Burger King

And The Franchisor Franchisee Relationship

By: Edward Landrum

1

Table of Contents

Background 3

Burger King and Franchising 3

Analysis of Burger King’s Relationship with Franchisees 10

Burger King Corporation vs. Family Dining, Inc: Franchisor

Distraction and Franchisee Termination 10

Steven Scheck vs. Burger King: Encroachment, the Franchise

Agreement, and Good Faith and Fair Dealing 14

National Franchisee Association vs. Burger King: Imposing a

$1.00 Maximum Price on the Double Cheeseburger 19

Conclusion 23

Works Cited 25

2

Background

Burger King and Franchising

Burger King was originally founded in Florida as Insta Burger King by David

Edgerton and James McLamore, Matthew Burns, and Kieth Cramer on March 1st 1954.1

The decision to start Burger King was made because the owners wanted to start a

restaurant business that was a simple food-service that produced an adequate margin and

could be easily expanded into a multi-unit chain. The Burger King concept fit the bill

because the idea revolved around a simple menu, perceived customer value, low prices,

and fast service that could be easily replicated with little training.2

Edgerton and McLamore’s intentions had always been for each restaurant to be a

company unit, but prior to 1957 it was determined the company owed $8,304 in back

taxes. The amount had to be payable within a year of the determination and neither

Edgerton or McLamore had the funds to pay it. A short time later Burger King

franchised the first of the five locations they owned for $20,000 in order to pay off the

back taxes.3

Both Edgerton and McLamore took a hands on approach to running the company.

This included all aspects of the day to day operations from updating the milkshake

machine and redesigning the broiler, to changing the format of how customers were

handled by employees. As a result the original restaurants owned by Edgerton and

McLamore performed far better than the units owned by Burns and Kramer.4

1 McLamore, 22.2 Ibid, 253 Ibid, 49 4 Ibid, 47 and 51-54

3

The hands on approach lead to an easy transition for Edgerton and McLamore

from owning to franchising to resolve their financial dilemmas and meet their main

objective of increasing the number of units throughout Florida. Franchisees that operated

under Edgerton and McLamore were the benefactors of their hands on approach and

performed better than franchisees under Burns and Kramer who were outside of Edgerton

and McLamore’s sphere of influence.5

By 1961 Burger King was expanding nationally. To attract franchisees Edgerton

and McLamore provided exclusive territorial rights to franchisees so franchisees could

expand without worrying about competition.6 This practice is not used today and is a

source of contention between Burger King and franchisees. In the 1960s though, both

McLamore and Edgerton realized however that only motivated franchisees could help

spur growth and therefore incentives needed to motivate them. Each valued the

contribution franchisees had made in the business as both knew that Burger King

depended on the success of the franchisees. Further, both felt that franchisees had placed

their trust in them and both wanted to justify that trust.7

Throughout this initial period of national growth both McLamore and Edgerton

continued their hands on approach when it came to working with franchisees to scout out

locations, help start the franchise, and resolve and problems.8 By 1965, with shrinking

equity in the fast growing company, McLamore had become concerned with his and

Edgerton’s ability to maintain a strong voice in the company’s affairs.9 To counter the

concern McLamore in 1967, during the merger with Pillsbury, had Bob Keith, the CEO

5 Ibid, 536 Ibid, 767 Ibid, 2328 Ibid, 77-849 Ibid, 105

4

of Pillsbury, issue a memorandum stating that Burger King would operate autonomously

from Pillsbury and be free from takeover. His concerns however were founded when

Pillsbury asked McLamore to step away from managing the day to day operations of

Burger King.10

Edgerton and McLamore had considered it necessary to stay involved in day to

day business activity. Neither felt that it was the right idea to destabilize Burger King

leadership and the overall message when the company was opening stores at a rate

comparable to McDonalds which was the industry leader. The highly centralized

business structure had allowed Burger King to quickly handle franchisee concerns, and

decentralization as a result of Pillsbury assuming control of Burger King lead to

inefficiencies and a loss of connection between Burger King management and the

franchisees.11

By 1971 Pillsbury had become disenfranchised with the franchising system and

real estate development, which lead to the order from Pillsbury to change the corporate

direction of Burger King, though franchisees and their motivation to succeed were the

reason Burger King had grown so quickly in the first place. Burger King management’s

original intention when merging with Pillsbury was to acquire the capital necessary to

continue generating growth comparable to McDonald’s and with a 75 percent return on

equity their idea had merit. Retraction of capital and the unwillingness to franchise

caused Burger King to lose the franchise war with McDonalds.12

On January 22nd, 1972 Pillsbury sent out a memo listing the following points that

disclosed that in the company’s eyes a Burger King franchisee was a person who:

