McDonald's Resolves Franchisee Dispute Over Refurbishment Costs. On September 3, 2003, the blog included an entry on McDonald's franchisees' dispute over the franchise agreement requirement that renewing franchisees upgrade their restaurants. The cost of such upgrades, according to the franchisees, could range from $800,000 to $1,000,000 per restaurant. According a group representing the franchisees, McDonald's has now agreed to invest up to $475,000 toward each upgrade. McDonald's did not confirm this statement but stated that it has agreed to contribute a "fair and equitable" amount to the upgrades.
Posner Rules That Motel 6 Bedbugs Case Was an Exception to State Farm Punitives Rule. In an appeal by Motel 6, the 7th Circuit affirmed a jury's award of $372,000 in punitive damages in a case where the compensatory damages amounted to only $10,000. The ABA Journal reports that on oral argument, Judge Richard Posner immediately questioned Motel 6's appeal of such a relatively small judgment in a case with such a high embarrassment potential for the motel chain. The guests, a Canadian brother and sister, sought damages for hundreds of actual bedbug bites inflicted during their one-night stay at a Motel 6 in Chicago. The evidence showed that the motel had notice of the problem and refused to pay for extermination of the offending bedbugs. Posner questioned the appeal, stating, "You want your bedbug experience to be discussed at length in the Federal Reporter?" While Motel 6 argued that the 37:1 ratio of punitives to compensatory damages violated the Supreme Court's pronouncement in State Farm, the 7th Circuit ruled that this case was one of the few cases where a greater ratio was appropriate.
Illinois State Rep. Looks to Ban Obesity Lawsuits. Chicago Business reports that Illinois State Representative John Fritchey has introduced the Illinois Commonsense Consumption Act. Like the Wisconsin bill (see below) and the Louisiana law (which became effective in June), the Illinois bill seeks to ban lawsuits that allege that restaurants and food manufacturers are liable for plaintiff's weight problems.
The British Ralph Nader. In an article in the Guardian UK, there's a report that the Labour MP intends to introduce a bill into Parliament to ban the advertising of high-fat, high-salt and high-sugar foods to pre-school children. Debra Shipley, the Labour MP, will introduce the bill, which has the support of the National Heart Forum and National Union of Teachers, on November 4. The bill will ban the advertising of these food products during pre-school television programs. For a look at the Ralph Nader group's challenge to McDonald's sponsorship of Sesame Street, see the blog entry for October 15 (with a follow-up entry on October 16).
H&R Block Franchisee Disappointed by $3 Million Verdict. The Kansas City Star reports that H&R Block terminated its Alabama franchisee and was required under its agreement to make "fair and equitable" payments to a terminated franchisee. Block paid the franchisee $4.9 million, representing 80% of the franchisee's revenue from the previous year. The franchisee sought $38.7 million in damages for the lost profits or "value of its business." The jury agreed that Block owed additional money but valued the franchisee's loss at only $3.2 million. The franchisee claimed that it felt vindicated by the jury's verdict on liability but planned to appeal the valuation. H&R Block faces 12 similar lawsuits by franchisees seeking compensation for their terminated franchises.
Some Hotels Close Doors to Smokers. Smoking rooms in many small to mid-sized hotels will soon be nothing but a memory -- like smoking sections on airplanes. Demand for smoking rooms -- even from smokers -- has been down over the last couple of years, leaving a substantial number of smoking rooms empty. After redecorating and deodorizing the rooms, hotels have either significantly reduced the number of smoking rooms or effected a complete indoor ban. In most hotels, guests will still be permitted to smoke on their balconies.
KFC EIEO -- Energy In, Energy Out . KFC Corp. is preparing an advertising campaign to advise consumers that Kentucky Fried Chicken can be a part of any balanced diet. KFC's executive vice president of marketing and food innovation said that "Consumers should no longer feel guilty about eating fried chicken." While KFC stresses that food should be consumed in moderation and combined with an exercise regimen (EIEO), this seems to mark the first time since the obesity lawsuits that a fast food company has promoted their non-salad, fried menu items as "healthy." Even KFC's sister company, Pizza Hut Inc., changed the recipe of its pizza before introducing the "Fit and Healthy Pizza." (See blog entry October 16). For an interesting article on the advertising itself (where a woman declares to her husband that their plans to eat better start today and she puts a bucket of Kentucky Fried Chicken in front of him), see this New York Times article (subscription required).
Meanwhile, Pamela Anderson Is Not Satisfied. Continuing on her mission as a PETA spokeswoman, Pamela Anderson has delivered a request to meet with KFC's CEO to discuss KFC's treatment of chickens. Ms. Anderson called for a national boycott of the company a few weeks back and now wants to meet to discuss PETA's recommendations for treatment of the KFC birds. See blog entry of October 17.
Auto Superstore -- Advocating Change in Auto Dealerships. In an interesting entry in the Manager's Journal section of the Wall Street Journal (subscription required), J.D. Power III discusses the possibility of an overhaul of the American automotive market. American auto dealers are currently under franchise (or dealer) relationships with manufacturers and offer a single line from one location. Mr. Power suggests that automotive retailing should dispose of -- or at least dramatically alter -- the franchise model and develop a Wal-Mart strategy offering consumers a variety of brands to compare prices of similar products at one dealership. Outside America, this idea has already taken shape. The European Union repealed antitrust rules preventing dealerships from offering competing brands. Virgin Brand opened a multi-brand car superstore and sold 150 vehicles in six weeks.
