Local IHOP franchisee initiates class action against company

An International House of Pancakes franchisee in Sacramento has filed a class action alleging the company wrongly charges him $740 per week in lease fees for equipment he bought himself.

August 15, 2010

Local IHOP franchisee initiates class action against company

An International House of Pancakes franchisee in Sacramento has filed a class action alleging the company wrongly charges him $740 per week in lease fees for equipment he bought himself.

Sultan Hameed, who runs an IHOP restaurant on Northgate Boulevard, also alleges the company has failed to account for advertising money he paid and didn’t provide monetary support promised if an IHOP competitor siphons off business and property taxes increase.

The lawsuit, filed July 2 in Sacramento County Superior Court, seeks class action status, claiming other franchisees have encountered similar problems. It alleges breach of contract, violation of California’s unfair competition law, accounting violations and unjust enrichment.

Plaintiffs seek a court order to halt the unfair business practices, restitution and attorneys’ fees.

Mark Ellis, the Sacramento attorney who filed the lawsuit, estimates his client is out an amount well into six figures.

“Just on paying for equipment he already owns, he’s probably owed reimbursement well over $300,000 to $400,000,” Ellis said. “It’s crazy. Small businesses always run on a narrow margin and having to pay for something they don’t legally (have to) cover can mean the difference between success and failure.”

Terms in the franchise agreement Hameed signed appear similar to those signed by other IHOP franchisees, Ellis added. Further investigation in preparation for trial will determine if more than 1,300 IHOP franchises nationwide have similar problems.

IHOP spokeswoman Jennifer Pendergrass declined comment, saying the company does not talk about pending litigation. Repeated attempts to reach Hameed at his restaurant were unsuccessful.

Hameed signed a franchise agreement, a sublease to rent the property on Northgate Boulevard and an equipment lease with IHOP in July 1998, court documents show.

The lawsuit alleges:

  • The franchise agreement requires franchisees to refurbish the restaurant to keep up with corporate standards at least every five years at their own expense. Hameed performed at least two remodels, replacing virtually all the equipment, but IHOP continues to enforce an equipment lease of $740 per week.
  • Hameed made regular weekly contributions equal to 1 percent of gross sales to IHOP for advertising services, but has not received proper documentation from the company on how the funds were spent.
  • Hameed is entitled to, but has not been paid, reimbursement from IHOP’s Development Impact Assistance Program that agrees to compensate franchisees if sales decline more than 3 percent after a competing IHOP is opened in the area.
  • Even though the franchise agreement states sublease obligations can’t be increased as a result of a sale or sale/lease-back transaction for the property, Hameed’s real estate property taxes have more than doubled since the sale of the property in March 2008.

A bias by franchising companies for owners who own multiple sites versus independent, one-shop operations could be an issue. Grouping is a trend across the country.

“A lot of franchisors allow investors to come in and buy a region,” said Andrew Rogerson, a local business transfer specialist with Clearwater, Fla.-based Murphy Business & Financial Corp. That’s attractive, Rogerson added, because investors can control quality and spread hiring costs across more than one establishment.

“Somebody with a large corporate severance package and management skills can be very good at running a franchise,” Rogerson said. “Someone with a small business, who is working their way up, has a very different skill set.”

In March 2009, IHOP announced plans to build a new IHOP in West Sacramento. Hameed opposed the plan on the grounds it would negatively affect his business, court documents allege. He asked for a development impact study and assistance, but the request was denied.

A different IHOP franchisee, also located near the new restaurant, was automatically issued an impact study and allowed to participate in the development assistance program, the lawsuit alleges.

“Plaintiff is informed and believes that because he owns a smaller franchise, he was discriminated against and denied eligibility (for the assistance),” court documents state.


Brought to you by WikidFranchise.org

Risks: Advertising fund use disagreements, Bad faith and unfair dealings, Breach of contract, Different deals for different dealers, Encroachment (too many outlets put in territory), Forced to spend on renovations, Lawsuits, class action, Unjust enrichment, United States, 20100815 Local ihop

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License