10 Ibid, 14111 Ibid, 143 and 14412 Ibid, 146-148

5

1. Is ingenious at shifting his losses over to Burger King rather than

absorbing them.

2. Automatically threatens company with antitrust suits as a bargaining tool.

3. Resists performance of contract duties and demands concessions from

Burger King under threat of litigation.

4. Only in the beginning is deeply and daily involved in operations of store.

5. After obtaining five stores is divorced from function of store manager. He

is then nothing more than a district manager. At ten stores he is simply a

regional manager.

6. After three or four stores are obtained, licensee’s function as an operator

phases out and his interest as an investor becomes paramount. Such

licensees are only mediocre development prospects.

7. Upon receiving additional stores the licensee’s declining personal

commitment to operations and growth is guaranteed.

8. Fits a pattern, or a “franchisee life cycle” – going initially from intense

personal involvement in stores to general manager. Gets fed up with the

day to day detail.

9. At certain stage of growth resists ideas of renovating, enlarging, or

upgrading his Burger King store. More interested in cash flow than

improving sales by reinvestment.

10. By concentrating new licenses in hands of existing multi-unit licensee’s,

we accelerate the pace toward the end of the licensee’s life cycle.

Repurchase of the license is a normal consequence of the issuance.13

13 Ibid, 51 and 52

6

This memorandum effectively closed the door on the beneficial relationship

between Burger King and its franchisees, which since 1954 had been a key growth tactic

for the company. McLamore explains management’s interpretation of the news by

stating: “If grown men were allowed to cry, we would be in need of bath towels.”14

Beyond, Pillsbury’s unwillingness to franchise the bureaucracy associated with corporate

management further hindered the franchisor franchisee relationship. Pillsbury’s control

eventually extended to advertising wherein the company ceased a comparative

advertising strategy that had seen same store sales increase from $750,000 to $1,000,000

in order to promote less combative forms of advertising.15 This along with other

marketing issues such as increased prices and the inclusion of untested new products lead

to an average 34 percent drop in customer traffic per restaurant.16 For a restaurant

business designed based on value and speed of service decisions imposed by Pillsbury

management were counterproductive. Around this time Burger King franchisees were

receiving a lot of press regarding their grievances with parent company associated with

declining revenue.17

By 1989 Burger King had become a pawn in Pillsbury’s fight to stay

independent.18 The Grand Metropolitan Plc of Great Britain (GM) had made an offer to

takeover Pillsbury. In response Pillsbury decided the best strategy to increase their share

price or remain independent was to spin Burger King off as a public company while

borrowing in excess of $1 billion on Burger King. Though the spinoff would have

boosted Pillsbury’s share price, the move would have left Burger King insolvent and

14 Ibid, 15315 Trout, 86-9016 McLamore, 19317 Ibid, 20018 Ibid, 194

7

incapable of running. McLamore believed this to be the worst moment in franchisor

franchisee relations for the company.19 It was apparent based on Pillsbury’s proposed

actions that franchisees valued little to Pillsbury.

After the takeover GM helped very little to quell franchisor franchisee relations,

as business was still off and franchisees felt little was being done to stem the problem.20

Furthermore, management had cut back on franchisee services, and closed regional and

district offices in order to cut costs.21 Franchisee tension increased as a result and in an

effort to find solutions GM appointed McLamore to work with franchisees to evaluate

specific problems and serviceable solutions. McLamore conveyed his ideas, value and

service, that helped start the company to both GM and the franchisees and by the end of

1993 the franchisees started to feel that corporate strategies centered around value and

service would alleviate some of the pressures they were feeling.22

In 1997 GM merged with Guinness to form the company Diageo. The company

however wanted little to do with the restaurant business leading to a disintegration of the

franchisor franchisee relationship akin to during Pillsbury’s ownership. As a result

franchisees adopted a program called “Project Champion” aimed to force the sale of