Schlotzsky's New Look, Menu and Concept Work Well. According to some early reports from its franchisees, Schlotzsky's new bakery-cafe design has been yielding positive results for converted franchisees. The new design and menu creates a more upscale experience at the restaurants, which serve panini sandwiches, have richer decor and serve their food on china. The bakery-cafe program was pilot-tested at company-owned stores in Austin, is incorporated by 13 existing stores and 25 franchisees are in the pipeline for development.
Wisconsin Moves to Ban Fat Suits. KFC and other franchisors may not have too many worries in Wisconsin, where the legislature recently introduced the Personal Responsibility in Food Consumption bill -- similar in more than name to the bill introduced in the U.S. House of Representatives. The bill is aimed to exempt food marketers, sellers, advertisers, packers, distributors and manufacturers from liability in obesity lawsuits.
Fast Food Diet Diet. Joining the trend of calorie counters in fast food dining areas, Applebee's has announced that it is testing a number of menu items, developed in conjunction with Weight Watchers, to address consumer concerns about healthy eating. The menu items will list Weight Watchers point values -- a system developed by Weight Watchers based on calories, fat and fiber content in a particular food. Applebee's expects to roll out the more popular dishes in 1,500 restaurants early next year.
Rising Above the Nameless Gourd. After a brief hiatus (when Team Blog went to Hollywood, Florida for the ABA Forum on Franchising annual meeting), the blog returns. The ABA Forum's annual meeting gives the franchise bar an opportunity to discuss some important topics in franchising. This year, Wiggin & Dana partners, Jack Dunham and Joe Schumacher each presented two programs at the Forum meeting. During the mini-programs on Wednesday, Jack was part of a panel of franchise experts that presented Fundamentals of Franchising and Joe, as a member of the Litigation and Alternative Dispute Resolution committee, participated in the NITA sponsored program "Road Warriors: Effective Direct and Cross Examinations in Franchise and Distribution Disputes." During the main program on Thursday and Friday, Jack moderated a program called "The Road to Perdition: The Case Against Arbitration in Franchise Disputes," and Joe (along with Scott Korzenowski) presented "Crouching Tiger: Franchise Fraud." Great programs, great location.
McDonald's Settles Obesity Claim in Employment Context. On Friday, McDonald's settled a claim brought by a 420-pound man who claimed he was not hired because of his weight. The terms of the settlement were not disclosed. McDonald's claimed that the man was hired when the store was corporately owned and before he started work, the store was transferred to a franchisee. McDonald's was represented in this litigation by Wiggin & Dana partner, Larry Peikes.
Self-Serve Franchising. The Charlotte Observer (registration required) reports that McDonald's is testing self-serve kiosks in Raleigh, NC and Denver, CO to allow customers to place their orders and pay for their food without dealing with a clerk. Fast food companies are testing these technologies, which are already part of gas station, bank and airport service, as a way to control labor costs and to provide customers with the service they need. The technology is also being tested in the lodging industry. This article from the Internet Travel News reports that Starwood Hotels is testing self-serve kiosks for the check-in/check-out process in Boston and New York.
As Long as We Don't Panic. This article from Vancouver Sun Times claims that "Fast Food Soon Will Kill More Canadians Than Smoking." Really, the article addresses obesity and deaths related to obesity and weight-related health problems. One in ten Canadian children is overweight. Dr. David Katz, a fast food critic, seems to blame in equal parts sedentary lifestyles and the accessible nature of food from drive-throughs, vending machines and the like.
McDonald's Sued By Franchisees in Brazil. The Wall Street Journal (subscription service only) reports today that McDonald's faces significant challenges in Brazil as 37 out of 109 of its Brazilian franchisees have filed suit against the burger giant. While McDonald's was a tremendous success in Brazil from its entry into the market in 1979 through the 1990s, a currency devaluation in 1999 changed Brazil's economy and seriously affected the franchisees' profit margins. In their lawsuit, the Brazilian franchisees claim that McDonald's cannibalized their sales and overcharged them for rent. McDonald's sales in Brazil -- once a model of McDonald's success -- have pulled company earnings down for several years.
Massachusetts Schedules Smoking Ban. With plans to join New York as a smoke-free workplace state, the Massachusetts legislature is set to approve a law that would ban smoking at bars, restaurants and workplaces by January 2005. Already two counties within Massachusetts have instituted workplace smoking bans. Nursing homes, tobacco farm testing facilities and licensed cigar bars would be exempt.
Subway vs. Starbucks. It's not a lawsuit; it's an interview on Entrepreneur.com with Fred DeLuca, a co-founder of Doctor's Associates, Inc., the franchisor of 18,000 Subway sandwich shops, and Howard Schultz, founder of Starbucks. The interview compares the business models of the companies with Subway exclusively dedicated to franchising and Starbucks focused on the company-owned store model. Each founder discusses the benefits of his business model and how it affected the growth and entrepreneurial spirit of the company. The article, however, treats Starbucks as if it was exclusively company-owned and does not address the hybrid nature of the company -- combining company-owned stores with licensing arrangements to place Starbucks coffee in exclusive venues like supermarkets, universities, hospitals and corporate facilities.
University Boycott Threat Against Taco Bell Spreads Across South. Following Tuesday's blog entry about the University of Florida's planned boycott of Taco Bell comes a report from Austin, Texas that the student leaders at the University of Texas rejected a proposal to oust Taco Bell from the University's concessions. The proposal was initiated based on Taco Bell's practice of using tomatoes picked by migrant workers who allegedly suffer unfair working conditions. The student leaders concluded that they needed more information before making a final decision. The proposal's authors intend to redraft and refile the proposal within weeks.
