictatorship."

A lawsuit filed by DQOA/DQOC against International Dairy Queen last fall was dismissed without prejudice after the company agreed to a number of stipulated changes to its operations. However, the DQ Grill 'n' Chill concept remains a point of contention between the two parties. While Cooper says it has failed to prove itself as a profitable venture, particularly for mom-and-pop operators who could be forced into the upgrade, Chuck Chapman, chief operating officer of IDQ, maintains that the new store concept is still strictly voluntary and makes financial sense for any franchisee seeking to reinvest in their business.

Cooper says his résumé gives him no special bargaining chips at the negotiation table. On the contrary, he says, "I think they have a vendetta against me," since he has made the franchisee organization much more powerful in his tenure as its director.

Legislative Agenda

Indeed, IDQ sees its ex-president as a source of conflict in relations with its franchisees. When potential franchisees inquire with the company about Cooper, as they often do, IDQ red-flags him as a competitor to the chain. "In addition to the DQOA, Mr. Cooper heads the Dairy Queen Operators' Cooperative (DQOC) which competes for business with the Unified Supply Chain, Inc. (USCI), a subsidiary of IDQ," a standard response to these inquiries reads. It continues, "As USCI has established a guaranteed lower margin program and involved franchisees in an advisory capacity (Unified Supply Chain Council), the market share of the DQOC has dropped. The lawsuits and attacks are nothing more than the DQOC trying to stay in business despite the success of the USCI bringing lower prices to the franchisees."

Some in the franchise industry see these case-by-case court battles as the only means to bring about fairer franchising. Others believe federal legislation protecting the rights of the franchisee is an obvious solution. The Small Business Franchise Act, first introduced in 1998 by Representatives Howard Coble (R-S.C.) and John Conyers Jr. (D-Mich.), and strongly endorsed by the AFA, failed to become law that year or when it was reintroduced in 1999.

"Currently, the only rules governing fairness are contracts that [the franchisor's] corporate attorney draws up. We have to address the systemic problems of franchising and level the playing field for franchisees," says AFA's Kezios. "Now is the time, with a new Congress, for legislation to be reintroduced."

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Douglas MacMillan is a reporter at BusinessWeek.com in New York.