Tim Hortons franchisees sue corporate parent for $850M, alleging bullying and intimidation, Hollie Shaw

National Post
October 7, 2017

Tim Hortons franchisees sue corporate parent for $850M, alleging bullying and intimidation
Filed on Friday, it marks the second class action lawsuit from unhappy Tim Hortons store owners this year against their corporate parent
Hollie Shaw

In June, Tim Hortons franchisees in Canada launched a $500-million class action lawsuit alleging mismanagement of an advertising fund and rising costs.Peter J. Thompson/Postmedia

TORONTO — Tim Hortons franchisees who created an association to address their grievances with parent company Restaurant Brands International Inc. have filed an $850 million class action lawsuit against the company, alleging the fast food operator is trying to intimidate its restaurant owners and force the franchisees who formed the group out of their restaurants.

Filed on Friday, it marks the second class action lawsuit from unhappy Tim Hortons store owners this year against their corporate parent. The legal action comes after months of escalating animosity between management and franchisees who have taken the veteran brand’s Brazilian-based owners to task for allegedly passing added costs on to the store owners.

“Since the time of the corporate takeover of Tim Hortons, the relationship between Tim Hortons and its franchisees has become more adversarial than amicable,” says the statement of claim filed in Ontario Superior Court on behalf of two store owners, one in Ontario and one in Alberta, who are board members of the Great White North Franchisee Association.

The franchisees say that Restaurant Brands (RBI) and its Ontario-based Tim Hortons operator TDL Group Ltd. issued them default notices — essentially, a legal claim by a master franchisor to take away a franchisee’s restaurants — after management claimed that they and seven other owners who make up the association’s board group leaked confidential corporate information to the press. Last month, TDL issued default notices to all nine of GWNFA’s board members, eight in Canada and one in the U.S.

Restaurant Brands has said the franchisees should enlist the company’s elected franchisee board to bring their concerns to management.

The association was formed in March after franchisees grew frustrated with the elected franchisee board for failing to address their complaints. The slow-brewing fight formed in the wake of Tim Hortons takeover in late 2014 by Burger King owner 3G Capital, a Brazilian private quity firm that merged the two in late 2014 to form Restaurant Brands International. In February, Restaurant Brands bought the Popeyes Louisiana Kitchen chain for US$1.8 billion, seeking to pursue an aggressive international expansion strategy for the chicken brand as it has done with Hortons and Burger King.

The lawsuit also comes amid concerns that Tim Hortons may be weakening due to market saturation on its home turf. In the second quarter ended June 30, Tim Hortons reported the second consecutive quarter of falling same-stores sales in Canada, where it has the bulk of its locations.

Beyond questions about the use of the advertising fund, the association has accused management of offloading costs onto franchisees by eliminating regional area managers and increasing the wholesale prices that franchisees are charged.

Daniel Schwartz, chief executive officer of Restaurant Brands International.

In the suit filed Friday, the plaintiffs called those allegations false and allege that the company has been interfering with franchisees’ legal right to form an association.
“Franchisees who have sought to or have joined the association have been subject to intimidation and bullying by the defendants both in private and in public,” have been “threatened with adverse dealings by TDL and RBI,” and who are fearful of being targeted for joining the group, the suit says.

After the association was incorporated, the claim says, the defendants “acted jointly and in concert in engaging in a pattern of conduct which constitutes a breach of its duty of fair dealing and directly or indirectly seeks to interfere with, restrict, penalize, or threaten franchisees from exercising their rights to association.”

The statement of claim Friday also names Daniel Schwartz, chief executive of RBI; Sami Siddiqui, president of RBI; Andrea John, head of finance for RBI and Jon Domanko, head of legal for RBI as defendants, and is seeking $300 million in individual damages for alleged breach of duty.

In June, Tim Hortons franchisees in Canada launched a $500-million class action lawsuit alleging mismanagement of an advertising fund and rising costs.

In August, Restaurant Brands International’s Schwartz called that suit “baseless,” and said he did not want to speculate on whether or not the franchisee outcry was hurting the Tim Hortons brand.

Both proposed class actions still require certification.

On Friday, Tim Hortons said that it will not interfere with its franchisees’ rights to associate.

“We recently issued default notices to a small group of restaurant owners who we believe are deliberately releasing confidential information to the media, which harms the businesses of the thousands of hardworking restaurant owners who built this great brand,” the restaurant chain said in a statement. “This latest tactic of filing another unfounded lawsuit and sharing it with the media is yet another example of their disregard for the brand and our restaurant owners.”

David Hughes, the Alberta-based president of the Great White North Franchisee Association and one of the two plaintiffs in the case, said he believes head office issued default notices “to stop us and instill fear,” he said in an interview.

But Hughes said news of the default notices from management has boosted the association’s membership, with the franchisee group including more than 50 per cent of the Tim Hortons’ franchisees in Ontario and over 50 per cent of those in Alberta. “It’s rallied the troops.”

Tim Hortons has more than 3,500 franchised restaurants across Canada and more than 1,000 franchisees.

The mudslinging could tarnish the brand’s name on its home turf, experts say, if consumers and investors perceive that management is mistreating its franchisees or that the dispute is affecting restaurant service.

“Tim Hortons’ whole consumer base is predicated on the connection to communities and they have tried to remain authentic and local, even though they answer to a big corporation,” said Carl Boutet, a retail strategist with the Montreal-based advisory firm StudioRX. “The message that 3G is sending here is that they will do what is right for them instead of what is right for their franchisees.”

Les Stewart, an Ontario-based franchisee consultant, said the issuance of default notices to franchisees is highly unusual.

“This shows a predatory franchisor at its worst and it suggests (RBI) is taking a juvenile approach towards Canadian law,” he said. “It seems that they don’t understand the difference between a franchisee and an employee.”

It is not an easy legal road for master franchisors to take back healthy franchises, Stewart added.

“The Superior Courts understand how franchising works.”

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