In other Yum! Brand News -- Pamela Anderson Seeks Boycott Against KFC. Yum! Brands has apparently ignited a boycott fire with another brand -- Kentucky Fried Chicken. This summer, Paul McCartney issued a letter - printed in the Louisville Courier-Journal - to KFC demanding that KFC improve the treatment of its 750 million chickens raised annually. Yesterday, Pamela Anderson joined in the debate and urged a consumer boycott of the chicken chain until KFC ensures better treatment of chickens.
Alamo and National Car Rental Acquired Out of Bankruptcy. According to the Miami Herald, Cerberus Capital Management, a New York investment firm known for purchasing distressed companies, acquired the assets of ANC Rental Corp. out of bankruptcy on Tuesday. ANC is the Texas-based parent of both Alamo and National Car Rental companies. The companies' combined car fleet numbered about 155,000. Cerberus paid $230 million and assumed $1.5 billion in secured debt and $60 million in unsecured debt. ANC did not offer franchises in the Alamo or National chains.
Jury Views Franchisee Tax Fraud Differently from Dunkin' Donuts and other courts. After the success of its standards program, Dunkin' Donuts focused its investigations in the past few years on underreporting, tax fraud and other criminal conduct by Dunkin' franchisees. In some cases, Dunkin' terminated franchisees for such conduct. In Dunkin’ Donuts, Inc. v. Barr Donut, LLC, 2003 WL 184017, a judge in the Southern District of New York held that the defendant franchisee's sales of illegal drugs violated the franchise agreement's "obey all laws" clause and provided good cause for termination. Likewise, in Dunkin' Donuts, Inc. v. Martinez, 2003 WL 685875, a judge in the Southern District of Florida held that the defendant franchisee's tax fraud discovered by Dunkin' - and not yet proven in a criminal court - was good cause for termination because the franchisee's conduct was potentially injurious to Dunkin'.
At least one jury has rejected this theory, however, On September 19, 2003, a Massachusetts federal jury rendered a verdict against Dunkin' in Dunkin Donuts, Inc. v. H&Z Donuts, Inc. finding that the defendant franchisees did not commit material breaches of the franchise agreement. It is unclear from the jury verdict sheet whether the jury found that the alleged tax fraud was not proven by a preponderance of the evidence or whether such fraud would not constitute a material breach of the franchise agreement. Dunkin' filed a motion for judgment notwithstanding the verdict on October 7.
This decision will be critical for Dunkin' -- not only with respect to its fraud claims against other franchisees but also because the defendants in the H&Z case are plaintiffs in a putative class action case instituted in the Southern District of Florida and transferred to the District of Massachusetts. That case, Moghaddam v. Dunkin' Donuts, Inc., is pending before Judge Patti Saris.
More Debate Over School-Corporate Alliances. Yesterday's blog included an entry regarding a Ralph Nader group's challenge to McDonald's Sponsorship of Sesame Street and a story on corporate firms' efforts to sponsor programs at preschools. This story from the Knox News discusses the issue of corporate sponsorships -- in conjunction with concerns over childhood obesity rates. In Knox County, Krispy Kreme, Chick-Fil-A and a local pizza restaurant offer reward programs for kids who earns good grades. Krispy Kreme awards a free doughnut for every A on a child's report card. School board administrators hail the Partnership in Education program because it provides much-needed dollars for the school system. Consumer advocates at the Center of Science in the Public Interest warn that such partnerships come at a price -- sacrificing nutrition for donations and threatening to increase problems with childhood obesity.
Tilden Announces Plans to Franchise Oilmatic. Yesterday, Tilden Associates announced that it entered into a Letter of Intent under which its subsidiary would acquire exclusive rights to develop franchises to sell the Oilmatic Bulk Cooking Oil System, a system produced and patented by a Newark, New Jersey company. The Oilmatic system provides patented equipment that supplies and disposes of bulk cooking oil for restaurants.
Pizza Hut Follows Fat Suit. Notwithstanding its previous offerings of Meat Lovers' Pizza, Double Cheese Pizza and Stuffed Crust Pizza (which has 20 grams of fat per slice), Pizza Hut has adopted a new low-fat pizza in response to consumer healthy eating trends. The low-fat pizza will contain about 2.5 to 5 grams of fat per slice (depending on toppings). Looking to launch its new advertising campaign, "Gather 'Round the Good Stuff," Pizza Hut is hoping to convince working mothers to serve pizza, especially the low-fat pizza, to their families for dinner.
Host Marriott Reports Dramatic Losses. Despite its plans -- announced Tuesday -- to acquire the Hyatt Regency Maui, Host Marriott yesterday reported quarterly losses of $97 million, more than double its reported quarterly losses for the same period last year. While the travel and hotel industry looks to 2004 for the travel recovery so desperately needed, many hotel chains are clearing out the low-performing units and selling off hotels. Host Marriott, on the other hand, is betting on a strategy of acquiring high quality properties in unique locations. Its plan to acquire the Hyatt Regency Maui fits within this strategy.
Obese Children Drawn to Fast Food. Meanwhile, in a study conducted by Boston Children's Hospital, researchers discovered that while both average and obese children enjoyed fast food, obese children failed to compensate for the increased caloric intake of fast food by reducing the size of their meals in the rest of the day. The study, which was conducted both at the hospital and at the children's homes, found that both sets of children consumed more than half of their daily caloric needs by eating the fast food provided by the study. As they reviewed their subjects later in an unannounced visit to their homes, the researchers determined that the non-obese children changed their eating for the rest of the day to compensate for the energy-dense fast food they consumed while the obese children made no changes in their caloric intake.
