Dive Brief:
- A cohort of franchisees operating 19 of Hurricane Grill & Wings’ 38 restaurants have sued franchisor Hurricane AMT and Fat Brands, alleging “widespread mismanagement, deceptive practices, and financial misconduct in violation of a previous settlement agreement,” according to a press release from law firm McDonald Hopkins.
- The plaintiffs claim that after they contributed 3% of weekly gross sales to a mandatory marketing fund, the franchisor failed to offer “critical marketing services” that led to declines in the brand’s presence and revenue. Without this marketing, the lawsuit says the brand’s store count fell from 58 to 38 units, “severely impacting franchisee profitability.”
- Franchisees are seeking transparent accounting of all marketing funds, reimbursement of allegedly misappropriated funds and royalty payments, compensation for financial loss incurred and coverage of legal fees and court costs.
Dive Insight:
Fat Brands denied the claims, calling the complaint a “meritless lawsuit with false allegations.”
“Since purchasing Hurricane Grill & Wings in 2018, FAT Brands has invested significant time and resources to strategically grow the brand through marketing initiatives—from menu development to modernizing the guest experience,” a Fat Brands spokesperson said in an email to Restaurant Dive. “We look forward to disproving these ridiculous claims and fighting this lawsuit in court.”
Hurricane’s franchisees allege that mismanagement of the brand constituted a multimillion dollar theft from the marketing fund, which had been created to directly benefit the franchise system.
“Despite collecting millions of dollars annually in required contributions to the Marketing Fund from the Franchisees since 2018, Hurricane has neither accounted for nor used marketing fund contributions on meaningful or impactful marketing,” the lawsuit states. “Hurricane has essentially raided and abandoned the brand, destroying its value.”
As part of a previous mediation agreement from 2018 under then-owner John Metz, Hurricane was supposed to maintain a separate bank account for a media fund and provide franchisees with quarterly and annual budgets as well as proposed marketing calendars within a month of the end of each quarter in 2019, according to the lawsuit.
Hurricane was allowed to terminate the obligation, but did not give notice of such termination to franchisees, and did not provide this information from calendar years 2019 to 2024.
The lawsuit claims that there should be plenty of funding for a robust marketing department given the amount of money franchisees have contributed since 2019, but the marketing department is “understaffed, underperforming and/or not performing.”
“Hurricane once had substantial market share and stood out as the place to go get a wide variety of fresh flavored chicken wings,” the lawsuit says. “However, there is now no brand strategy and Hurricane is losing (and has lost) market share to its competitors.”
Hurricane Grill saw little growth in terms of new units during the first three quarters of last year compared to other brands, Fat Brands chairman and founder Andy Wiederhorn said during an October earnings call, but he did not provide any more information on the chain. Round Table Pizza, Fazoli’s and Twin Pinks were among the brands owned by Fat that had strong development pipelines last year, on the other hand.
The lawsuit also noted that the Securities and Exchange Commission filed an initial complaint last year against Fat Brands and Wiederhorn over the misappropriation of $27 million, which included marketing funds, from Fat Brands. That lawsuit claims a loan scheme was used to divert money from Fat to Wiederhorn for his personal use.
This isn’t the only recent lawsuit filed by franchisees against franchisors. Bojangles franchisees sued the chain last year alleging that the company didn’t provide information on how marketing dollars were spent. In December, three I Heart Mac and Cheese operators sued the chain accusing it of using illegal practices to entice them into buying into the system, with low startup and operational costs, but stores were unprofitable.
