Court calls for compromise in KFC-franchisee advertising dispute

A Delaware Chancery Court judge ruled Monday that KFC and its franchisees must work together and use existing checks and balances when deciding advertising strategy

The decision settles a year-old lawsuit sparked by franchisor-franchisee disagreements over the chain’s effort to merchandise its grilled chicken line in 2009.

The KFC National Council and Advertising Cooperative, or NCAC, representing the chain’s 650 franchisees in the United States, argued that it has the authority to develop advertising strategies and set the advertising calendar for the brand, even if it involves making changes to campaigns suggested by franchisor KFC Corp.

KFC contended that it had sole control of advertising strategy. The corporation always has held the responsibility of hiring, firing and directing KFC’s national advertising agency, which NCAC did not dispute in its lawsuit or its certificate of incorporation.

Judge Leo E. Strine Jr. ruled in favor of the franchisee group, though he stressed that the NCAC would not be able to carry out its strategies without regard to KFC’s input.

The NCAC’s governing committee — composed of 13 franchisee members and four KFC corporate members — approves by majority vote advertising plans, Strine wrote. “But KFC Corp. does not have a duty, if it acts in good faith, to develop with the national advertising agency and air commercials or adopt advertising themes that KFCC and the agency think harmful to the KFC brand.”

For example, if the NCAC demanded commercials containing a negative theme like “All Fat, All Fried, All the Time,” KFC has the right not to develop such commercials and buy airtime for them, Strine wrote.

Roger Eaton, KFC’s president, said the brand was “very pleased” that the judge affirmed KFC’s ability to check the NCAC through its control of the national advertising agency in order to protect its image.

“This lawsuit was always about retaining rights, not gaining rights,” Eaton said, “and we are pleased the court has affirmed that the franchisees do not have authority to run ads which KFC Corp. deems to be inconsistent with its brand image.”

Strine’s 65-page opinion also noted practical realities of the franchise model that necessitate the NCAC and KFC Corp. work together. Because the 650 KFC franchisees operate 4,200 units compared with the franchisor’s 900 locations, they produce the bulk of KFC’s $150 million national ad budget with their 3-percent marketing fees. But KFC Corp., a division of Louisville, Ky.-based Yum! Brands Inc., has the infrastructure and resources for menu development and directing national creative. The NCAC, which has six full-time staffers, does not.

“If the KFC brand is impaired, KFC franchisees stand to suffer as much as KFC Corp.,” Strine wrote. “The franchisees would be foolish to ignore the thoughtful plans proposed by KFC Corp., as foolish as KFC Corp. would be to ignore the views of those who sell directly to KFC customers. KFC Corp. has every opportunity to form a working majority if it proposes viable plans.”

Further, the judge wrote, “The fact that only KFC Corp.-approved products can be sold provides a bulwark against the NCAC’s power to steer the KFC brand in a direction that KFC opposes.

The settlement does not necessarily answer every possible dispute between KFC Corp. and its franchisees over the NCAC, he continued. “That reality itself, however, should induce greater, not lesser, cooperation, unless the franchisees have been sniffing the secret spice blend in closed spaces.”

According to Strine’s summation in the opinion, the NCAC and KFC Corp. had agreed initially on advertising strategies to promote the launch of Kentucky Grilled Chicken in the spring of 2009. “But the honeymoon period for Kentucky Grilled Chicken was short-lived,” the judge wrote, as sales began to decline for the product by July 2009 and franchisees voiced concerns that KFC’s grilled-chicken-focused mind-set for advertising was damaging their ability to sell their Original Recipe menu items.

Disagreements were so strong that the NCAC’s committee at first refused to approve a commercial for September 2009, because the value item featured only Grilled Chicken and not Original Recipe, according to the judge’s opinion. The committee eventually relented, but tensions mounted from there. The NCAC filed its lawsuit in January 2010.

Both the franchisee group and KFC Corp. are based in Louisville, Ky. The chain of 5,100 chicken restaurants in the United States had an 8-percent decline in domestic same-store sales for its most recent third quarter.

According to Strine’s opinion, KFC Corp. has announced plans to refranchise much of the concept to a point where only about 250 units are company-owned.

Contact Mark Brandau at [email protected]