Ralph Nader Group Challenges McDonald's Sponsorship of Sesame Street. While watchdog groups continue to monitor corporate sponsorships and advertising methods, one has taken aim at the link between McDonald's and public television. In a letter to PBS, Consumer Alert - a Portland, Oregon-based, Nader-backed organization, charged that the airing of the McDonald's message after Sesame Street violates a "trust" between public television and its viewers. PBS has denied that the McDonald's sponsorship promotes McDonald's products and has emphasized the importance of McDonald's funding of these programs to ensure the continued success of public television projects. In another AdAge.com article, the website reports that Consumer Alert filed FTC and FCC complaints against the operators of network television stations for their use of product placement in their programming without disclosing these arrangements to viewers.
Finally in a related article, msn.com reports that some companies are targeting preschools to test products or to sponsor programs that promote name recognition. One group, Stop Commercial Exploitation of Children, claims that while tight economies create the need for corporate sponsorships in preschools, such promotions make children believe that the products endorsed by the school are good for them.
Finally - A Low-Carb Margarita. Responding to the low-carb demands of its customers, Don Pablo's, a Tex-Mex restaurant chain out of Lubbock, Texas, has created a low-carb margarita to accompany its low-carb fajitas. The fajitas are wrapped in lettuce - which appears to be regarded by the restaurant industry as the new bread -- and the margaritas are created using Splenda, a low-carb artificial sweetener.
Body Shop Eases Back Into Black. After a disappointing and turbulent 2002, the Body Shop appears to be battling back, posting a pre-tax profit of 9.1 million pounds for the six-month period ending on August 30 (compared with a loss of .7 million pounds for the same period last year). This BBC article reports that the company, which owns and franchises about 1,900 locations around the world, was shaken last year after a number of competitors chipped away at its market share -- forcing a number of changes including the resignation of founder Anita Roddick as co-chairman. Ms. Roddick and the Body Shop became known in the 1980s for their position on corporate ethics -- rejecting the use of animal testing for any of the Body Shop products and requiring Body Shop employees to perform community service as part of their job responsibilities.
Tough Times for Blockbuster and Hollywood Video. This Motley Fool article reports that both Blockbuster and Hollywood Video are struggling as the video rental industry appears to have flattened out. Netflix - the video home delivery system -- is continuing to thrive although the success may not be based on industry growth so much as a consumer shift to the Netflix model. The article also reports that rumors have surfaced that Blockbuster's parent, Viacom, is looking to sell the chain. The question that these industry conditions raise is this: Is this a temporary consumer lull or are video rentals becoming obsolete in view of the other technology available? For a look at this issue and competition facing Blockbuster and Hollywood Video, see blog entry from September 3, 2003.
Eckerd on the Auction Block. J.C. Penney has announced that it plans to hold an auction to solicit bids for its struggling Eckerd drug store chain. Eckerd is the fourth largest drug store chain in the U.S. While Penney has sought help from its bank to solicit bids for 2,700 store chain, the New York Post reports that its pool of buyers may be significantly restricted by antitrust concerns and the sale of the chain is not a foregone conclusion. Canadian radio reports - via CJAD 800 - indicate that Jean Coutu Group, the Montreal-based owner and operator of 332 Brooks drug stores in Canada, may be interested in bidding on some or all of the Eckerd chain.
Taco Bell Threatened with National Boycott. According to am850.com, a national boycott of Taco Bell restaurants is planned by the Members of the Coalition of Immokalee Workers and the Student/Farmworker Alliance at the University of Florida. The boycott is in response to Taco Bell's alleged practice of using tomatoes picked by migrant farm workers, whose salaries fall well below the poverty line. A spokesman for the group stated that the goal is a national consumer boycott that would force Taco Bell to change its practices and pay more for tomatoes, with the end result of increasing the salaries of the workers who pick them.
Franchising Wraps in Detroit. This article from the Detroit Free Press profiles two Detroit-area franchisors focusing on the wrapped sandwich -- Rio Wraps, a three-year old franchisor, and Mr. Pita, a ten-year veteran of franchising. Each franchisor is enjoying the wrap niche, which competes with sub shops and delis and has the added benefit of being perceived as part of a healthy food movement. Both stores offer low-fat and healthy alternatives on their menus. Rio Wraps has 13 stores and is planning to add six more this year; Mr. Pita has 37 stores in the Detroit area.
Red Bull Succeeds in Putting Down Passing Off. After discovering that some of its customers -- bars and restaurants -- were serving customers substitute beverages when customers ordered "Red Bull and vodka" or some other Red Bull mixed drink, Red Bull NA took a number of steps to urge the offending establishments to come back into legal compliance. When these steps proved unsuccessful, Red Bull instituted lawsuits in New York, Las Vegas and Philadelphia to enjoin the restaurants/bars from passing off non-Red Bull product as Red Bull. Because Red Bull is only available in its distinctive cans, some of the offending establishments were identified based on their filling of Red Bull orders from a beverage gun. As reported in this Wall Street Journal article (subscription only), Red Bull has reached settlements for undisclosed terms in each of the three lawsuits. Jim Goniea of Sonnenschein Nath & Rosenthal in San Francisco is National Coordinating Counsel for Red Bull passing off litigation and Wiggin & Dana acted as local counsel in Red Bull's Philadelphia litigation. A copy of the Red Bull press release is available here: Red Bull settlement.htm
Appeals Court Upholds Dismissal of Franchisor in Shooting Case. Finding that the franchisor did not exercise sufficient control over personnel matters to impose vicarious liability, a Minnesota appeals court affirmed the lower court's decision to dismiss Arby's Inc. from a lawsuit based on events at a Madison, Minnesota Arby's restaurant. In 1999, an Arby's franchisee's employee left his job without permission and shot his girlfriend and another individual in the Arby's parking lot. The gunman then shot himself. In the lawsuit, the victim's parents asserted claims against Arby's for negligent hiring, supervision and retention of the gunman. The appeals court held that a franchisor cannot be liable for the negligent acts of its franchisee unless it had control over the alleged negligent activity.
