McDonald's, Franchisees In Germany Wage Dispute

The restaurant operators say these methods are part of a broad campaign by McDonald's in Germany, one of the company's biggest markets, to reclaim stores held by franchisees and to slow unit growth in a country saturated with fast-food outlets, an allegation McDonald's denies.

The Wall Street Journal
January 28, 2010

McDonald's, Franchisees In Germany Wage Dispute
David Crawford in Berlin and Julie Jargon in Chicago

McDonald's Corp.'s German unit is engaged in a dispute with several franchise holders who accuse the world's largest hamburger chain of using aggressive tactics to try to force them out of their contracts.

Court records show McDonald's hired a team of private detectives to dig up evidence of conflicts of interest against one of the franchisees.

In other instances, at least five franchisees say, McDonald's offered corporate jobs to franchise employees in exchange for information needed to terminate franchise holders' contracts or ordered its personnel auditors to collect evidence against them.

The restaurant operators say these methods are part of a broad campaign by McDonald's in Germany, one of the company's biggest markets, to reclaim stores held by franchisees and to slow unit growth in a country saturated with fast-food outlets, an allegation McDonald's denies.

Ulrich Bissinger, senior director of McDonald's German legal department, confirmed that the company hired detectives to monitor one franchisee.

On Wednesday, that franchisee said he would forfeit his four restaurants to McDonald's Germany because he couldn't afford to post a security bond of about €4 million ($5.6 million) required to continue litigation against the company.

Mr. Bissinger denied that McDonald's was terminating franchise contracts as part of a new business strategy. Its motive, he said, was "to protect its franchise system" from partners it believes violated its contracts.

Heidi Barker, a spokeswoman at McDonald's corporate headquarters in Oak Brook, Ill., said the use of detectives was "an extremely uncommon occurrence that does not reflect the broader practices of McDonald's Germany nor those of McDonald's."

None of the things McDonald's Germany is alleged to have done are illegal. But while German privacy officials found it had a legitimate purpose in conducting personnel audits, they asked for changes in its approach, which violated privacy regulations. Those changes have been made, the company and privacy officials say.

While it isn't common in the restaurant industry, hiring private investigators to gather information on franchisees "is one way to confirm whether a franchisee is within the boundaries of what's been outlined in their agreement," said Darren Tristano, executive vice president of restaurant consulting firm Technomic Inc. More typical of the industry is the use of company auditors and secret shoppers to monitor the service, cleanliness and quality of food at fast-food restaurants, he and other industry experts say.

Investigators are "one of many tools that franchisors use to protect their brand, but my sense is [they are] used on a case-by-case basis," says Alisa Harrison, spokeswoman for the International Franchise Association, a trade group representing both franchisees and franchisors across a range of industries, including restaurants, retailers and cleaning services.

Frankfurt franchisee Enrico Sodano said McDonald's began trying to force him out of his four restaurants in summer 2008, by alleging breach of contract in a lawsuit.

McDonald's initially accused Mr. Sodano of paying his employees late on at least one occasion. McDonald's then dispatched a team of detectives to shadow him in Switzerland last year, court records show, in an attempt to prove that Mr. Sodano was a silent partner in a Zurich pizzeria.

Such an investment could constitute a violation of company rules that prohibit franchise holders from managing or putting money into competing restaurants. Mr. Sodano, a McDonald's franchisee since 1997, denied he was a partner in the venture, and said he was sharing ideas with a friend, not discussing a new restaurant.

Mr. Bissinger, McDonald's German legal executive, said he ordered the detectives to collect evidence on Mr. Sodano's alleged conflict in Zurich after the franchisee postponed a court hearing to travel there.

Weeks earlier, a German court had rejected McDonald's original bid to force him out of his restaurants, a ruling the company had appealed.

McDonald's presented the information collected by the Zurich detectives as evidence in a lawsuit to cancel Mr. Sodano's franchise contract, according to court records. It won a key court decision in November based in part on that evidence. Mr. Sodano appealed the ruling.

On Tuesday, Germany's highest civilian court said Mr. Sodano would have to relinquish his restaurants to McDonald's or put up a bond to continue with his appeal.

Mr. Sodano said Wednesday, that he plans to return his restaurants to the company by Feb. 1, and to consider legal options for obtaining compensation from the company.

A McDonald's Germany spokesman declined to comment on the litigation.

Some German franchisees alleged spying was only one method McDonald's used to gather information on them. They said McDonald's also misused its franchise audit system to justify contract terminations.

Volker Alex, a McDonald's franchisee in Jena, Germany, and Ulrich Enzinger, a former franchise holder in Lindau, allege McDonald's ordered its restaurant personnel auditors, who generally gather information on franchise employees—such as whether they are paid appropriately—to collect evidence suitable for terminating franchise holders' contracts. The acknowledged purpose of the audits is to help franchisees improve their management. But the auditors were looking for evidence that employee paperwork wasn't up to date or that payments to workers were delayed, Messrs. Alex and Enzinger allege.

The men haven't brought suit.

McDonald's Germany's Mr. Bissinger denied the pair's assertions that McDonald's Germany was looking for evidence against them. "The audits are impartial and help strengthen restaurant management," he said.

Citing sworn statements by former franchise employees, Horst Becker, a German lawyer who advises more than two dozen McDonald's franchisees, said McDonald's has also offered management positions to staff at franchised restaurants who provided information about their employers that would help justify canceling a contract. Mr. Becker's clients include Messrs. Sodano, Alex and Enzinger.

Mr. Bissinger denied that the company used such methods. He said McDonald's hasn't offered jobs to former franchise staff in exchange for witness statements, and doesn't routinely recruit staff employed by franchisees.

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