David Crawford and Julie Jargon at the Wall Street Journal write that McDonald’s Corp.’s German unit is engaged in a dispute with several franchise holders who accuse the world’s largest hamburger chain of using aggressive tactics to try to force them out of their contracts.
Court records show McDonald’s hired a team of private detectives to dig up evidence of conflicts of interest against one of the franchisees.
In other instances, at least five franchisees say, McDonald’s offered corporate jobs to franchise employees in exchange for information needed to terminate franchise holders’ contracts or ordered its personnel auditors to collect evidence against them.
The restaurant operators say these methods are part of a broad campaign by McDonald’s in Germany, one of the company’s biggest markets, to reclaim stores held by franchisees and to slow unit growth in a country saturated with fast-food outlets, an allegation McDonald’s denies.
Ulrich Bissinger, senior director of McDonald’s German legal department, confirmed that the company hired detectives to monitor one franchisee.
On Wednesday, that franchisee said he would forfeit his four restaurants to McDonald’s Germany because he couldn’t afford to post a security bond of about €4 million ($5.6 million) required to continue litigation against the company.
Mr. Bissinger denied that McDonald’s was terminating franchise contracts as part of a new business strategy. Its motive, he said, was “to protect its franchise system” from partners it believes violated its contracts.
Heidi Barker, a spokeswoman at McDonald’s corporate headquarters in Oak Brook, Ill., said the use of detectives was “an extremely uncommon occurrence that does not reflect the broader practices of McDonald’s Germany nor those of McDonald’s.”
None of the things McDonald’s Germany is alleged to have done are illegal. But while German privacy officials found it had a legitimate purpose in conducting personnel audits, they asked for changes in its approach, which violated privacy regulations. Those changes have been made, the company and privacy officials say.
While it isn’t common in the restaurant industry, hiring private investigators to gather information on franchisees “is one way to confirm whether a franchisee is within the boundaries of what’s been outlined in their agreement,” said Darren Tristano, executive vice president of restaurant consulting firm Technomic Inc. More typical of the industry is the use of company auditors and secret shoppers to monitor the service, cleanliness and quality of food at fast-food restaurants, he and other industry experts say.
Investigators are “one of many tools that franchisors use to protect their brand, but my sense is [they are] used on a case-by-case basis,” says Alisa Harrison, spokeswoman for the International Franchise Association, a trade group representing both franchisees and franchisors across a range of industries, including restaurants, retailers and cleaning services.
Frankfurt franchisee Enrico Sodano said McDonald’s began trying to force him out of his four restaurants in summer 2008, by alleging breach of contract in a lawsuit.
McDonald’s initially accused Mr. Sodano of paying his employees late on at least one occasion. McDonald’s then dispatched a team of detectives to shadow him in Switzerland last year, court records show, in an attempt to prove that Mr. Sodano was a silent partner in a Zurich pizzeria.
Such an investment could constitute a violation of company rules that prohibit franchise holders from managing or putting money into competing restaurants. Mr. Sodano, a McDonald’s franchisee since 1997, denied he was a partner in the venture, and said he was sharing ideas with a friend, not discussing a new restaurant.
Mr. Bissinger, McDonald’s German legal executive, said he ordered the detectives to collect evidence on Mr. Sodano’s alleged conflict in Zurich after the franchisee postponed a court hearing to travel there.
Weeks earlier, a German court had rejected McDonald’s original bid to force him out of his restaurants, a ruling the company had appealed.
McDonald’s presented the information collected by the Zurich detectives as evidence in a lawsuit to cancel Mr. Sodano’s franchise contract, according to court records. It won a key court decision in November based in part on that evidence. Mr. Sodano appealed the ruling.
On Tuesday, Germany’s highest civilian court said Mr. Sodano would have to relinquish his restaurants to McDonald’s or put up a bond to continue with his appeal.
Mr. Sodano said Wednesday, that he plans to return his restaurants to the company by Feb. 1, and to consider legal options for obtaining compensation from the company.
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