Rx Depot Franchise Thriving. Despite the federal lawsuit instituted against Rx Depot for illegally importing prescription medication from Canada, the Pittsburgh Business Journal reports that business at its Squirrel Hill, PA franchise, owned by George Risov, is booming. Mr. Risov owns franchise rights to Pittsburgh, Philadelphia, and parts of Ohio and New Jersey. Amid the legal controversy, however, the franchise expansion has been put on hold. While both state regulators and the federal lawsuit agree that the importing of drugs from Canada is illegal, legislators in both state and federal government are petitioning for legislation to address the costs of prescription medication and some are seeking legislation to allow purchases from Canada.
Marriott Hotel Owner Claims that Marriott Mismanaged Hotel. The New York Times (subscription required) reports that owner of a Manhattan Marriott that is operated by Marriott International has filed for Chapter 11 bankruptcy protection and has alleged that Marriott's mismanagement of the hotel forced it into bankruptcy. Marriott manages about 2,500 hotels owned by 500 different owners. According to the NY Times, this bankruptcy demonstrates the growing tension between Marriott and its hotel owners. Marriott has been named in five other suits, where the owners claimed that Marriott mismanaged the hotel, defrauded the owners and overcharged for supplies. Two of the lawsuits appear to be headed for trial next year.
More on Low-Carb Franchising. The Washington Post reported over the weekend on the continuing Atkins trend among fast food and quick casual chains. Many chains are looking to reduce the numbers of carbs or to provide Atkins-friendly options according to LowCarbiz.com, an Internet newsletter that follows carb trends. Blimpie, Wendy's and McDonald's are launching low-carb products -- McDonald's is introducing a whole package called "Real Life Choices" in New York. Wendy's is also a part-owner of a restaurant called Pasta Pomodoro, which has introduced a number of dishes with whole wheat and low gluten/high protein pasta. As these restaurants battle back from the focus on fat, the low-carb industry continues to grow with an estimated $2 billion market (a mere fraction of the total food market) in retail alone.
K-B Toys Holds Court Ordered Sale. In a rather bizarre settlement, K-B Toy Stores are holding sales offering goods at its 1,300 stores at 30% off until Tuesday. The sale represents the chain's efforts to refund $3 million to consumers to settle a lawsuit alleging that the chain posted misleading prices -- the chain has denied any liability. Curiously, the settlement documents prohibited K-B's advertisement of the court-ordered sale.
$5 Million Jury Verdict Against McDonald's Thrown Out. The Cleveland Plain Dealer reports that an Akron, Ohio man, who was a former manager for McDonald's and accused McDonald's of firing him because he had AIDS, has lost an appeal to the 8th Ohio District Court of Appeals. Russell Rich, a former McDonald's employee, was awarded $5 million by an Ohio jury in 2001 for wrongful termination. The three judge panel stated that the lower court's refusal to read jury instructions and submit interrogatories to the jury as requested by McDonald's was error. The court further held that some of the instructions were incorrect. As a result, the appellate court held that McDonald's did not receive a fair trial and the case is to be retried. Mr. Rich's counsel plans to appeal the Court of Appeals' decision to the Ohio Supreme Court.
Franchisor Found Liable for Fraudulent Scheme in Canada. An Ontario Superior Court judge ordered 3 for 1 Pizza, the franchisor of pizza restaurants, to return the deposit paid by a would-be franchisee, along with some mortgage fees and interest. The Toronto couple that brought the suit claimed that they responded to a 3 for 1 Pizza franchise ad, met with a salesman at the company's offices, and paid half the price of a new location -- but never received a franchise. 3 for 1 Pizza claimed that the "salesman" did not work for the franchisor, but rather was a franchisee and the coordinator of the chain's call center. The court apparently rejected this defense -- the salesman/franchisee was never called to testify and the plaintiffs claimed that they never heard of him.
Franchisor of Three Systems Files Chapter 11 Bankruptcy. Chevy's Inc., the franchisor of Chevy's Fresh Mex, Fuzio Universal Pasta and Rio Bravo, filed for bankruptcy protection on Friday, just days after a planned acquisition of the company by Dallas-based Consolidated Restaurant Operations, Inc. fell through. Just three years after acquiring Rio Bravo from Applebee's Inc., Chevy's claims that the struggling Mexican chain of 37 franchises caused a significant drain on Chevy's resources and on the remaining two successful chains. As part of the bankruptcy, Chevy's plans to close the Rio Bravo chain and emerge with its two remaining franchise systems intact.
Some Notes of Interest About the Hotel Industry From the Wall Street Journal (subscription required):
Get Your Wake Up Call From Sponge Bob - Now That's a Vacation. Holiday Inn Family Suites Resort has entered into a licensing arrangement with Nickelodeon and is planning to spend $20 million to upgrade the Family Suites Resort in Orlando to include a variety of Nickelodeon characters -- most notably Sponge Bob whose large porous visage will grace the outside of the resort. The entire theme of the resort is getting a Nick kid-friendly overhaul -- Many of the eight hundred rooms in the resort will now feature bunk beds and video games, and the resort will provide wake up calls in Nickelodeon characters' voices and live entertainment. This appears to be Nickelodeon's first venture into lodging although the company hopes to open four other themed resorts in resort towns. Nickelodeon has so far been successful in setting up these types of licensing arrangements with companies like Lowe's (paint colors), J.C. Penney ("Nick Zone" stores) and Avon Products.
