A longtime franchisee of the Long John Silver’s chain filed a lawsuit against franchisor Yum! Brands Inc. last week, claiming it was misled into “the abject failure” of co-branding units with the A&W brand.
Treasure Isles Inc. of Lexington, Ky., a 26-unit Long John Silver’s franchisee that sought Chapter 11 bankruptcy protection Feb. 1, filed its suit Sept. 16 in U.S. Bankruptcy Court for the Eastern District of Kentucky.
“The co-branding was a failure,” said Wayne Mack, a partner with the Philadelphia law firm of Duane Morris LLP, which represents Treasure Isles.
The lawsuit alleges that the A&W and Long John Silver’s co-branding efforts — which Yum Brands said earlier this year it would limit as a growth strategy — resulted in restaurants that were not as profitable as stand-alone locations. Mack said Treasure Isles anticipates a trial date within the next nine to 12 months.
"The lawsuit does not have merit and we intend to vigorously defend our position," a representative for Yum said in an e-mailed statement to Nation’s Restaurant News.
Louisville, Ky.-based Yum Brands also franchises the Pizza Hut, Taco Bell and KFC brands.
Mack noted that part of the alleged co-branding failure rested in a series of agreements that allowed the A&W franchisee association to hold a veto vote over operational standards for the co-branded restaurants. These agreements, which stymied combo specials or cross promotions between the two brands, were not disclosed to franchisees, the lawsuit claimed.
“[Yum Brands] didn’t tell people who were buying into the co-branded restaurants, like Treasure Isles, about the full implications of the deal when they invested in the co-brands,” Mack said. The lawsuit also cites previous owners A&W Inc. and LSJ Inc.
The lawsuit claims that “because of opposition from NAWFA [the national A&W Franchisees Association] defendants did not engage in the type of promotions or advertising that Yum utilized for its other brands that it has multi-branded, such as combinations of Pizza Hut, KFC, Taco Bell and Wing Street.”
“We do not believe there was adequate disclosure,” Mack said. “People would not have invested in these things if they had known that it wasn’t Yum making the decisions but the franchisee association.”
Mack said Treasure Isles invested in seven co-branded Long John Silver’s-A&W units in the Illinois municipalities of Bloomington, Collinsville, Decatur, Litchfield, Mattoon and Springfield. The franchisee owns an additional 20 Long John Silver’s units in Illinois and four other franchised restaurants in Virginia.
The lawsuit states, “Treasure Isles invested $5.4 million in converting the seven [Long John Silver’s] restaurants into co-branded restaurants; an investment it never would have made had defendants provided it with accurate franchise offering circulars that fully and fairly described the co-branding program and the arrangements with NAWFA [the national A&W Franchisees Association].”
Treasure Isles further claimed that in 2009, Yum Brands made the decision to stop supporting A&W and Long John Silver’s co-branded restaurants and to stop offering co-branded A&W and Long John Silver’s franchises for sale.
The suit cited a Yum press release from February in which the company announced that it had “made a decision to limit multi-branding as a U.S. growth strategy going forward, particularly as it relates to the use of Long John Silver’s and A&W as multi-branding partners.”
That corporate decision led to a $26 million non-cash charge in the fourth quarter of 2009 for the impairment of goodwill related to the two restaurant brands.
Contact Ron Ruggless at [email protected].