Darrell Dunafon Oversight Hearing

Intimidation, threats, coercion, loss of support, insults, and ultimately, exile - that is the price I paid for having the courage to speak for myself and nearly 90% of the other Taco Bell franchisees that were members of the International Association of Taco Bell Franchisees ("IATBF") when I was thrust into the leadership role of the organization in May of 1993.

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U.S.A. House of Representatives
June 24, 1999

Oversight Hearing on the Franchising Relationship
Darrell Donafon, franchisee

United States of America
House of Representatives
Subcommittee on Commercial and Administrative Law

DARRELL DONAFON

Intimidation, threats, coercion, loss of support, insults, and ultimately, exile-that is the price I paid for having the courage to speak for myself and nearly 90% of the other Taco Bell franchisees that were members of the International Association of Taco Bell Franchisees ("IATBF") when I was thrust into the leadership role of the organization in May of 1993. In less than 30 days, I went from a franchisee in good standing, a franchisee who, for 20 years, had grown the Taco Bell name in Jefferson City, Missouri area, one who had met or exceeded Taco Bell's standards for sales and customer service and had been a partner with Taco Bell in developing some nine locations around central Missouri (with their name and my money), to a franchisee who, in the words of Taco Bell's then Chief Executive Officer and President was a "renegade" and "scum," an unwelcome presence at the Taco Bell table, and most critically, a franchisee who, despite meeting all objective criteria for the opening of a new restaurant, was first denied the opportunity to expand my business, and then, ultimately, denied the opportunity to keep my business. And I was not the only one.

Moreover, because federal legislation that would, among other things, prevent a franchisor like Taco Bell from seeking to deny franchisees the right to associate does not exist, Taco Bell was ultimately successful in its campaign to destroy the IATBF.

I opened my first Taco Bell Restaurant on January 27, 1974, in Jefferson City, Missouri. For nearly 24 years, I had an exemplary financial and operating history as a Taco Bell franchisee, with average annual sales at each of my locations (some of which are located in unusually small communities), consistently above the national average. The written Franchise Agreements for these locations stated that they were for a 20 year term.

In 1990, Taco Bell sponsored a meeting between its franchisees and Taco Bell management executives at Vail, Colorado. At that meeting, Taco Bell's President and CEO informed the Taco Bell franchise community that he alone would determine Taco Bell's policies and procedures regarding pricing and marketing. He further stated that Taco Bell franchisees would be required to adhere strictly to his mandates and would have no say in the direction of Taco Bell's future. Taco Bell's emphasis on marketing a three-tiered "value menu" was a hotly contested issue with many franchisees, as we all believed that it threatened to significantly reduce the profitability of our franchises. Additionally, Taco Bell intended to pursue aggressive market penetration through the promotion of new nontraditional, non-restaurant distribution points including movable food carts, kiosks, concession-like facilities, and even vending machines. Many franchisees were concerned that such an emphasis would result in a significant reduction of their customer base and would create overlapping markets. Additionally, many franchisees were alarmed that Taco Bell was test marketing these nontraditional distribution systems by using outside contractors, such as Marriott, rather than permitting franchisees the opportunity to develop these systems. At the Vail meeting, it was made clear to the attending franchisees that Taco Bell franchisees' concerns would not be considered by Taco Bell.

Taco Bell subsequently sent a letter to franchisees that had not attended the Vail meeting which informed them that their nonattendance at the meeting for any reason other than a dire emergency was taken by Taco Bell to be an indication that the non-attending franchisees had a different strategy for the future of the Taco Bell system than Taco Bell and Taco Bell representatives would be meeting with them within thirty days to discuss their leaving the Taco Bell system.

As a result of the statements to the franchisees at Vail, the letter that followed, and the failure of the company controlled franchise association ("FRANMAC") to disclose to franchisees new pricing programs being developed, tested and implemented by Taco Bell, a large number of Taco Bell franchisees determined that an independent franchisee association for the Taco Bell community was needed.