Hotel Industry Looks to New Prototypes to Boost Development. In other hotel news, an October 8 article in the WSJ reported that many lodging chains, in anticipation of an expected rebound in the travel industry, are changing their hotel models by giving rooms more home-like feel and modern amenities like high-speed internet access -- all this for a reasonable development cost. Franchisors of hotel chains, while interested in attracting guests, need to attract developers for their hotels. The article discusses some innovations that are being tested by lodging franchisors to make their hotels both user-friendly for the guest and cost efficient for the developer.
Applebee's Skillet Sensations Suit. On Tuesday, Applebee's sued Nestle, the owner of Stouffer's, for Stouffer's use of "Skillet Sensations" as a brand name for a frozen dinner product. Applebee's clamed that it began using Skillet Sensations in November 1996 to describe a selection of menu items brought to the customer's table on a steaming skillet -- fajitas, for example. Applebee's applied for a trademark on June 13, 1997. Nestle claimed that it started using testing products under the trademark in 1997 and applied for a trademark on June 2, 1997. Last month, Applebee's won a crucial victory at the TTAB, which ruled in favor of Applebee's and held that customers would believe that the products sold by the parties were somehow associated with one another. To view the TTAB decision, click here. Applebee's lawsuit seeks unspecified damages and a court order to prohibit Nestle from using the Skillet Sensations name. To view a pdf version of Applebee's lawsuit against Nestle and Stouffer's, click the link: Applebee's complaint.pdf
Bad Ass Can Stay in Jacksonville. Despite complaints from offended members of the citizenry, a Jacksonville city attorney announced yesterday that the Bad Ass coffee franchise that recently opened in Jacksonville can display its Bad Ass sign. The sign displays a donkey -- which the owner of the franchise says represents the donkeys used to haul Kona beans up and down the mountains of Hawaii -- and the words Bad Ass. In response to the controversy and the complaints lodged at city hall, Jacksonville's deputy general counsel stated that "While the Bad Ass Coffee Company sign may be offensive or even immoral to some, a court would not find it to be obscene."
Saladworks Looks to Grow. In a very salad-friendly climate, the franchisor of Saladworks restaurants serving salads, soups and other healthy offerings has seen the opportunity for growth. The company added eight franchises last year and expects to reach 52 units before the end of this year, and 125 in five years. Situated in the fast-growing quick casual sector with Panera and Noodles & Co., Saladworks expects to enjoy significant growth as one of the first companies in this exploding market. Like Noodles & Co., Saladworks expects to benefit from the public's recent retreat from traditional fast food into more health conscious, nutritional products.
7-Eleven Feeling the Heat of Competition. On Monday, we included a story on the Franchise Law Blog detailing Alimentation Couche Tard's acquisition of Circle K stores for approximately $830 million. Today, Forbes.com reports that 7-Eleven has announced plans to revamp its coffee service to provide more coffee varieties and gourmet coffee. 7-Eleven, which operates or franchises 5,800 units in the U.S., has long relied on coffee as a staple sales product; recently, however, the competition form gourmet coffee houses has caused the sales to slip. While skeptics maintain that gourmet coffee will not affect 7-Eleven because it lacks the atmosphere, seating and barristas needed to make the coffee service work, 7-Eleven will rely on service and price to draw the customer in -- service as in self-service to allow the customer to bypass lines and prices $2 to $3 per cup cheaper than the competition.
McLattes on the Menu. Entering into yet another sector of food service, McDonald's has announced plans to open a string of coffee bars under the name McCafe. Like most everyone else, McDonald's is looking to cut into the coffee industry that is currently dominated by Starbucks and very few others. See Blog Entry on September 4 for story on trademark challenge against McDonald's use of McCafe in Moscow). The Entrepreneur.com article also discusses McDonald's continuing battles with franchisees over the refurbishing requirements contained in the franchise agreements.
Home Maintenance Franchises Find Market. In the growing list of new franchisors, Steve Spratt has identified a service area where many people need constant service -- home maintenance. Home Preservation Services of Palo Alto provides any number of services for its clients from gutter-cleaning to fixing leaky faucets and repairing loose doorknobs for people who don't have time to handle these home maintenance projects. Concentrating on preventive maintenance, the service is priced based on the age and size of the home, as well as the market for handyman services in the area. When it comes to repairs, however, the franchise does not attempt to take on specialized projects -- it doesn't provide services like plumbing or roofing. Rather, the emphasis is on home maintenance -- catching problems before they become big repairs. Home Preservation Services has recently franchised locations in Sonoma, Marin and Louisville, Kentucky.
Ben & Jerry's Moves North. The Globe and Mail reported today that Ben & Jerry's, the premium ice cream maker and franchisor that is now a subsidiary of Unilever NV, has plans to open 100 ice cream shops across Canada. Ben & Jerry's previous expansion into Canada in 1988 was halted because Canadian dairy quotas required that the ice cream be manufactured in Canada. Unilever is now prepared to manufacture the ice cream in its Canadian facilities.
Wouldn't It Be Nice If We Could License? In other licensing news, the Supreme Court today announced that it would not hear the appeal from the Ninth Circuit decision, barring Al Jardine from using the Beach Boys name in connection with his new band. Jardine, who played guitar for the Beach Boys, is prohibited from using the Beach Boys name as "Beach Boys Family & Friends," "Al Jardine, Beach Boy" or "Al Jardine of the Beach Boys." The Beach Boys name is owned by Brother Records, a company jointly held by Mike Love, Brian Wilson, the estate of Carl Wilson and Al Jardine. Although Mike Love has a licensing arrangement with Brother Records, Jardine would not agree to the same terms provided by Love's license, according to Brother Records. When Jardine started using the name without a license, Brother Records sued and the district court granted summary judgment for Brother Records. Jardine lost his appeal, was prohibited from using the Beach Boys name and ordered to pay $2 million dollars in court costs. For a copy of the Ninth Circuit decision, click here.
