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Burger King Headed to Court?
Franchisees sue to block the burger giant's plans to reallocate soft-drink rebates for national advertising.
NFA - an association of Burger King franchisees

Burger King franchisees are fighting efforts by the company to divert hundreds of millions of dollars in rebates from soft-drink companies to its national advertising budget.

On April 6, Miami-based Burger King Corporation told franchisees that, starting next February, it would strip them of up to 40 percent of the rebates they receive from the Coca-Cola Company and Dr Pepper Snapple Group for purchasing soft-drink syrup. In response, the National Franchisee Association (NFA), a group representing about 90 percent of all Burger King franchisees in the U.S., filed a pair of lawsuits against Burger King on May 4. The lawsuits also name the soft-drink companies as defendants.

Filed in the U.S. District Court for the Southern District of California on behalf of all Burger King franchisees (not just the 850 who comprise the NFA), the class-action lawsuits seek judgments declaring the franchisees the intended third-party recipients of the soft-drink rebates. Franchisees have received the payments since 1990 to help offset costs associated with equipment, promotions, and inspections, says the NFA, whose members own approximately 6,300 restaurants in the Burger King system.

“We simply want to maintain the status quo,” NFA Chairman and Maryland franchisee William A. Harloe, Jr., said in a statement released by the association.

Filing a lawsuit was not the group's first course of action to resolve the problem. The association says several attempts to engage in discussions with the franchisor were unsuccessful.

“We attempted to resolve this issue quietly and amicably but were rebuffed time and time again," Harloe said in the statement. "BKC left us with no other alternative."

The Atlanta-based NFA claims franchisees are entitled to receive the rebates under agreements made in 1999 between Burger King and the soft drink companies, which are not set to run out until all restaurants purchase 600 million and 100 million gallons of soft-drink syrup from Coca-Cola and Dr Pepper, respectively. Diverting 40 percent of the rebates, the lawsuits claim, would cost franchisees $25 million in 2010, increasing to almost $40 million per year by 2012 and until 2022, when the NFA estimates the purchase commitment will be met. Burger King, Coca-Cola, and Dr Pepper, the lawsuits argue, cannot terminate or amend the agreements without the franchisees' consent.

Burger King, however, says the lawsuits are "without merit."

"BKC and the soft drink suppliers have the right under their agreements to reallocate these funds, which will be used for marketing and other promotional purposes," says a statement released by company spokeswoman Denise T. Wilson.

Atlanta-based Coca-Cola expressed a similar sentiment.

"We believe this lawsuit is without merit," says a statement from the company released by spokesman Scott Williamson. "We value our relationship with the Burger King system and support their desire to grow their business and the value of their brand."

Dr Pepper, too, backed Burger King.

"We support Burger King's strategy to fuel growth and add incremental value to their entire system," Greg Artkop, a spokesman for the Texas-based company, said in a statement. "The more consumers know about Burger King the better it is for all parties."

On April 16, the burger chain announced it would increase U.S. national advertising by 20 to 25 percent next year. The increase, it said, would be made possible through the allocation of restaurant-level funds to the national level and lower advertising rates. Franchisees, the NFA says, already contribute a percentage of their sales to the national advertising budget as determined by their individual franchise agreements.

"We are confident that this increase will enable the brand to continue its record positive comparable sales growth trend,” Russ Klein, Burger King president of global marketing, strategy, and innovation, said at the time.

That announcement came less than two weeks before Burger King announced a profitable third quarter but lowered earnings expectations for the 2009 fiscal year, which the company blamed on the economy and possible effects from the swine flu outbreak. Burger King also said traffic in its restaurants declined significantly this past March.

Jamie Hartford is a regular contributor to QSRmagazine.com.