BK Stung By $45M Encroachment Judgment For Australian Licensee

By Amy Zuber

Nation's Restuarant News, The Newsweekly of the Foodservice Industry, Vol. 33. No. 48, November 29, 1999
 

On the heels of Burger King's skirmish with high-profile minority franchisee La-Van Hawkins, who went public about his desire to terminate his relationship with the burger chain, the company also found itself on the losing end of a court ruling in a battle with one of its largest overseas operators.

An Australian court ordered Burger King Corp. to pay $45 million to franchisee Hungry Jack's Ltd. for lost profits from delayed restaurant openings, inability to sell third-party franchises, and cannibalization by the chain's corporate-owned locations.  The Miami-based chain has until early December to appeal the case or pay the fine.

"The court's ruling was very lengthy with 411 pages," said Rob Doughty, a Burger King spokesman.  "Our lawyers are currently evaluating and going over it to determine our options, including grounds for appeal."

Sidney-based Hungry Jack's, which operates more than 150 Burger King-clone franchises in Australia under the Hungry Jack's brand, joined the BK system in 1971.  In 1990, Burger King signed a new agreement to allow Hungry Jack's to sign up third-party franchisees.

But Miami lawyer Robert Zarco, who was part of the legal team that defended Hungry Jack's and its owner, Jack Cowin, said once Burger King officials realized the franchisee had such a lucrative market in Australia, the company began looking for ways to take over the operations and thwart the franchisee's development plans.

Burger King attempted to terminate Hungry Jack's contract on the grounds that the Australian franchisee was not opening new units as fast as was required under the agreement.  In response, Hungry Jack's sued Burger King for breach of contract, alleging that the chain had no legal grounds for terminating the contract.

Court documents revealed that Burger King had been receiving confidential insider financial reports from a Hungry Jack's senior executive named "J. Montgomery."  The judge ruled that "This was both thoroughly discreditable conduct on the part of Mr. Montgomery and reflected no credit on the [BK] officers willing to receive and act on the information."

Regardless of whether Burger King appeals the judgement, the case serves as a warning to other U.S. restaurant chains with aggressive international growth plans, according to Zarco, who also has represented franchisees of such chains as McDonald's, Taco Bell and Subway.  He said foodservice companies that expand overseas too rapidly often face problems related to encroachment issues, as well as a lack of adequate support for their franchisees.

"They often don't have the necessary management infrastructure in those countries to support the franchisees," Zarco said. "I have seen a trend where the problems that existed in the U.S. in the last 10 years are now surfacing internationally."

Zarco added: "Burger King started putting competing units in close proximity to Hungry Jack's, so we argued encroachment.  Although this is Australian law, I think American franchisees can use this decision as a vehicle to persuade the U.S. court system to find damages for cannibalism and encroachment."

But Susan Kezios, president of the American Franchisee Association, said the Australian court's decision does not have a direct impact on the U.S. franchisees.  "The same set of facts might have had a different outcome in the U.S.," she said.  While litigation against franchisors is increasing, franchisees typically do not win court battles in the United States, she said, adding that her association is trying to convince Congress to draft new laws governing franchising.