Dive Brief:
- Jack in the Box now faces a formal lawsuit for breach of contract and implied covenant of good faith, the National Franchisee association announced Tuesday. The franchisees allege in the Los Angeles court filing that the company has refused to provide them with an audit of the marketing fund and has shifted repair costs out of step with their contracts.
- Franchisees have negotiated with Jack in the Box for two years to no avail, the release said, pushing them to the last resort of litigation. “They have on multiple occasions made not only their concerns for the direction of the company known, but also their willingness to work in union with Jack in the Box to correct its course,” said attorney Robert Zarco.
- The NFA hopes for a ruling that would legally enforce franchisees’ right to a marketing audit, per a 1999 agreement, and require annual reports from 2016 onward. It also requests financial reimbursement for roofing and other “corporate mandated capital expenses,” which owners contend have been unfairly passed on to them despite Jack in the Box’s control of their leases, according to Restaurant Business.
Dive Insight:
Though this court filing comes as no surprise given the escalating tensions between Jack in the Box and its franchisees, the formality of it probably stings. The association’s chairman emphasized the importance of “healthy franchisees" in the press release, adding they could “sit back and allow decisions that greatly impact our businesses to be made without our interest in mind.”
The release also notes that such lawsuits are fairly common and cites Tim Hortons’ franchisee lawsuit against parent company Restaurant Brands. Filed by a group of Canadian owners, that suit deals mainly with a dispute over the U.S. court location for resolving disputes. But they also plan to contend advertising dollars, which seems to be a sticking point for Jack in the Box owners, too.
Misuse of advertising funds is one of ten common causes of franchisee lawsuits. Breaching contract in one way or another — by placing new stores too near existing franchised ones or wrongly estimating investment costs — can also spur disputes. The latter could prove thorny for Jack in the Box, should a court find that remodeling or repair costs far exceeded what franchisees expected.The NFA contends corporate cuts have hurt training and remodeling efforts at the store level, AdAge reported in October.
No matter who wins these kinds of suits, some experts say neither party truly comes out on top, as the cost of litigation and potential brand backlash can hinder success post-resolution.
The company, meanwhile, has been exploring a possible sale to private investors, perhaps not a surprising move since divesting Qdoba earlier this year. It has also been operating without a CMO since August 30. While franchisees struggle with the day-to-day of running a restaurant, corporate seems to be focused on restructuring lease agreements — which peeved franchise owners only two weeks ago.