The Independent Taco Bell Franchisee Association, IATBF, was formally incorporated in January 1992. Its mission was to provide a forum for franchisees within the Taco Bell franchise community to address their concerns regarding Taco Bell policies and procedures and the relationship between Taco Bell and its franchisees and to protect franchisees' investments in the Taco Bell system and their interests in growth opportunities. IATBF consisted of six autonomous regions, each with its own board of directors and bylaws, and a national board composed of the presidents of the six regions. At its inception, franchisee membership in IATBF consisted of approximately 90% of all U.S. Taco Bell franchisees. It was not, as Taco Bell liked to say, a group of small "renegades" or "scum."

IATBF polled its regional constituency and determined the following issues, among others, were major concerns in all regions: clearly established any written criteria for expansion into additional franchises; new product development; system documentation; encroachment of existing franchises by the promotion of nontraditional distribution points; advertising which reflected tiered "value menu" promotions which not all franchisees had implemented; policies for transfer, termination and renewal of franchises; brand marketing; and independent, competitive sources of supplies and equipment. IATBF facilitated the communication and discussion of these issues among its constituency at regional and national meetings, and by the use of letters and a magazine called "Newsline." IATBF surveyed its members and then communicated its position regarding various Taco Bell pricing and marketing policies to Taco Bell by submitting written proposals to Taco Bell executives. Taco Bell's President, however, refused to acknowledge the existence of IATBF and refused to negotiate with it directly.

From its very inception, Taco Bell treated the leadership of the IATBF with hostility and acrimony. In fact, Taco Bell's President expressly told attendees of a FRANMAC meeting occurring in February 1993 that the leaders of IATBF would not be permitted to grow within the Taco Bell system. Taco Bell's President repeatedly characterized the IATBF leadership as "scum" and renegade franchisees. Such representations to Taco Bell franchisees by Taco Bell appeared to be intentionally calculated to reduce the effectiveness of IATBF by belittling its leaders and intimidating other franchisees into leaving, or not joining, the independent association.

IATBF aggressively pursued the harmonious and business-like resolution of numerous issues with Taco Bell management, including without limitation: the encroachment of franchisees' business base by corporate-owned and licensed restaurants and the possibility of substantial encroachment through Taco Bell's development of the Hot 'n Now hamburger chain which targeted the same customer base; tier pricing systems and value-priced menus; and the T.A.C.O. program which provided Taco Bell direct computer access to franchisees' sales and proprietary financial information.

Taco Bell resented being confronted on these and other issues by a large and unified body of franchisees. Accordingly, one by one, Taco Bell attacked the vocal leadership of the IATBF by denying them, individually, the ability to expand and develop new Taco Bell franchises.

Ron Bellamy was the first President of IATBF. Bellamy, with his wife, Helen, and their corporation, Kawara, Inc., operated seven Taco Bell franchises in Wichita Falls, Texas. Before becoming a Taco Bell franchisee and assuming the IATBF leadership, Bellamy had several positions with Taco Bell. During his four and one-half year tenure at Taco Bell, Mr. Bellamy held senior executive positions with responsibilities, at various times, for operations and franchising, real estate and construction, and as Chief Financial Officer.

As President of IATBF, Mr. Bellamy was an aggressive and vocal advocate of franchisee interests, which necessarily involved some criticism of many of Taco Bell's policies and practices. During his tenure as IATBF President, the association successfully negotiated arrangements for Taco Bell franchisees who so desired to purchase supplies from an independent purchasing cooperative (rather than the former PepsiCo controlled supplier, who was then an affiliate of Taco Bell).

In August of 1992, Mr. Bellamy requested Taco Bell's approval to develop a new Taco Bell restaurant. In a letter dated August 12, 1992, Taco Bell's National Vice President of Franchise Operations informed him that, although he was financially and operationally qualified for new store development, Taco Bell had made a "judgment call" that "based on our working relationship with the franchisee," the "fit" of the proposed franchise within the system, and "other factors," Bellamy would not be permitted to expand. On August 18, 1992, Bellamy was told by his Franchise Business Manager that Bellamy had been denied growth because of his involvement with IATBF.

At an IATBF national meeting in San Antonio in October 1992, a portion of the constituency of IATBF proposed that the association back off on its external communications efforts to let relations between it and Taco Bell cool down and to determine what results had been accomplished. To preserve the integrity of IATBF, Bellamy substantially ceased talking to the media about Taco Bell in January 1993. On April 19, 1993, Taco Bell approved Bellamy's application for a successor agreement (renewal) of an existing restaurant in Altus, Oklahoma. Taco Bell permitted Bellamy's expansion because he had ceased openly and vocally challenging Taco Bell's policies for a period of several months. Mr. Bellamy resigned from his leadership position with IATBF on May 27, 1993 approximately seven months before the end of his term of office.