Burger King. As a result Texas Pacific Group with Bain Capital and Goldman Sachs

Capital Partners (TPG) purchased Burger King.23

Though considered a smart move by franchisee’s at the time of purchase, any

goodwill gained by TPG when Burger King was acquired was quickly lost when

management announced that Burger King would cut ties with the National Franchisee

19 Ibid, 207-21420 Ibid, 23321 Ibid, 24022 Ibid, 242-25023 Funding Universe

8

Association (NFA), the association which approximately 83% of all Burger King

franchisees were members, by limiting the NFA’s working relationship with Burger King

to the minimum contractual requirements of the franchisee agreement.24 During this time

franchisees were against many corporate policies which lead to an increasingly frosty

relationship.

The hostile relationship recently has lead to multiple lawsuits by franchisees

regarding the franchise agreement and management decisions based on the agreement.

These lawsuits include the retention of money from the selling of soft drinks, the

introduction of the double cheeseburger at the maximum price of $1, and the mandate to

keep all stores open beyond 11pm. In response Burger King has filed lawsuits against

franchisees the company says is defaulting on the agreement.25

On September 26th, 2010 Burger King was acquired by 3G Capital.26 It has yet to

be seen what result the acquisition will have on the franchisor franchisee relationship.

24 Gibson, “Have It Whose Way?”25 Ibid26 Market Watch

9

Analysis of Burger King’s Relationship with Franchisees

Burger King Corporation vs. Family Dining, Inc:

Franchisor Distraction and Franchisee Termination

James McLamore valued the contribution franchisees had made in the business as

he felt the success of Burger King depended on the success of the franchisees. Further,

McLamore felt that franchisees had placed their trust in them and both wanted to justify

that trust.27 His appreciation for franchisees and willingness to help each achieve their

franchising and expansion obligations to Burger King were most evident with regards to

McLamore’s handling of Family Dining, Inc, hereinafter Family Dining. McLamore

further felt the relationship with franchisees would deteriorate when corporate

bureaucracy prevented Burger King management from working with franchisees as

partners.

The operator of Family Dining, Carl Ferris, had been given a 90 year territorial

agreement to develop exclusive territory in Pennsylvania by Burger King in 1963, four

years before the merger with Pillsbury. The agreement contained a clause that stated

Ferris must build one Burger King a year for the next ten years in order to not default on

the agreement.28

By 1968 Ferris had not completed the fourth required restaurant and he

determined the fifth restaurant would not be completed on time. McLamore however,

understanding that Ferris was trying to complete the restaurants as scheduled modified

the development agreement so Ferris would not default. Ferris experienced another delay

with the sixth restaurant and McLamore helped modify the agreement a second time

27 McLamore, 23228 Burger King Corporation v. Family Dining Inc, 1-3.

10

stating: “It never crossed my mind to call a default of this agreement based on a

technicality”.29 McLamore’s actions indicated he felt it was more important to help

franchisees achieve their goals in order to maintain profitability and continue expansion

than to promote negative reinforcement towards franchisees by defaulting one’s

agreement whenever a problem encountered could not be overcome in time.

By 1972 McLamore had been forced out of CEO of Burger King by Pillsbury and

out of the day to day operations of the company, and as a result Burger King’s inclination

to aid franchisee development ended. When problems arose in constructing the ninth and

tenth restaurants required by the agreement Ferris’s requests for an extension were

largely ignored and lost within the Pillsbury bureaucracy.30 In late 1973, Burger King

indicated to Ferris their agreement was in default due to the ninth and tenth stores not

being completed. When Ferris tried to open the ninth and tenth stores Burger King and

Pillsbury filed suit.

The merger between Burger King and Pillsbury caused the company to lose focus

of the franchise system and forced management away from properly handling franchisee

affairs.31 As evidenced by Pillsbury’s actions, the franchisor no longer considered the

franchisee an integral part of the development and future profitability of Burger King and

how Pillsbury’s actions would be viewed by their franchisees was not taken into

consideration. McLamore had used the tender of exclusivity to Family Dining as a

means to promote the growth of the franchise. Pillsbury’s actions appeared to be

contrary to McLamore’s intended goal.

