On May 4, Burger King’s National Franchisee Association announced to franchisees at its Town Hall meeting in Las Vegas that thirty minutes prior it had served Burger King Corp. with a lawsuit as it was kicking off its grand annual convention across the street. According to undisclosed sources, not only was Burger King Corp named in the legal action, but so were its two drink distributors, Coca Cola and Dr Pepper.

The main issue of the litigation is over Burger King’s unilateral decision, announced last April, to strip the franchisees of their right to a substantial percentage of the Restaurant Operating Funds (ROF) and appropriate those funds to Burger King’s designated use, at a loss to the franchisees. Burger King Corp’s intention is to divert to itself up to 40 percent of funds owed to the franchisees under the soft drink agreement, effective February 2010. According to one source, “That amounts to approximately $1.5 billion over the balance of the contract, and is money relied on by the franchisees, which goes right to their P&L. It’s $20,000 a year per restaurant.”

The National Franchisee Association (NFA), which has represented franchise owners since 1988, filed the two separate complaints in U.S. District Court, Southern California, as a class action on behalf of all franchise owners, whether or not they are members of the independent association. The NFA contends that the members of the class are so numerous that joining all members of the lawsuit as plaintiffs is impractical. Non-franchised restaurant owners are not part of the litigation. There are approximately 6300 Burger King restaurants in the U.S., owned by 850 franchisees, and approximately 75 percent are represented by NFA.

According to the complaints, at a collective cost of hundreds of millions of dollars, U.S. Burger King franchisees have over the past decade substantially relied on and performed under the terms of the Soft Drink Agreement (SDA), entered into between BKC and Coca-Cola and Dr Pepper, separately. The beverage companies have made semi-annual payments of the Restaurant Operating Funds (ROFs) directly to the franchise owners. Those funds are calculated per each gallon of syrup manufactured and sold by the drink companies and then sold to the franchisees to make Coke and Dr Pepper products.

The Soft Drink Agreements’ terms end on the date the restaurants have achieved a purchase commitment of 600,000,000 gallons of syrup from Coke and 100,000,000 gallons from Dr Pepper, from and after the effective date of the agreements. The suit states that based on BKC’s Uniform Franchise Offering Circular projections the SDA purchase commitment will be met in 2033.

The association asserts that they are bringing this action on behalf of the franchisees, named in the soda drink agreements as Restaurant Franchise Owners (RFOs), to preserve and protect their rights under the contracts. NFA alleges that it has standing to maintain the legal action, that the interests sought to be protected are germane to the NFA’s purpose. It declares, “The purposes of the NFA shall be to function as an association to foster and coordinate the activities of independent Burger King franchisees and to serve as the official voice of the Burger King franchisee community,”

The complaints also stress that the franchise restaurant owners are the intended third party beneficiaries of the Soft Drink Agreements, including beneficiaries of the payment of the Restaurant Operating Funds. It further explains that the franchisees also had a prominent role in the written provisions of the agreements and were involved throughout the entire negotiation process of the SDAs. NFA states that from the inception of the SDAs in 1999, and since the inception of its predecessors since at least 1990, the restaurant owners have met their obligations under Burger King’s agreements with Coke and Dr Pepper, and up until its announcement on April 6 to dramatically revise the agreements, the franchisor and drink companies have confirmed and reinforced that the franchisees are owed the SDA funds.

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