Wallace Fowler, a multiple franchise operator located in Jonesboro, Arkansas, was a regional president of the IATBF and its national treasurer. Mr. Fowler's son, Chris Fowler, is an independent Taco Bell franchisee for the sole franchise located in Jonesboro, and is a joint-franchisee with his father on six others. Chris Fowler was a member, although not an officer, of IATBF. Wallace Fowler openly and publicly criticized Taco Bell's proposed development of a corporate restaurant in the small town of Jonesboro as unwarranted and unfair encroachment into the customer base of Chris Fowler's franchised restaurant in
Jonesboro.

At a FRANMAC meeting in San Antonio, Texas in October 1992, Taco Bell's National Vice President of Franchise Operations, informed both Wallace and Chris Fowler that they would not be permitted to develop any new franchises because of Wallace Fowler's involvement with IATBF and because of his public statements to the media critical of Taco Bell. They were further told that if they ceased making any public statements for a period of six months, Taco Bell would reconsider its position regarding their expansion.

Chris Fowler was the President of the Arkansas Restaurant Association in 1992. In that capacity, Chris Fowler lobbied the 1992 session of the Arkansas legislature to seek franchise reform legislation. A representative of PepsiCo lobbied against the legislation. Following this activity, a Taco Bell Franchise Business Manager informed Chris Fowler that such political activity would not be tolerated by Taco Bell and would result in the continued denial of either Chris or Wallace Fowlers' requests for growth within the Taco Bell system.

On March 19, 1993, several months before I assumed a leadership position with the IATBF National Board, I negotiated with developers for the purchase of land at a retail development center in Holts Summit, Missouri (Old Highway 54 and Missouri Route OO). Thereafter, on May 27, 1993, with the resignation of Ron Bellamy, I assumed the position of Chairman of the Executive Committee of the IATBF.

On June 2, 1993, the Taco Bell Franchise Coordinator of Franchise Administration informed me by letter that I was financially and operationally approved for the new franchise development. Financial approval would remain valid for a one year period (expiring May 26, 1994) and operational approval would remain valid for a six month period (expiring September 3, 1993). The letter further stated that "[s]hould there be an unfavorable change in your financial or operational situation, this approval will be revoked." No change in my financial or operational situation occurred between June and September 1993. The only change was Taco Bell becoming aware of my assumption of leadership of the position as IATBF's Executive Chairman.

On July 12, 1993, Taco Bell furnished me with two Taco Bell Franchise Direct Development applications, release forms and confidentiality agreement. I executed these documents and returned them to Taco Bell.

By letter dated July 12, 1993, Taco Bell's Executive Vice President of Franchise Operations informed me that I was denied expansion approval for the Holts Summit franchise.

By a letter dated July 26, 1993, Taco Bell's Director of Franchise Administration informed me that, pursuant to Taco Bell's July 12, 1993 letter denying expansion approval, Taco Bell would not accept any new site proposals from me nor would it consider me eligible for any franchise approval.

In addition to Taco Bell's conduct in denying approval for the Holts Summit expansion, Taco Bell virtually abandoned its efforts to provide the corporate support Taco Bell was contractually obligated to provide in the written Franchise Agreement.

As a result, with the financial backing of the IATBF, I filed suit and asked Taco Bell to mediate my claims through the newly formed Center for Public Resources ("CPR"). As I understood at the time, CPR was an organization, formed by the nation's largest franchisors (including Taco Bell), for the purpose of providing an alternative dispute mechanism that would decrease or eliminate the need for legislation to help resolve legitimate franchisee claims. I regret to inform the Committee that Taco Bell flatly rejected my request to mediate (despite the fact that Taco Bell, as a founding member of CPR, had pledged to mediate any disputes with franchisees, and despite CPR's assurances that its members would be required to mediate such disputes).

