News Briefs

Wyndham has not challenged the summary judgment from the district court. However, it would be able to challenge the trial court's decision, as would the franchisees.

KFC Franchisees Sue over New Focus on Grilled Chicken

The KFC National Council and Advertising Cooperative, Inc. (“NCAC”), filed a lawsuit on Jan. 7, 2010, seeking an injunction to stop what it calls KFC Corporation's (“KFCC”) efforts to take unilateral control of major marketing decisions for the brand (KFC National Council and Advertising Cooperative, Inc. v KFC Corporation, Delaware Chancery Court). NCAC is a partnership between KFCC and its franchisees, designated to provide input on and approve KFCC's major marketing initiatives, as well as to oversee implementation of those programs.

Allan Forsythe, executive director of the NCAC, did not return phone calls from FBLA, but a reading of the complaint indicates that NCAC believes that KFCC is violating NCAC's charter by acting as “the sole authority” on key marketing decisions. “This dispute concerns who ' NCAC or KFCC ' has the ultimate authority under the NCAC's certificate and bylaws with respect to advertising programs for retailers of Kentucky Fried Chicken in the United States,” the lawsuit states. Since the charter was revised in 1997, KFCC has had sole authority to hire or fire advertising agencies and public relations firms, but other marketing decisions were subject to “give and take” between NCAC and KFCC. Not incidentally, the charter was revised as part of a settlement of a franchisee class action lawsuit about marketing expenditures and activities. NCAC's 17-member board (13 franchisee representatives and four KFCC representatives) votes to approve marketing programs.

KFCC's rollout and extensive promotions of its grilled chicken products in the last year have brought the matter to a head. Seeking to respond to consumers' health concerns, KFCC added grilled chicken to its traditional fried chicken products, and it is showcasing grilled chicken extensively. “Specifically, [KFCC President Roger] Eaton appears to believe that the future of KFCC lies with grilled chicken rather than with fried Original Recipe' or Extra Crispy' chicken products, and as a result, KFCC's recent media and advertising proposals to NCAC have been heavily, if not exclusively, lopsided towards grilled chicken,” the complaint states. “The franchisees represented on NCAC's Committee, on the other hand, believe that a more balanced approach ' would be prudent.”

Unquestionably, KFCC sees grilled chicken as a key part of its future. “Our customers have been telling us that we need to offer more balanced choices, and our answer is Kentucky Grilled Chicken'. This product receives rave reviews and represents around one quarter of our chicken-on-the-bone business. And the fact is, we hate to think of where we would be without it,” said Yum! Brands Chairman and CEO David Novak during the company's quarterly conference call on Feb. 3. Yum! Brands owns KFCC. (For a full transcript of Novak's remarks, go to www.seekingalpha.com.)

But miscues in the rollout of grilled chicken, as well as the de-emphasis on fried chicken, have angered franchisees. In May 2009, KFCC announced on the “Oprah” show that customers could download a coupon for a free two-piece grilled chicken meal; more than 10 million coupons were downloaded, and consumers flooded the restaurants. Franchisees could not meet demand, and a class action lawsuit on behalf of consumers was filed in July 2009.

More Than 1,600 Auto Dealers Apply for Reinstatement

The American Arbitration Association (“AAA”) received more than 1,600 requests for arbitration by current and former Chrysler and GM auto dealers who are challenging the companies' closures of their dealerships. The closures came in the wake of the bankruptcies by the two U.S. automakers, a record number of dealership closures, and legislation passed by Congress in December 2009 to allow terminated dealers to challenge their closures. The reinstatement requests represent about 55% of the dealerships that were closed or announced as slated for closure in May 2009.

Arbitrations will begin in March, and Congress has mandated that they are to be completed by June 14, 2010 (with a 30-day extension for good cause). Each appeal will be handled by the AAA in the dealer's state. The arbitrations will proceed under a modified procedure with limited discovery that is designed to expedite the process and reduce the costs. According to the AAA, both the dealer and automaker will be charged a flat fee of $1,625 to register for arbitration, and then they will be charged another $625 each if the arbitration is heard.

