Franchisees Focus on Use of Marketing Funds and Relationship Issues Significantly Impacting the Business Model
The Jack in the Box National Franchisee Association (NFA) today announced that it has filed a breach of contract and implied covenant of good faith and fair dealing lawsuit against Jack in the Box (NASDAQ:JACK) in Los Angeles, California. The lawsuit details Jack in the Box’s failure to perform its contractual obligations, resulting in a negative impact on its franchisee financial business model as it pertains to the rights assured to franchisees under their current franchise agreements.
The lawsuit cites the following:
- Breach of a 1999 settlement agreement with the NFA by refusing to provide franchisees with an audit of the marketing fund and documentation detailing the income and expenditures of the fund as required therein.
- Violation of the good faith and fair dealings provisions of the franchise agreements by Jack in the Box in inappropriately requiring franchisees to undertake major remodeling programs on stores where roofing and other structural work is required for which Jack in the Box took full financial responsibility while shifting some of the roofing repair costs to the franchisees.
This lawsuit comes after nearly two years of failed negotiations between franchisees and Jack in the Box with franchise owners working to collaborate on solutions that would, amongst other issues, arrest declining transactions that are being seen system-wide. The NFA has engaged renowned franchisee attorney Robert Zarco, Esq., founding partner from the Miami law firm Zarco, Einhorn, Salkowski & Brito, P.A. to act as lead counsel in the proceedings.
“The NFA has acted in good faith for years when dealing with their franchisor partners, expecting that their passion for the brand would be matched and their investments protected,” said Zarco. “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. However, their pleas to the franchisor have been ignored. They have been left with no other recourse than to pursue litigation to maintain the appropriate resources and focus that are vital to their continued success.”
The franchisees are seeking a ruling that would:
- Legally enforce the franchisees right to an audit of the marketing fund under the 1999 agreement and provide a full accounting of the activity of the marketing fund from 2016 forward to continue annually.
- Financial reimbursement for roofing and other corporate mandated capital expenses without being required to simultaneously undertake unnecessary remodels in order to subsidize the franchisor for its acknowledged financial responsibility.
“The franchisee is the lifeblood of this brand and the key to its future success,” said Michael Norwich, Chairman of the Jack in the Box National Franchisee Association Board of Directors. “Many of us have invested a great deal in its future. Healthy franchisees are the key to brand success and we have been an undervalued stakeholder in the eyes of this management. We have been diminished as a result of the heavy G&A cuts whereas we believe prudent investment in the brand would have yielded better returns for all stakeholders. We can no longer sit back and allow decisions that greatly impact our businesses to be made without our interest in mind.”
This action taken by the NFA is far from uncommon and this filing is the latest in a long line of large brand franchisees who have become unhappy with the handling of their marketing, relationships and company structure. In June of 2017, Tim Hortons sued corporate head Restaurant Brands, Inc. for misallocation of marketing funds and is currently engaged in litigation regarding alleged price gouging.
Currently the Jack in the Box system of over 2000 restaurants are 93% franchise owned and operated, 85% of which is represented by members of the Jack in the Box National Franchisee Association.