29 Ibid, 330 Ibid, 531 Khan, 251

11

Furthermore, the merger caused the company to forget that the franchising

relationship is based on a mutual understanding.32 Family Dining had grown into one of

Burger King’s most successful franchisees by 1977 and had done so by solely obtaining

the necessary financing and shouldering much of the risk. 33 McLamore understood the

risks involved having helped construct the first five Burger King’s largely with capital he

and Edgerton acquired. Based on his experience he understood it was not in Burger

King’s best interest to terminate successful franchisees like Family Dining who had

assumed so much of the initial risk and prospered despite it. Post merger, this idea of

mutual understanding was lost. Judge Hannum’s decision sheds light on the lack of

understanding Pillsbury and Burger King now had for franchisees. Hannum states:

In arguing that by termination Family Dining will lose nothing that it earned

Burger King overlooks the risks assumed and the efforts expended by Family

Dining, largely without assistance from Burger King, in making the venture

successful in the exclusive territory. While it is true that Family Dining realized a

return on investment, certainly part of this return was the prospect of continued

exclusivity….Assuming all ten [restaurants] were built on time Burger King

would have been able to expect some definable level of revenue, a percentage of

which it lost due to the delay….Such a loss would be without any commensurate

breach on its part since the injury caused Burger King by the delay is relatively

modest and within definable limits. Thus, a termination of the Territorial

Agreement would result in an extreme forfeiture to Family Dining.34

32 Ibid, 25233 Burger King Corporation v. Family Dining Inc, 334 Ibid, 8

12

In Hannum’s opinion the punishment bestowed on Family Dining by Pillsbury and

Burger King did not befit the crime. Pillsbury and Burger King could no longer identify

with the risks associated with being a franchisee and building restaurants and as a result,

and evidenced by the company’s actions involving Family Dining, the franchisor

franchisee relationship suffered. If Burger King had taken a more proactive approach in

dealing with expansion problems Family Dining was encountering much like McLamore

had done previously, the franchisor franchisee relationship would not have suffered and

litigation would not have been necessary.

13

Steven Scheck vs. Burger King:

Encroachment, the Franchise Agreement, and Good Faith and Fair Dealing

As the franchising market has matured exclusive territorial rights handed out by

franchisors to franchisees has become less and less common. Since franchisors make

their money off of royalty payments from a percentage of gross sales, the more

restaurants the better. However there is a consequence to every action and without

worrying about all interested parties affected certain actions by franchisors could hurt the

franchisor franchisee relationship. One of these actions is encroachment.

The main reason franchisor encroachment is a source of contention between

franchisors and franchisees is that when it comes to making money the values of

franchisors and franchisees are not aligned. Franchisees seek to make their units as

profitable as possible, while franchisors make money from franchisees’ gross sales.

When encroachment occurs, a franchisee could see his or her profits decrease but the

franchisor will still make money regardless of how profitable the franchise is.35 A typical

successful fast food franchise has approximately an eight percent profit margin.36

Therefore even a one percent decrease in profit can potentially result in a 12.5 percent

decrease in profit for a franchise. With this knowledge it is understandable why

franchisor encroachment is a hot topic among franchisees as sales cannibalization has the

potential to lead to financial ruin.

As discussed above with regard to Family Dining, Burger King did have a history

of doling out exclusive territorial rights to franchisees to promote growth. However by

1989, Pillsbury and Burger King had stopped this practice and had changed the Franchise

35 Emerson, 4 and 536 Wites, 11

14

Agreement to reflect the company’s new outlook on territorial rights. More specifically

the Franchise Agreement specifically denied franchises “any market, area, or territorial

rights.”37 This language opened the door for Burger King and Pillsbury to develop

restaurants with little or no regard for the welfare of current franchisees.

