Tim Hortons has sued large franchisees in Minnesota and Missouri this month over unpaid royalty fees, putting a pair of key markets in jeopardy at a time the company is eager to grow its business in the U.S.
The Canadian doughnut and coffee chain this week sued Show Me Hospitality LLC, operator of six units in the St. Louis area, over unpaid royalties. Show Me had signed a 40-unit development deal with Tim Hortons in 2014.
The franchisor has also sued a seven-unit operator in the Minneapolis area just 18 months after the brand entered the market with a 14-year development deal.
Tim Hortons did not respond to a request for comment on Thursday morning.
The lawsuits come as Tim Hortons continues to struggle in its efforts to make its presence felt south of the Canadian border, something it’s been trying to do for years. Changing that had been a key goal for parent company Restaurant Brands International Inc., formed in 2014 with the merger of Tim Hortons and Burger King.
Tim’s same-store sales have been roughly flat all year amid a highly competitive restaurant market in the U.S.—particularly in a coffee market where convenience stores and McDonald’s Corp. have been making big pushes to compete with Dunkin’ Donuts and Starbucks Corp.
At the same time, the lawsuits come as tension between Tim Hortons franchisees and the operator grow on both sides of the U.S.-Canada border.
Earlier this year, Canadian franchisees formed a rogue association, the Great White North Franchisee Association, and operators there have filed multiple class action lawsuits against the franchisor.
Over the summer, U.S. franchisees joined the association.
The operators complained about abuse in procurement, performance metrics, franchisee intimidation, misuse of ad fund dollars and a reduced ability to sell their stores.
The Missouri lawsuit comes after Show Me Hospitality sued the brand in July. The operator had signed its 40-unit development deal with Tim Hortons before the Burger King merger.
In that lawsuit, Show Me claims that Tim Hortons wanted the operator to “rip up” its area development agreement and replace it with a more complicated “Area Representative Agreement” that would require the operator to invest $20 million in capital. The lawsuit claims that the brand wanted the operator to develop up to 200 locations.
The lawsuit also claims that Tim Hortons “gutted” the brand’s U.S. headquarters in Dublin, Ohio, “firing most of the employees with whom Show Me Hospitality had been working, and leaving Show Me Hospitality without the support” the brand agreed to provide.
That lawsuit claims that Tim Hortons failed to communicate with the franchisee and delayed or “simply denied sites” the operator had submitted to the company. It also says that the brand’s “extreme cost cutting led to a harmful transition” and operation deficiencies.
The St. Louis operator closed two locations last month, according to local reports. And now the franchisor is suing the franchisee, saying that it has failed to make payments for royalties and advertising. Franchisees pay the franchisor a percentage of their revenue for the right to operate the brand, and pay another percentage that is to go into a fund that pays for advertising and marketing, known as the ad fund.
Similarly, Tim Hortons sued the Minneapolis operator, TM Inc., saying that it had refused to pay royalties, ad fund and opening charges for seven locations in Minnesota.