In November 2009, the National Franchisee Association (NFA), which consists of approximately 83% of all Burger King (BKC) franchisees in the United States and Canada, filed suit against BKC in Florida federal court. The NFA alleges that (1) BKC does not have the right to set maximum prices under the franchise agreement, and (2) the DCB promotion violates BKC's duty of good faith under both the express terms of the franchise agreement and the implied covenant of good faith and fair dealing under Florida law.
National Franchisee Association v. Burger King Corp., 2010 WL 2102993 (S.D.Fla. 2010), called into scrutiny BKC's systemwide one-dollar double cheeseburger (DCB) promotion. BKC’s DCB promotion mandated that all franchisees price the double cheeseburger at one dollar, and has been the subject of heated debate between BKC and its franchisees. The franchisees, by and thru the NFA, maintain that because it costs more than one dollar to produce the DCB, the promotion requires them to sell it at a loss, and could lead to bankruptcy of some franchisees. The franchisees accurately focused on the fact that BKC's marketing of the DCB promotion was funded by the franchisees' advertising contributions. BKC's decision to implement the promotion in the fall of 2009 marked the first time that it had imposed a maximum price on its franchisees without obtaining their majority consent, the franchise community having twice voted against it.
While the court agreed that it was bound to follow the previous Eleventh Circuit determination that BKC does have the right to set maximum prices under the franchise agreement, the court declined to deny the NFA standing to bring its action at the current stage of the litigation, and it ordered that the case proceed with respect to the NFA's claim that BKC's decision to impose the DCB promotion violated its contractual or implied duty of good faith. Both aspects of the court's decision are significant; however, we are focusing on the right to set maximum prices here.
At the heart of the franchisees’ complaint was the claim that BKC had wrongfully required the franchisees to sell double cheeseburgers for no more than one dollar as part of its value meal menu. The franchisees complained that they could not price the double cheeseburger at one dollar without losing money on it. The court cautioned, however, that because of the nature of the NFA's claims, it must prove, on a franchisee-wide basis, that BKC imposed the DCB promotion in bad faith, and "it remains to be seen" whether the NFA can prove such bad faith "without resort to individual determinations". The court defined motive in terms of whether the party was trying to evade its contractual duties and achieve some purpose contrary to the purpose of the contract and impermissible because “it is so harmful to the other party as to deprive it of its reasonable expectations.”
The court addressed injury to the plaintiff and claimed that the magnitude of that injury is of central importance. On the one hand, the court held that no inference of bad faith will arise simply because the franchisor’s decision has “some marginal economic impact on the plaintiff.” On the other hand, there may be an inference of bad faith when the defendant exercises discretion in a way that effectively destroys whatever benefits the plaintiff could have reasonably expected.
The court held that BKC had the authority under its franchise agreements to set maximum prices, but that, for purposes of a motion to dismiss, the NFA had asserted a “plausible” claim that BKC’s decision may not have been made in good faith. Both cases were consolidated into a single consolidated class action complaint which BKC moved to dismiss on September 22, 2010. On November 19, 2010, the court issued an order granting BKC’s motion to dismiss on all claims in the consolidated complaint with prejudice.
In the wake of this decision the question remains: Can the Franchisor Dictate Pricing? The answer to that question lies in the content of the respective franchise agreements coupled with the good faith intent of the Franchisor to promote a national campaign. Caution: The BKC decision is not a license to franchisors to set maximum pricing of key menu items.