Chilly Relations in the Ice Cream Business-Franchise Litigation

That old saying that the partners start to fight when the money gets tight has never been more true than in the current world of franchising. Cold Stone Creamery and Edible Arrangements have now followed Burger King onto the court dockets in lawsuits between franchise owners and management. In the current economic downturn where people limit their discretionary spending, fast-food franchisees are under more financial pressure than ever and franchise litigation is increasing.

A couple of weeks ago, an association made up of U.S. Cold Stone Creamery  franchise owners filed a lawsuit against Cold Stone Creamery Inc.,  accusing the ice-cream chain of refusing to disclose information about funds that the franchisees believe should be set aside for their benefit in a marketing fund.

The lawsuit, which seeks declaratory relief, is asking the Court to force Cold Stone to provide the franchisees with information on whether the revenue received from rebates and unused gift cards is being plowed back into advertising or other services to benefit them.

The franchisee’s association filed the lawsuit in a Miami-Dade County, Fla., state court. A spokeswoman for Cold Stone’s parent company said she could not comment on pending litigation. Cold Stone Creamery, of Scottsdale, Ariz., has roughly 1,500 locations in 17 countries.

In 2011, a typical Cold Stone Creamery franchise’s revenue was down about 12% since 2005, according to the group of franchise owners who filed the lawsuit. It is difficult to know how much of the declining profitability for franchise owners may be due to the economic downturn, or what the group says is the franchisor’s poor management.

Many new franchisee associations have been formed over the past few years.  The most recent high profile legal challenge by franchisees against their franchisor was when Burger King owners sued over being forced to sell double cheeseburgers for $1.00. The franchisee association alleged that they were being forced to sell these items at a loss. One contention by the Franchise owners that the Franchisor violated antitrust laws. These laws prohibit companies from setting minimum prices i.e. “price-fixing”,. The Courts dismissed those claims stating that franchisors have leeway when establishing maximum prices for products, especially upon a showing that the pricing has a reasonable economic basis . The Burger King litigation ultimately settled with the parties giving franchisees more say in promotions picing.

For the most part, these cases are usually decided on purely contractual grounds  When this is the case, franchisors usually win due to the unequal bargaining power when franchise agreements are signed.

But the system is changing. As these cases whittle away at the power of the franchisors and the cases highlight points that must be negotiated by prospective franchisees, I think we will probably see a more level playing field in the world of franchising.