Conoco Sells Circle K. According to SmartMoney.com, ConocoPhillips has agreed to sell its Circle K Corp. to Alimentation Couche-Tard Inc., a Canadian convenience store operator, for a reported $820.9 million (plus the assumption of $9 million in debt). Conoco has stated that the sale will result in the loss of 17,000 jobs. The sale will transfer ownership of 1,663 Circle K stores and the franchise agreements for 350 more, making Couche-Tard the fourth largets convenience store operator in North America. ConocoPhillips will continue to supply gasoline and petroleum products and operate 300 to 350 retail outlets. For a similar report from the Toronto Star on the sale, click here. (The exchange rate between Canadian and American dollar may account for the difference in the reported sales price -- The Toronto Star claims the company was sold for $1.1 billion).
Shakey's Lawsuit from the Franchisor's Perspective. Following last week's interview with a Shakey's franchisee regarding the lawsuit pending in Los Angeles, Shakey's outside counsel, Mitchell Shapiro, speaks this week to Entrepreneur.com to present Shakey's view of the lawsuit and its outlook on the future of Shakey's.
Wiggin & Dana’s New York Office. Effective October 1, Wiggin & Dana merged with Howe & Addington, a New York firm with sophisticated real estate, tax, estate planning and litigation practices. The combined firm of 155 lawyers will be known as Wiggin & Dana. All of Howe & Addington’s partners, associates and staff will join us and continue to practice from their offices at 450 Lexington Avenue.
Wiggin & Dana is delighted about this great opportunity. The Howe & Addington lawyers are excellent and their approach to the practice of law mirrors our own. Our New York office will allow us to serve our clients better, and enable us to expand several important practice areas. In addition, Howe & Addington’s extensive relationships with European and Latin American clients will enhance our own thriving international practice.
In the coming weeks we will be sending clients, colleagues and friends additional information about the merger.
Carvel Parent Company Buys Fastsigns. The Atlanta-based private equity firm, Roark Capital Group, has acquired its third franchise operation, Fastsigns International Inc. After acquiring Money Mailer LLC, a shared mail advertising franchisor with 250 franchisees, and Carvel Corp., the franchisor of 425 franchised ice cream locations, Roark Capital announced on Thursday that it purchased Fastsigns for an undisclosed amount. Fastsigns owns and franchises sign and graphics stores -- it has about 440 locations and annual revenue of $200 million.
Wolfgang Puck Worldwide May Sell Cucina! Cucina! chain. Looking to concentrate on its Wolfgang Puck Express brand, Wolfgang Puck Worldwide may be looking to sell the 19-unit Cucina! Cucina! restaurant chain that it acquired just last June, as well as some of the 15 Wolfgang Puck Cafes. Citing the small size of his company, Chef Wolfgang Puck recently indicated a desire to sell off the Cucina restaurants or convert them into Wolfgang Puck Cafes. No formal decision has been made by the company concerning the future of the restaurants.
The Do-Not-Call List and the Real Estate Industry. This article from the Realty Times discusses the logistical and economic problems created by the national do-not-call registry for the real estate industry. Although realtors do not sell a product over the phone (and are exempt from some state do-not-call laws), the national registry law seems to prohibit realtors from contacting consumers (even active home sellers) on the do-not-call list. Compounding this problem is the significant expense that compliance with the law can generate -- the do-not-call registry costs $25 per area code (with a nationwide total of $7,375) and the lists must be periodically updated. Although one broker, Prudential California Realty, intends to post the do-not-call list on its intranet for use by brokers in California, Texas and Nevada, real estate franchisors are generally rejecting that option because of liability and agency concerns in under taking that duty for their franchisees.
Krispy Kreme Enters London Market Through High-End Retail. The Business Journal reports that Krispy Kreme has opened its second store outside of North America (and first store in England) by launching a location at Harrod's of Knightbridge department store. By partnering with Harrod's, Krispy Kreme looks to associate its brand with a higher level of sophistication at higher prices than typically charged for doughnuts in London. FT.com reports, however, that growing concerns over obese Brits -- UK's obesity numbers tripled in the last 20 years -- have some watchdog groups complaining about Krispy Kreme's entry into the British market. Krispy Kreme UK intends to open 25 locations in the UK and Ireland in the next 5 years.
McDonald's Nutrition Director. With the attention of the country drawn to the link between fast food and obesity, McDonald's has named Cathy Kapica nutrition director for the burger giant.
Court Dismisses Securities Fraud Claims Against Rent-A-Center. Rent-A-Center announced today that the federal court in Texas dismissed the class action securities fraud claims pending against the company in Walker v. Rent-A-Center. Plaintiffs claimed that Rent-A-Center and certain officers and directors violated securities laws by issuing false or misleading statements. The court dismissed the claims based on a statute of limitations argument with respect to certain later added director defendants. Under the court's ruling, plaintiffs can refile within 60 days. Rent-A-Center operates 2,500 stores which offer merchandise (mostly home furnishings) through a rental purchase agreement. Rent-A-Center also owns ColorTyme, Inc., the franchisor of 326 rent-to-own stores.
Fastest Growing Private Companies in America. In a story about a story, Rocky Mountain News reports that Inc. magazine's October 14 issue will list the top 500 fastest growing privately-held companies in the U.S. Among the Denver area selections were franchisors Noodles & Co. (#64) and Maui Wowi (#219). While California topped the state list with 59 companies on the list, the metropolitan leaders were Washington, D.C. (41 companies), Boston (23), Philadelphia (21), Dallas (19) and Chicago (14). The #1 company is a Rhode Island company, American Biophysics, which saw a five-year sales growth of 25,615%. For a preview of some companies on the 2003 list and a review of the full 2002 Inc. 500, click here.
