A series of moves by Jack in the Box left a Houston franchisee with “millions” of dollars in damages in higher rent and other costs, along with weaker sales, according to a lawsuit filed in a state court in California.
In the lawsuit, filed in a California Superior Court, franchisee Gulf Coast Jacks is accusing the San Diego-based fast-food chain of a litany of issues. They include excessive rent charges, cannibalization, withheld rebates, marketing challenges, a concealed sewage agreement and royalty charges on delivery orders.
“As a direct result of this conduct,” Gulf Coast Jacks said in its lawsuit, “Plaintiffs have suffered millions of dollars in damages and seek all remedies permitted by law.”
Jack in the Box in a statement said that the lawsuit’s claims were “without merit” and that it would defend itself “vigorously.”
But it’s the latest in a series of controversies and changes at the San Diego-based company, which has spent the year under new management and faced a tough sales environment. The company has also faced an activist investor and is battling with a franchisee in Washington over a termination and a threat to close stores.
The latest lawsuit was filed by the Ghilezan Law Firm out of Los Angeles, along with the Miami firm Zarco Einhorn Salkowski, P.A. It is rooted in a pair of refranchising deals before the pandemic. In 2017, Gold Coast and its owner, Umar Ibrahim, bought 11 Jack in the Box locations in the Houston area. Ibrahim bought another 24 locations in 2018. Currently, Ibrahim owns 56 restaurants, 24 of which that are currently operated through Gold Coast.
In those deals, as with many of its refranchising deals, Jack in the Box kept control of the real estate and charged the operator a percentage of its sales as rent. Ibrahim was to pay 9.5% of 90% of the stores’ trailing 12 months’ gross sales. Some of the restaurants Ibrahim bought in 2018 also came with higher royalty rates, as high as 10%, compared with the 5% that is typical of the system, because they were higher-performing stores.
Ibrahim then acquired the right to operate additional locations throughout the Houston area.
At one store, Jack in the Box owned the real estate and then in 2018, after the sale, it sold that real estate and leased it back, while subsequently sub-leasing it to Ibrahim at a profit. That sale-leaseback led to a 23% increase in rent at that location, according to the lawsuit, and Jack in the Box did not provide any prior notice of the deal.
In 2021, Jack in the Box opened a new restaurant in Houston four miles from two of Ibrahim’s locations. One of those locations saw sales fall 13% the next year, the other’s sales fell 11%. Yet Ibrahim was required to pay higher rent and royalties at those stores, based on the stores’ previous sales. Those obligations “have become nearly impossible to meet,” the lawsuit says.
Jack in the Box in 2024 opened a store three miles from a different store owned by Ibrahim. That store’s sales fell nearly 18% the next year. Ibrahim in his lawsuit argues that Jack in the Box’s franchise disclosure documents say that the company may propose a trade area survey analysis in cases when a store is proposed within 15 miles of an existing location. That was not done in this case, the lawsuit says.
Ibrahim in his lawsuit also takes aim at royalties charged on delivery orders, a major franchisee frustration.
According to the lawsuit, Jack in the Box will charge royalties based on gross sales, including the full charge of delivery orders. DoorDash charges Jack in the Box franchisees 20%, the lawsuit says. So the operator gets $8 on a $10 delivery order. But the franchisor charges a royalty and rent based on that $10.
Franchisees typically raise prices to make up for those higher costs. That DoorDash order, in other words, might be 23% higher than the typical menu price. So Jack in the Box gets royalties and rent payments based on the full, higher price. The lawsuit argues that the practice of charging royalties for the full delivery sale violates the company’s franchise agreement and generally accepted accounting principles.
Ibrahim complained about other issues, including a sewer fix that cost him $100,000 and a change in distribution centers that cost him the same amount. The lawsuit also says that Jack in the Box is improperly withholding incentive payments from the company’s beverage provider, Coca-Cola, over the legal dispute.
The franchisee also says that Jack in the Box debited $750,000 from Ibrahim’s account to fund property taxes. The debit prevented Ibrahim from completing a 1031 exchange transaction, which cost the operator another $175,000 in capital gains taxes, the lawsuit says.
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