However, in 1989 Steven Scheck filed a lawsuit against Burger King for opening

another Burger King two miles away from the franchisee’s location. Scheck argued that

opening of the restaurant caused him compensable damages at his location because of

cannibalization sales.38 Scheck argued the Franchise Agreement not only included

written provisions but also a covenant of good faith and fair dealing implied by law and

that Burger King had broken the covenant of good faith and fair dealing by opening the

store.39

To understand this reasoning a review of the franchisor franchisee relationship is

necessary. In most franchise negotiations and franchise agreements, the franchisor

promises to do what is necessary to aid the franchisee.40 Though Burger King and

Pillsbury had shown different colors in the past it would have been reasonable to expect

franchisees, which had to invest a significant amount of money to obtain and run a

franchise, would think that Burger King and Pillsbury had their needs in mind. Though,

the Franchise Agreement did not provide any territorial rights a franchisee would not

envision that a franchisor, Burger King, would purposely act to diminish the franchisee’s

success.41

37 Leichtling, 238 Steven A. Scheck v. Burger King Corporation, 339 Ibid, 640 Wites, 241 Ibid, 2

15

The covenant of good faith and fair dealing, derived from common law, is a

concept relevant to contract agreements that places a duty upon each party “to do nothing

destructive of the other party’s right to enjoy the fruits of the contract and to do

everything that the contract presupposes they will do to accomplish its purpose”.42 In

laymen’s terms the covenant is designed to protect the rights of both parties entering into

a contract regarding portions of the contract that were not expressly written.

In the case of Scheck, as decided by Judge Hoeveler, it was determined that

Burger King had violated the covenant of good faith and fair dealing because the

Franchise Agreement only expressly disclosed the franchisee had no territorial rights and

did not further disclose the franchisor had the unlimited right to develop restaurants at

any location besides the exact location of a franchise. This decision was also based on

the fact that Burger King policy at the time prohibited the franchising of a location that

would cannibalize the sales of a preexisting franchised location. Since the Franchise

Agreement did not grant this right to Burger King, and Burger King Policy prevented the

new location from being franchised, Hoeveler contended that a franchisee was “entitled

to expect that Burger King will not act to destroy the right of the franchisee to enjoy the

fruits of the enjoy the fruits of the contract.”43

Burger King appeared to have left the Franchise Agreement purposely ambiguous

regarding territorial rights of franchisees. Leichtling argues that the ambiguity allowed

Burger King to charge a higher price for a franchise than it could have if the Franchise

Agreement stated the company could open an adjacent location at any time.44

Furthermore, good franchisees would potentially choose to operate a different franchise if

42 Ibid, 243 Steven A. Scheck v. Burger King Corporation, 744 Leichtling, 7

16

they knew they had little fiscal security when making such a large investment to build

and develop a market at a franchised location.

In the case of Scheck the territorial rights of the franchisor, Burger King, were

ambiguous and not readily understood by all parties. A mutual understanding of contract

terms was not set forth45 and this caused a breach of the covenant of good faith and fair

dealing by the franchisor. Burger King therefore needed to clarify both the franchisee’s

and franchisor’s territorial rights to overcome this problem. In the 2009 FDD territorial

rights have been stated as:

Your Franchise Agreement grants you the right to operate your BURGER KING

Restaurant at a specific location only. The Franchise Agreement does not grant

you or imply any type of area or territory, exclusive, protected or otherwise, or

protected customer base. You do not have any right to prevent or restrict the

development of other restaurants at any other locations, at any time…46

The above statement resolves any issues regarding territorial rights of either party but

also increased the risk for any interested franchisee. Due to more stringent language

Emerson argues, as evidenced by Burger King Corp v. Weaver, being a franchisee takes

so much time and money no franchisee enter into a contract where encroachment was

possible.47

To mitigate franchisee risk Burger King developed a solution to encroachment

with their franchisees. The solution still allows Burger King to encroach, but if a new

store adversely impacts franchisee sales the franchisee will be reimbursed according to a

predetermined formula.48 Other solutions to the problem are available. For example 45 Khan, 25046 Burger King, Franchise Disclosure Document, Item 12.47 Emerson, 24.48 Ibid, 24

17

Blimpie, provides franchisees forums to voice complaints as well as software that can be

used to track franchise development to avoid future encroachment problems.49

Blimpie’s approach appears to be more proactive. Providing software and an

open forum lets the company listen and analyze franchisee concerns before a franchisee’s

profits are directly affected. This gives each franchisee a voice to help with a solution

instead of to overcome a problem. Burger King’s system does not take effect until after

encroachment has already occurred. Generally problems cost more to fix after

implementation than during planning. Furthermore, any monetary gains from the use of

the formula may not fully constitute what was lost due to encroachment.

