Jack in the Box franchisees sue the company

The franchisee association is suing the franchisor over the company's marketing fund and its remodels.
Photograph: Shutterstock

Jack in the Box’s independent franchisee association filed a lawsuit against the franchisor on Tuesday over the company’s marketing fund and remodel requirements, intensifying a growing dispute between the burger company and its operators.

The lawsuit, filed in a Los Angeles court, wants the court to give franchisees the right to audit the company’s marketing fund.

Operators are also accusing Jack in the Box of requiring them to do “unnecessary” remodels on restaurants in part to shift some maintenance costs toward the franchisees.

The lawsuit comes amid deteriorating relations between the franchisees and the San Diego-based fast-food chain. The Jack in the Box National Franchisee Association recently called for the company to replace its CEO, asked for a seat on the company’s board and filed a complaint with state regulators in California over a proposed restructuring of the company’s real estate.

The association says the lawsuit has come after two years of negotiations between Jack in the Box and its operators.

The franchisees “have on multiple occasions made not only their concerns for the direction of the company known, but also their willingness to work in union with Jack in the Box to correct its course,” Robert Zarco, the association’s attorney, said in a statement. “However, their pleas to the franchisor have been ignored.”

Brian Luscomb, spokesman for Jack in the Box, said in a response that, “The case lacks merit, and we intend to vigorously defend it fully.”

The lawsuit is the latest in a series of issues for the 2,200-unit chain, which has struggled in recent years with weak same-store sales amid intense competition in the burger space. The company has had a pair of activist investors and is reportedly eyeing a sale just months after it sold its fast-casual burrito chain, Qdoba Mexican Eats.

Jack in the Box over the years has sold the vast majority of its restaurants to franchisees, shifting from an 80% company-operated chain to a 94% franchised concept in 15 years.

Franchisees over the summer passed a rare vote of no confidence in company management and complained about Jack’s cuts in corporate overhead, which operators say has been hurting the franchisor’s service to the restaurant owners.

They’ve also complained about the lack of a chief marketing officer and what operators say is a weakening marketing plan.

Jack in the Box CEO Lenny Comma, for his part, blamed the difficult operating environment, including weak sales and rising labor costs, for operators’ consternation. “Franchisees are essentially looking for performance to improve,” he said last month. “That’s the driving force behind what you see publicly.”

One of the disputes between the company and its franchisees being highlighted in the lawsuit is the chain’s remodel program. Jack in the Box controls many of the franchisees’ leases and is therefore responsible for some maintenance costs such as roofing.

But operators say that the company is in turn requiring remodels on franchisees in part to pass on the costs of structural work to the operators. Operators want financial reimbursement for those structural costs as part of the lawsuit.

Franchisees also say that they have the right to audit the company’s marketing fund, to which they contribute a percentage of revenues, based on a 1999 settlement between Jack in the Box and the association. The association wants an annual accounting of the marketing fund.

The association says it represents 95 operators with about 2,000 restaurants.

“This is our livelihood,” Michael Norwich, chairman of the association’s board of directors, said in an interview in October. “We have more invested than any other stakeholders. We’re the ones putting our blood, sweat and tears operating restaurants. It seems logical for us to have the opportunity to be heard.”

UPDATE: This story has been updated to include a response from Jack in the Box. 

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