El Pollo Loco – their slogan is “Crazy you can taste” – is popular for Mexican-style food such as tacos, burritos, enchiladas, and quesadillas and, in particular, citrus-marinated, fire-grilled chicken. The Costa Mesa, California chain operates over 460 company-owned and franchised restaurants in the southwest, and is a favorite with many locals.
In Lancaster, Calif., about 70 miles north of Los Angeles, near the Edwards Air Force Base, Michael Bryman and Janice Handler-Bryman opened their first El Pollo Loco franchise almost two decades ago. Sales boomed, thanks to an efficient operating team, skilled managers, excellent customer service – and an awful lot of salsa. In 1999, the Brymans’ El Pollo Loco store generated $1.4 million in sales; in 2014 it jumped to $3.8 million. That same year, the Brymans opened a second location in Victorville, an hour’s drive to the east.
Around the same time the Brymans were expanding their business, El Pollo Loco went public, filing its initial public offering on July 30, 2014. According to a press release, it sold 8.2 million shares its first day. With its newfound status, the company mounted an aggressive expansion campaign—opening its first restaurants in Houston and expanding further in Las Vegas, Arizona and California.
Having noticed the popularity of the Brymans’ two restaurants, El Pollo Loco decided to open corporate-owned restaurants in the market. The Brymans didn’t learn of the company’s plans through any direct communication. No one called them; no one emailed them; no one came to visit them. They heard the news secondhand, from an employee. The company’s plan called for a new location in east Lancaster, just 2.2 miles away from the Brymans’ flagship store, and another 4.4 miles away in West Lancaster.
Like most QSRs, El Pollo Loco has access to its franchisees’ financial information through the point of sale systems that record transactions, along with other data. The information proved that El Pollo Loco was a brand growing in popularity – and profits – and that the Antelope Valley was prime for new development. But, the brand’s actions showed it had little interest in offering new development opportunities to the franchisees, who had helped build the brand’s popularity and had developed relationships within the community. To the Brymans, their brand’s actions were unfair; to their lawyers, the actions represented bad faith conduct and unfair dealing.
“There was no question they intended to steal away customers,” says well known franchise attorney Robert Zarco, principal of the Miami law firm of Zarco, Einhorn, Salkowski and Brito, who represented the Brymans when the case ultimately went to trial. According to Zarco, the Brymans approached El Pollo Loco to resolve the dispute and offering various resolutions, with no response. In one meeting, the Brymans presented a PowerPoint, showing area demographics and how the two new corporate stores would negatively impact them. The presentation apparently failed to change the minds of El Pollo Loco’s corporate officers. The Brymans’ appeals fell on deaf ears. With no response from the brand, the franchisees felt that they had no choice but to file a lawsuit.
Before going to trial, they sent a final letter to El Pollo Loco CEO Steve Sather, saying that they wanted to remain good business partners and just wished to be compensated for the damages caused by the new stores, but again there was no response. So the Brymans reluctantly went to court.
“There was no discussion, no resolution. This left us no choice except to file a lawsuit, which we really didn’t want to do,” Handler-Bryman says. “We wanted to resolve it in a more beneficial manner.”
“Why would a franchisee battle the franchisor?” Zarco asks. “Franchisees have to stand up to issues like this immediately or [they] get slapped and taken advantage of.”
The Brymans case represented a test for a long-standing ruling regarding the territorial rights of a franchisee. In that case, known as Scheck v. Burger King, Zarco represented Steven A. Scheck, the owner of a Burger King restaurant in Lee, Massachusetts (near the New York border). In 1992, he sued Burger King for allowing another restaurant to be built near his. While courts have traditionally protected franchisors in their attempts to develop additional outlets wherever they see fit, this ruling by a Florida federal court protected Scheck and, in turn, franchisees rights.
For the Brymans, facing the nation’s leading fire-grilled chicken chain was truly intimidating. In fact, other El Pollo Loco franchisees were reluctant to get involved in any way. “There was a fear factor against the El Pollo franchisees and the El Pollo corporation,” Handler-Bryman says. “But we were against a wall to protect our interest and our future.”
When the 12-member jury announced their verdict – that El Pollo Loco, Inc. had breached the implied covenant of good faith and fair dealing when it improperly encroached on the Brymans’ territory – the couple felt like they had been given their life back. “We held hands and looked at each other and felt a huge sense of vindication,” Handler-Bryman says.
The decision is a precedent setting case, Zarco says. “The franchisor should have gotten the store and didn’t and this is the first time that something like this has occurred.”
Far reaching impact
The question arises, how does the California El Pollo Loco decision affect owners in a system like Dunkin’ Donuts where virtually all of the shops are franchised? According to one restaurant analyst, who can’t be identified because he is involved with a similar case, any victory for franchisees is to be celebrated.
“Contracts are very much [stacked] against franchisees everywhere, so every win is a victory. Overdevelopment and cannibalization – a reduction in sales or market share because of encroachment – is of interest to all franchises.”
The analyst also notes that in the Dunkin’ system, like many other publicly-traded restaurant companies, expansion is a way to satisfy Wall Street pressure and corporate profits. “Dunkin’ gets paid when stores are open and royalties are paid,” and he says many systems encourage growth, even if new locations are now being built closer to existing ones.
Zarco agrees, saying, “Whether it’s franchisee to franchisee or corporate versus franchisee, the principle is the same, protection against expansionary tactics.”
Even though it was a state court that ruled against El Pollo Loco, the decision will most surely impact other jurisdictions. Zarco calls this case a “persuasive precedent,” which will be cited in encroachment cases in other courts.
“Because the U.S. is so transient and has such similar laws about covenant and fair dealing in most of the states, while legally or technically a state decision is not binding on any other state court, at the same time it does have an impact,” says Zarco.
For the Brymans, there is now the question of what compensatory damage El Pollo Loco will be forced to pay. The jury’s decision, that the franchisor was liable, allows the Brymans to be awarded money for future lost sales, the loss of net income, and other earnings; the amount will be determined at a hearing to take place later this year. Already El Pollo Loco has threatened to appeal, which, for the Brymans, represents the possibility that the verdict could be erased and they could be back at square one. But the franchise owners who stood up against their franchisor are taking an optimistic tack as they focus on running their successful restaurants. They recognize the obvious tension that exists between them and the brand, but are simply taking it day to day, working as hard as they have since opening for business nearly 20 years ago.
“The reality is, when something like this happens, you have two choices: either walk away and take the hit and do nothing about it, or decide to take action,” Handler-Bryman says. “We decided to take action, and that’s something we don’t regret.”