49 Ibid, 23

18

National Franchisee Association vs. Burger King:

Imposing a $1.00 Maximum Price on the Double Cheeseburger

Most commercials for deals at nearby fast food restaurants include a small

statement at the bottom. This statement says “at participating locations”. The statement

comes from the fact most franchisors will recommend a specific pricing for a product but

their franchise agreements do not provide the authority to impose it. Until 2002, Burger

King was one of these companies.

After 2002 Burger King issued the “99 cent BK Value Menu Policy Statement”

which dictated the company was allowed to dictate the maximum price for certain

products sold in their restaurants.50 The idea of the value menu came from McLamore in

the early 1990s in response to franchisees’ concerns that high prices were causing

restaurants to lose foot traffic and therefore lose customers to both Wendy’s and

McDonalds, both of which had value menus.51 The idea of the value menu was roundly

accepted by franchisees at the time and it appears that the idea was so well received that

when Burger King put the maximum pricing policy to a vote, two thirds of the

franchisees voted for it and the policy became part of the Manual of Operating Data

(MOD). Based on the value menu’s previous success it appears the franchisees thought

Burger King had their best interests in mind. In 2005, franchisees were instructed to vote

for six menu items that would be priced at $1.00. The vote subsequently passed.52

By 2008, the inflexibility caused by the institution of the maximum pricing policy

was beginning to show cracks in the franchisor franchisee relationship. E-Z Eating 8th

Corp (E-Z) filed suit against Burger King claiming imposing maximum prices on the

50 National Franchisee Association v. Burger King Corporation, 451 McLamore, 231-25152 National Franchisee Association v. Burger King Corporation, 4

19

value menu caused extreme losses at two of their restaurants.53 At the time value menus

constituted as much as 15% of sales at top chains, with much of the national marketing

directed towards these low margin products it only appeared to be getting worse.54 E-Z’s

restaurants were in Manhattan, an area where costs are generally higher than the rest of

the country, which lead to the restaurants not being able to make any money from

“upselling” consumers on higher margin items that were generally far more expensive

than those items on the value menu. E-Z further argued that since the franchisor made

money of the gross sales, Burger King was making money off the increased foot traffic

due to the value menu while the franchisees were paying for it.55 The courts however

found that under the Franchise Agreement Burger King had the right to impose maximum

pricing on the value menu as Section 5(A) of the agreement requires franchisees to

“adhere to the comprehensive format and operating system”.56 Since the adherence was

expressly required in the Franchise Agreement it was not bad faith to institute a policy

requiring specific pricing.

Increasing tensions, Burger King in 2008 and early 2009 tried to place the double

cheeseburger (DCB) on the value menu with a selling price of $1.00. On multiple

occasions franchisees objected to the idea, which lead to Burger King unilaterally

imposing a $1.00 maximum price on the DCB.57 As a result of the maximum pricing

money and the high cost of making the double cheeseburger, franchisees were losing

money on every DCB sold.58 A typical successful fast food franchise has approximately

53 Ibid, 854 York55 Ibid56 National Franchisee Association v. Burger King Corporation, 857 Ibid, 458 Gibson, “Can’t Have It Their Way”

20

an eight percent profit margin.59 Therefore even a one percent decrease in profit can

potentially result in a 12.5 percent decrease in profit margin for a franchise.

The National Franchisee Association (NFA) argued that because the DCB cost

more than $1.00 to make selling this product for a maximum of $1.00 broke the covenant

of good faith and fair dealing between Burger King and franchisees. The NFA further

argued that Burger King had admitted the sale of the DCB for $1.00 could lead to the

bankruptcy of its franchisees. Judge Moore determined based on the aforementioned

facts the NFA had the right to move forward with its lawsuit against Burger King’s

pricing of the DCB.60

The franchisor franchisee relationship is best when profitability is shared between

the two.61 The inclusion of the DCB on the value menu appears to be a lopsided affair

with Burger King unfairly profiting off of a product that directly harms the profitability

of its franchisees. Burger King should have realized after the franchisees objected to the

$1.00 DCB on multiple occasions that its implementation as is would be a source of

contention between the company and franchisees.