Carbolite Sued Over Restaurant Chain Plans. After plans to open "Skinny's" restaurants tanked, an investment company, Levine Emmons Entertainment, Inc., filed an arbitration and a federal lawsuit against Carbolite to force it to proceed with the development plans. According to the lawsuit, the companies agreed to enter into a 99-year licensing agreement for the Carbolite name and restaurants would be opened and later franchised. Carbolite is a leading manufacturer in the low-carb market, producing low-carb shakes and other food products. Levine Emmons alleges that based upon the parties' agreement, it hired restaurant consultants to begin scouting locations and received a $12 million commitment from an investor to open three restaurants and start a franchise program. The lawsuit is pending in the Central District of California.
Multi-Unit Franchising. Entrepreneur.com discusses the advantages of owning multiple units in a franchise systems, or even multiple units in multiple systems -- including an efficient business model and more profits for the franchisee and franchisor. While financing has become more difficult for franchisees to secure, the multi-unit operator is the operator of choice in hair cutting, automotive aftermarket and sign franchises.
Shakey's Facing Disgruntled Franchisees and Uncertain Future. Entrepreneur.com reports that a lawsuit instituted by a group of Shakey's franchisees in December 2002 is slotted to go to trial in Los Angeles in February, unless the parties can successfully mediate the conflict this month. The franchisees alleged fraud, breach of contract, and negligence in connection with Shakey's alleged conduct in offering franchise agreement renewals on a "take it or leave the system" basis. The Entrepreneur.com article features an article with a Shakey's franchisee who settled a similar lawsuit against the company. The franchisor's perspective will be presented next week. Shakey's is owned by the Singapore company, Inno-Pacific Holdings Ltd. For one man's review of Shakey's history and the lawsuit, click here.
What's the "Best a Man Can Get?" Following the Pizza Hut v. Papa John's battle of the superlatives ("Better Ingredients, Better Pizza"), Schick-Wilkerson Sword has sued Gillette Co. in Connecticut federal court, accusing the Boston company of false advertising in violation of federal and state advertising laws for slogans like "Best a Man Can Get," and "Mach3 is the world's best shave." (Dow Jones Newswire). In a related matter, the companies remain locked in a Boston patent infringement case instituted by Gillette in August over Schick's Quattro razor. If the Pizza Hut dispute -- which was ultimately denied cert from the U.S. Supreme Court in 2001 -- is any indication, this dispute may actually outlast the usefulness of the slogan.
In a side note, Papa John's was successful in the Pizza Hut dispute when the Fifth Circuit reversed and vacated a jury verdict against the pizza maker and remanded with instructions. The Fifth Circuit held that the slogan "Better Ingredients, Better Pizza," standing alone, represented only the typical puffery used in advertising and was a statement of opinion that did not violate advertising laws. For a copy of the Fifth Circuit opinion in the Papa John's case, click here.
Judge Allows Dealer Class Action to Proceed Against Subaru of New England For Now But Strikes Racketeering Claim. A New Hampshire federal judge ruled Friday in a 41-page opinion that the racketeering and extortion claims of New England's current and former Subaru dealers against their distributor should be dismissed. The dealers accused their distributor of "padding cars with unwanted options to boost profits at [the dealers'] expense." The court held that plaintiffs had not presented viable claims and acknowledged Subaru of New England's right to withhold certain cars and to require its dealers to accept higher-end, accessorized cars as part of a negotiation process to get cars they need. The judge also entered a rule to show cause on the dealers' coercion claims, ordering the dealers to show cause why the class should not be decertified on these fact-specific claims.
Franchising in Hard Times. The Daily News in Tennessee reports on the effects of corporate downsizing on franchising. Generally, tough economies result in an increased interest in small business ownership, entrepreneurship and franchising. This economy is no exception. According to the article, the U.S. Department of Commerce estimates that 90% of franchised businesses survived 10 years, while only 18% of independent businesses survived. While I'm not sure how this statistic fits with the fast food statistics that were released earlier this month (see Blog entry, September 10), it was evidently very persuasive to the franchisees profiled in the article.
So persuasive is the statistic, in fact, that it was quoted in another article on Tallahassee.com (although it estimated that 85% of franchised businesses succeed). The article provides a review of a number of business format franchises that exist in a wide variety of industries.
Franchise Site Selection -- A Study in Claustrophobia. The Wall Street Journal (subscription required) reports on the difficulty, especially in the fast food industry, of finding available and profitable sites for future franchises. The article follows Barbara Vinson, a real estate scout for Arby's Inc., as she travels in California identifying good real estate. Because some chains have expanded so successfully, further expansion, especially with the competition of 277,708 fast food outlets in the U.S., can mean stepping on franchisees' toes or risking unsuccessful units. Wal-Mart, however, has become an important real estate partner with fast food, because it specifically targets fast food companies sending real estate development information for Wal-Mart-anchored shopping centers.
McDonald's Considers a Spin-off. Following rumors earlier this year that McDonald's would sell its Donato's Pizzeria, Boston Market and Chipotle Mexican Grill brands, the Chicago Tribune (registration required) reports that the hamburger giant is now looking at another solution -- spinning the brands off into a separate company. Apparently, the chains represent substantial sales and McDonald's likes their potential -- especially Chipotle. Their operation under the McDonald's umbrella, however, has caused some friction with McDonald's franchisees, who view the brands as competitors. The spin-off solution -- which is not certain -- may provide McDonald's with the long-term benefits while avoiding franchisee relations problems.