Tim Hortons is the largest franchise system in Canada by number of franchised locations, operating with approximately 3,500 units nationally. Accordingly, any legal action relating to the business makes waves in the franchise community and serves as a warning to other franchisors.
On June 19, 2017, an Ontario-based Tim Hortons franchisee filed a $500 million class action lawsuit (the “Claim”) against its franchisor, its franchisor’s parent, the company that distributes its advertising fund, and four executives related to the companies. A copy of the issued Statement of Claim can be found at this link.
Prior to the December 2014 acquisition of the franchisor’s parent by Restaurant Brands International (“RBI”), the Plaintiff states that the relationship between the franchisor and franchisees was solid. Upon acquisition by RBI, however, the new franchisor parent began to make a number of changes in order to increase profitability.
The most substantial assertion in the Claim is the allegation that the Franchisor, in an attempt to extract more money from the franchise system, administered the Ad Fund from December 2014 to present in ways that it historically had not. According to the Claim, operational and administrative expenses not traditionally charged to the Ad Fund were charged to it and the Advisory Board, including a marketing subcommittee made up of franchisee representatives, ceased to be consulted in any meaningful way.
The Claim lists a number of specific allegations for the increase in charges to the Ad Fund:
- The Franchisor began charging the Ad Fund for employees previously paid by the Franchisor directly through its general operating revenues and whose roles or responsibilities had little or nothing to do with administering the Ad Fund.
- The Franchisor created a “Marketing Intelligence Team”, which consisted of hiring a number of analysts responsible for analyzing operating data consistent with the Franchisor’s business practices, relating little to the Ad Fund objectives, and providing no tangible benefit to the franchisees.
- The Franchisor began charging the Ad Fund for the cost of franchisee training. This expense was previously borne by the Franchisor.
- The Franchisor began charging the Ad Fund for its research and development department, including product testing and menu development. Before the takeover by RBI, only research for marketing purposes was charged to the Ad Fund.
- The Franchisor began charging the Ad Fund for the administration of a customer service and franchisee evaluation program. Before the takeover by RBI, neither program was charged to the Ad Fund.
- The Franchisor charged the Ad Fund for the promotion and listing fees of the Franchisor’s private label products sold through non-franchised channels that compete with franchisees for sales of Tim Hortons branded coffee.
- The Franchisor charged expenses of the Tim Hortons Children’s Foundation to the Ad Fund.
- The Franchisor charged the Ad Fund for expenses related to TimCards and directed the breakage to itself instead of the Ad Fund as it traditionally did.
- The Franchisor charged the Ad Fund a disproportionate amount of operational expenses in relation to the amount charged to the US-based Ad Fund.
- Additionally, the Claim alleges that the new administrative expenses charged to the Ad Fund occurred despite the dismissal of close to half of the Franchisor’s employees responsible for advertising and promotional activities.
As with any franchise, the administration of the Ad Fund will largely depend upon the specific terms governing its management in the Franchise Agreement. According to the Claim, the Franchisor’s administration of the fund in this manner violates the terms of the Franchise Agreements.
It is important to note that none of the allegations repeated here have been proven in court to be a breach of any of the Defendants’ duties to the franchisees. However, the case serves as an important reminder to franchisors to review the provisions in their franchise agreements to ensure that they are administering their ad fund in a manner consistent with their duties to their franchisees.
Andrew is an associate in Siskinds’ Franchise, Distribution, and Licensing Group. If you have questions about this article, please contact him by email or by phone at 519.660.7848.