The merger between Tim Hortons, Canada’s largest homegrown chain restaurant, and its new parent company, U.S.-based Restaurant Brands International (RBI) is off to a rocky start: A group of Tim Hortons franchisees has filed a class-action lawsuit against RBI, which also owns Burger King and Popeyes, alleging breach of contract.
Approximately half of all U.S. franchisees have now joined the fight, forming an alliance to lobby for corporate improvements improvements, the St. Louis Post-Dispatch reports. Attorneys representing the U.S. group say “the stores are lacking profitability and the franchisees feel that Tim Hortons is not helping them."
According to the Financial Post, the Canadian lawsuit claims RBI has been collecting money from Tim Hortons’ franchisees that is meant to go into an advertising fund, but instead of using it for marketing Tim Hortons, the company used it to line RBI’s coffers or for other expenses unrelated to Tim Hortons.
“Since the acquisition of TDL, RBI has used various strategies to extract more money out of the Tim Hortons franchise system at the expense of franchisees,” the lawsuit filed Monday in the Ontario Superior Court of Justice reads. “One such strategy has been to use the Ad Fund in ways in which the fund had never historically been used or permitted... Contrary to the franchise agreement... RBI has funneled this money to itself, TDL and the individual defendants at the wrongful expense of the franchisees.”
Tim Hortons’ franchisees contribute 3.5 percent of their gross sales to the Ad Fund, which is meant to be used for promotions, advertisements, and marketing, according to the Toronto Star. There is now around $700 million in the fund, according to the suit.
RBI, Tim Hortons corporate, and RBI CEO Daniel Schwartz are listed as defendants in the proposed class action.
The franchisees are seeking $500 million in damages for breach of contract.
“We vehemently disagree with and deny all the allegations,” RBI said in a statement. The company previously issued warnings to franchisees for speaking to financial analysts and the press, calling the spread of “misinformation,” or what franchisees might call complaints against their parent company, a possible violation of RBI’s confidentiality agreement.
This isn’t the first sign of trouble in burger-doughnut paradise: Not long after Burger King parent company RBI bought Tim Hortons for $1.8 billion in 2014 Tim Hortons franchisees started getting restless. Earlier this year, frustrated by the new company structure, they organized and hired legal representation.
Though profits are up for the Canadian chain, worker discontent is up. Schwartz, a self-described millennial, is a controversial CEO whose focus on efficiency, cost-cutting, and passing the buck on to franchisees is unparalleled. This may please investors, but it continues to rankle franchisees across the company who complain of higher product costs and “a culture that no longer lets them solve problems with a phone call to head office,” according to the Post.
After cutting RBI’s corporate headcount down to just 1,200 from 38,884 — mainly by selling off company-owned restaurants so more workers now report to franchise owners — Schwartz “effectively pushed costs for remodels onto operators,” according to Business Insider.
In explaining away his strategy of dodging costs, Schwartz along with his chief financial officer Joshua Kobza say they want employees to “think of themselves as owners... We want everyone to act as if they are running their own small business.”
This class-action lawsuit is what happens when those small business owners grow displeased with their corporate King.
Update: This story originally ran on June 20 and has been updated to include information about U.S. franchisees.
• Tim Hortons franchisees file lawsuit against Restaurant Brands for breach of contract [Financial Post]
• Tim Hortons' U.S. Franchisees Form Alliance as Tensions Boil [St. Louis Post-Dispatch]
• Burger King Acquires Tim Hortons for $11.4 Billion [E]