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Franchisee sues Tim Hortons for $500M over ad fund

Lawsuit claims company misused marketing funds

A Tim Hortons franchisee has sued the company and its parent, Restaurant Brands International Inc., for $500 million in damages, claiming that the franchisor began misusing ad fund revenue shortly after the 2014 merger between Tim Hortons and Burger King.

In a statement of claim filed this week in a Canadian court, a franchisee called 1523428 Ontario Inc. alleged that Tim Hortons increased charges for administrative costs after the merger. Charges rose even though the company let go of nearly half of the employees responsible for promotional activities, whose compensation was previously charged to the fund.

“Since its acquisition of [Tim Hortons], RBI has used various strategies to extract more money out of the Tim Hortons system at the expense of franchisees,” according to the statement.

In a statement, Tim Hortons said the issues were risen only by a “few restaurant owners.”

“It is very disappointing that a few restaurant owners have opted to take actions against us when our focus remains on protecting and enhancing the brand,” the company said. “We vehemently disagree with and deny all the allegations that have been made about our business and the brand. We remain committed to working together with our Restaurant Owners to ensure the incredible Tim Hortons brand continues to be strong for many years to come.”

The suit is the latest sign of strife within Tim Hortons’ Canadian system since the merger, which led to the creation of Restaurant Brands International.

Earlier this year, franchisees formed the Great White North Franchisee Association and hired an executive director, while citing several issues they said have hurt their ability to serve customers.

“The claim was filed because RBI failed to adequately respond to legitimate questions about its use of advertising funds collected from Tim Hortons’ franchisees,” the association said in a statement. “Litigation was not our preferred option. It became the default option due to RBI’s lack of transparency and unwillingness to answer important questions put to it in writing.”

The plaintiff is a franchisee that operates in Toronto. The lawsuit seeks status as a class action.

In addition to royalty payments, Tim Hortons franchisees pay 3.5 percent of revenue into a fund earmarked for advertising and marketing. Use and control of the fund can frequently cause strife between a franchisor and franchisees.

According to the lawsuit, the ad fund was historically administered with input from Tim Hortons’ franchisee advisory board. The fund’s unofficial target was to spend 7 percent of franchisee contributions on administrative expenses, mostly to administer the fund.

After the merger, however, Tim Hortons increased administrative charges to the ad fund and charged the fund for employees who were previously paid through operating revenues, the lawsuit stated. Those workers “had little or nothing to do with the ad fund.” 

Tim Hortons used the ad fund to pay for customer service representatives, operations support workers and employees in regional offices who support workers responsible for running the fund, according to the lawsuit. 

In addition, the ad fund was charged for several other programs, such as private label promotion, training, research and development, debit card expenses and funds related to the Tim Hortons Children’s Foundation.

Tim Hortons’ “funneling of money out of the ad fund, following the RBI takeover, is in breach of the franchise agreements,” the lawsuit said.

In February, Restaurant Brands International acquired Popeyes Louisiana Kitchen Inc. for $1.8 billion.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

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