A study by Urban Science in January found that 1,605 dealerships of all brands were closed in 2009, a record number. A similarly large number of closures are expected in 2010 because many of GM's announced closures have not yet occurred. Depending on the outcome of the arbitrations, GM's announced target of closing 1,300 dealerships by October 2010 will be affected.

Bankrupt Max & Erma's and Damon's Grill Get New Boss

The bankrupt franchisor of the Damon's Grill and Max & Erma's restaurant chains has agreed to hire an outsider to restructure the company. G&R Acquisitions filed separate Chapter 11 bankruptcies in October 2009 for Damon's and Max & Erma's in U.S. Bankruptcy Court in Pittsburgh, and those filings are being resolved through a restructuring that has removed Gary Reinert, Sr., as CEO of G&R.

Reinert has been the target of franchisee anger since the bankruptcy filing. Within days of the filing, franchisees of Max & Erma's filed in opposition to the bankruptcy plan, insisting that he be replaced. G&R had purchased Max & Erma's in 2008. The Max & Erma's 11 franchisees that filed the lawsuit represented all of the chain's 28 franchised restaurants (it also has 79 company-owned restaurants).

However, it was creditors, not franchisees, who forced the installation of Mark Roberts, managing director of Alvarez & Marsal North America LLC in New York, as chief restructuring officer (“CRO”). Roberts is exploring the possibility of a sale of the restaurant brands, said Mark Freelander, partner with McGuireWoods LLP (Pittsburgh), counsel to the Official Committee of Unsecured Creditors in the Max & Erma's bankruptcy.

Roberts has “sole discretion to make business decisions for Max & Erma's,” wrote Freelander in an e-mail to FBLA. “We are aware that the CRO, since his appointment, has spent time communicating with representatives of franchisees in order to address their issues and concerns.”

The unsecured creditors and lenders to G&R challenged transfers of nearly $1 million from Max & Erma's to other Reinert businesses. Also, they expressed concern that Reinert is the largest unsecured creditor of Damon's ($6.7 million) and would possibly seek to transfer funds from Max & Erma's to Damon's.

Super 8 Franchisees Win Breach-of-Contract Claim

One hundred sixty longtime Super 8 franchisees are entitled to damages for breach of contract from Wyndham Worldwide for the franchisor's mandate that they participate in and pay a fee for Wyndham's customer-loyalty program.

In an unusual decision, Judge Lawrence L. Piersol, U.S. District Court, District of South Dakota, granted summary judgment in favor of the franchisees for breach of contract, but he ruled that a jury trial will be held beginning on June 1 to assess damages. The parties will hold a mediation before a judge on March 15 to try to negotiate a financial settlement prior to trial.

The lawsuit, Bird Hotel v. Super 8 Motels, Inc., was originally filed in 2004, and 160 franchisees were granted class action status in 2007. They are seeking the return of nearly $3.7 million in fees (and counting) that they paid for Wyndham's TripRewards program since Wyndham required them to join it in 2003. The franchisees also are seeking about $1.2 million in interest. Wyndham has not stopped collecting the fees for the program, now renamed Wyndham Rewards, so it is possible that final damages will be higher.

Wyndham began to charge a fee to all Super 8 franchisees for referrals through its TripRewards customer-loyalty program after it purchased Super 8 brand in 2003. While most Super 8 franchisees opposed the fee, only a limited number of franchisees who signed contracts between 1984 and 1991 were allowed by the court to join the class. Their contracts, which one attorney described as “very franchisee-friendly,” did not give the franchisor the right to add new fees, and required that any disputes be litigated in South Dakota court, where Super 8 was founded. Franchise contracts signed after 1991 gave the franchisor more authority to change the fee structure, and they require litigation in the franchisor's home state, which is New Jersey.

Wyndham has not challenged the summary judgment from the district court. However, it would be able to challenge the trial court's decision, as would the franchisees.