McDonald’s ran into a similar issue with the inclusion of a DCB on their Dollar

Menu. However, McDonald’s does not dictate maximum prices, however McDonald’s

was so interested in providing the DCB on the Dollar Menu the company worked with

franchisees to update the sandwich, by removing a piece of cheese, in order to lower cost

of the sandwich below one dollar.62 To quell the situation Burger King instead removed

the DCB from the value menu entirely and raised its maximum price.

59 Wites, 1160 National Franchisee Association v. Burger King Corporation, 11

61 Khan, 24562 Gibson, “Can’t Have It Their Way”

21

Similar to the issue of encroachment above, Burger King failed to take a proactive

stance on diffusing the situation building due to setting the maximum price of the double

cheeseburger. On the other hand McDonald’s, like Blimpie, took a more proactive

approach to handling a similar situation.

The profitability of franchisor relies on the sustainability of franchisees. Loss of

influence for franchisees, TPG limited the NFA’s working relationship with Burger King

to the minimum contractual requirements of the franchisee agreement,63 lead to pricing

decisions that did not promote mutual growth and had little sound rationale and

reasoning.64 Discussions between Burger King and the NFA had the potential to quell the

situation before a lawsuit was filed much like in the case of McDonald’s.

63 Gibson, “Have It Whose Way?” 64 Khan, 254

22

Conclusion

Proactive vs. Reactive

Burger King has grown from five company owned locations to one of the largest

franchises in the world. Most of this expansion can be credited to franchisees as

approximately 90% of all Burger King restaurants are franchised. Dr. Kahn states:

Franchising is a unique symbiotic relationship that must function smoothly in

order to be successful…Because franchising is a mutual relationship, one of the

clear ways to maintaining that mutuality is for both parties to be honest and fair

with each other. The system fails if understanding lacks in any way. The success

of the franchisee-franchisor relationship is achieved in the same way as any other

successful relationship—by mutual understanding. When the relationship is out

of balance, when one party feels or perceives that the other is contributing less,

the relationship begins to crack and crumble.65

Burger King’s handling of Family Dining (post McLamore), Sheck, and the

Double Cheeseburger all convey the company forgot that mutual understanding and

influence is required in order to maintain a successful franchisor franchisee relationship.

The company’s reactive approach to deal with problems all evidence franchisees’ needs

and opinions were not considered valuable to the running of the company.

The actions of McLamore, Blimpie, and McDonalds all teach that a more

successful franchisor franchisee relationship is possible if franchisees maintain some

level of influence, and the franchisor takes care to manage situations before the execution

of a plan or a problem’s only solution is litigation. Burger King’s new parent company

3G Capital should take head of these lessons to better the franchisor franchisee

65 Ibid, 244

23

relationship and expand on the success that allowed Burger King to grow into the 2nd

largest fast food franchise in the United States.

24

Works Cited

Burger King Corporation v. Family Dining Inc.  426 F. Supp. 485; U.S Dist Ct. 1977.

Burger King, Franchise Disclosure Document. Burger King Corporation, 10/7/2009.

Emerson, Robert W. American Business Law Journal. “Franchise Encroachment”. Academy of Legal Studies in Business, 2010.

Funding Universe. Burger King -- Company History. 2004. 10/13/2010 <http://www.fundinguniverse.com/company-histories/Burger-King-Corporation-Company-History.html>.

Gibson, Richard. The Wall Street Journal. “Burger King Franchisees Can’t Have It Their Way”.  New York: Jan 21, 2010.

Gibson, Richard. The Wall Street Journal. “Have It Whose Way? At Burger King, management and franchisees are locked in battle over the company’s direction”.  New York: May, 17, 2010.

Khan, Mahmood A. Restaurant Franchising. “Franchisor- Franchisee Relationships”. New York: John Wiley & Sons, 1999.

Leichtling, Adam B. University of Miami Law Review. “Scheck v. Burger King Corp.: Why Burger King Cannot Have Its Own Way with Its Franchisees”. University of Miami, 1994.

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