After the initial suit was commenced, I continued to fulfill all of my obligations under my franchise agreements. In 1996, I reached terms with my landlord that would allow me to construct a new Taco Bell restaurant in Rolla, Missouri, on land across the street from a Taco Bell that I had owned and operated since 1978. However, before beginning construction, I complied with my obligations under the Franchise Agreement and sought the approval of Taco Bell for both the new location and "Successor Agreement" for the Rolla site.

Despite the expressed criteria, and the previous approval of my franchise operations, during a telephone conversation on August 13, 1996, Taco Bell's National Vice President of Franchise Operations informed me that I was being denied a Successor Agreement and the opportunity to re-build in Rolla.

During the course of that conversation, this Taco Bell executive mentioned, on several occasions, that he believed the re-build and Successor Agreement made "good business sense" and that there was no business reason for denial of the re-build and Successor Agreement. However, he went on to inform me that, because I had exercised my legal rights in an attempt to force Taco Bell to live up to its contractual commitments regarding new Taco Bell franchises, Taco Bell was not willing to grant me a Successor Agreement. The effect of this decision was to deprive me of all of the "going-concern" value I had built up in Rolla for both my location and the Taco Bell name. Indeed, Taco Bell acknowledged to me that this decision was contrary to Taco Bell's best interests. The Vice President of Franchise Operations told me that he agreed that "[myself] and Taco Bell would financially benefit from the location and new building" and that if I dropped my lawsuit, Flanagan would be "willing to reconsider [my] proposal for relocation and a Successor Franchise Agreement." Because I believed that I had an obligation to myself, to my family, and to the thousands of other Taco Ball franchisees to help protect the basic right of association, I rejected Taco Bell's "offer."

In 1997, recognizing that I had no future with Taco Bell (as my franchise agreements would lapse one by one, leaving me with no viable operation), I sold those Taco Bell-related assets I had left. The expert I retained for trial opined that the value of the sale was decreased by over 1.5 million dollars as a result of Taco Bell's conduct. My sale also removed me as a member of IATBF (as I was no longer a franchisee). By late 1997, and based in large measure on the failure of the organization to attract assertive leadership, the IATBF ceased operations.

While I settled my case after a day and a half of trial in August of 1998, I can tell the Committee that the amount I received was an amount roughly equivalent to the costs and expenses (including attorneys' fees) I expended over the course of the litigation-an amount that was significantly less than the decreased value at which I was forced to sell my business. In short, I was driven from the system, had my livelihood taken from me, and was paid a depressed price on the value of my business, all because Taco Bell was not prevented from acting to deny the free association of franchisees-a basic right most Americans would be surprised they don't have in their business relationships.

Ironically, my Franchise Agreements had a California choice of law. If the court had seen fit to enforce the California choice of law, I would have received the benefit of California's protection of a franchisee's right to the freedom of association. However, the court determined that Missouri law controlled my claim, and therefore, my claim for Taco Bell's denial of my right to free association was dismissed prior to trial.

My experience demonstrates the need for the legislation which is currently pending-legislation which is definitely needed to level the playing field and make explicit that which business people know (but which some courts and franchisors have refused to acknowledge): franchisors and franchisees, in their dealings with each other, need to deal with each other fairly, in good faith, and in a commercially reasonable manner. In short, the minimum standards of acceptable conduct that are represented by this legislation are sorely needed.

I thank the Committee for their time, and am hopeful that my ordeal will help the Committee in recognizing the value of this long overdue legislation.

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Risks: U.S. Oversight Hearings on the Franchise Relationship, 1999, Retaliation, Right to associate, Dissident leader, Right to associate and right to harass, Darrell Dunafon, Cannibalization of sales, Intimidation, No franchisor support, Franchisee association, independent, Franchisee advisory group (lap-dog), Encroachment (too many outlets in area), Ineffective marketing, Gouging on supplies, Secret kickbacks and rebates, Corporate store competing with franchisees, Must buy only through franchisor (tied buying), Lawsuits, group, Scum, Unfaithful servants, Corporate stores competing with franchisees, Deny expansion because of media, political or association involvement, Buying co-ops, Mediation, Drop the lawsuit and we’ll give you what you want, Settlement just covers fees, Terminate or buy off leaders, Ignore, gag, belittle and post head on pole, Scum, United States, 19990624 Darrell Dunafon

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