Do Franchisee Associations Have the Power to Block Franchisor Actions? Cheap Burgers Hang in the Balance.

Interesting situation flaring up with the flame broiled king.  Burger King franchisees are revolting against the franchisor with a lawsuit over the company's new promotion to sell $1.00 double cheeseburgers.  This situation raises a few issues and provides a glimpse into how a large franchise organization operates. First, the legal issue in the suit is whether Burger King has a right to force its franchisees to sell double cheeseburgers at $1.00.  Franchisors must be cognizant of anti-trust laws which exist to prevent companies from using their size and power and collusion to set artificial prices - aka "price fixing" - in an effort to restrain trade.  This includes an absolute bar against setting minimum prices, but allows franchisors a bit of latitude in setting maximum prices for products.  The Supreme Court requires these pricing mechanisms to be evaluated with a "rule of reason" test, and only prevents those schemes that unreasonably restrain trade.  (Is it reasonable to sell double cheeseburgers at $1.00? I can't get the image of the kid in Fast Food Nation out of my head: "there's a reason they only cost 99 cents".) This effectively gives franchisors the right to set promotional pricing as Burger King has done here.

But even if it is legal for franchisors to set promotional pricing, is it good for the system?  In large franchise systems, franchisees often form associations - independent organizations designed to allow collective action - to work with the franchisor on a number of issues relevant to the franchisees.  Here the National Franchisee Association of BK franchisees is pushing back against the franchisor on the pricing promotion:

While costs vary by location, the $1 double cheeseburger typically costs franchisees at least $1.10, said Dan Fitzpatrick, a Burger King franchisee from South Bend, Ind. who is a spokesman for the association. That includes about 55 cents for the cost of the meat, bun, cheese and toppings. The remainder typically covers expenses such as rent, royalties and worker wages.

After testing the $1 deal in markets across the country, the discounted burger went on sale nationwide last month even though franchise owners, who operate 90 percent of the company's 12,000 locations, twice rejected the product because of its expense. (emphasis added)

First of all, 55 cents for all of the ingredients in a double cheeseburger?  Yup.  Secondly, the franchisees are simply arguing that they don't want to lose money with every double cheeseburger sold.  However the courts come down on whether the lawsuit has any merit, the bottom line is that the franchisees just want more say in what the chain requires of them, and are using this collective action by the franchisee association to get it.

We'll have to watch and see whether BK will respect the wishes of its franchisees to "have it their way", but this episode at least provides a good example of the what can happen when a franchisor goes against the wishes of its franchisees.  In the mean time, enjoy your cheap burgers.

What do you think?  Is BK being unreasonable to its franchisees?