A large Hardee’s franchisee that calls itself one of the brand’s most successful operators, though it refuses such modern ideas as third-party delivery, loyalty and dinner hours, is suing the franchisor to prevent the termination of its franchise agreements.
In the process, Paradigm Investment Group revealed a long-running dispute with the brand while revealing wounds over the chain’s frequent executive changes, falling sales, profitability, operator bankruptcies and closing stores.
The 76-unit operator has restaurants in Alabama, Mississippi, Tennessee and Florida. It was terminated earlier this year for violating system standards, notably its refusal to use digital services like third-party delivery, online ordering and loyalty, and its refusal to pay technology fees. Paradigm owes more than $200,000 in tech fees, according to court documents.
The franchisee was also terminated for refusing to stay open from 6 a.m. to 10 p.m. daily. Many of the franchisee’s stores close at 2 p.m., opting to avoid serving dinner altogether.
For brands like Hardee’s, such standards are important to maintain consistency and ensure that all restaurants follow through on modern amenities consumers have come to expect.
For instance, refusing to participate in loyalty programs may frustrate members who can’t accumulate or redeem points when they visit certain restaurants, which can damage its membership.
Yet Paradigm argues that doing so is necessary, particularly given Hardee’s weak sales and profitability. The operator also argues that franchisors repeatedly institute new fees that were not included in the original franchise documents.
“If Paradigm gave in to [Hardee’s] demands, the harm to Paradigm would be immeasurable,” the lawsuit says. “There would be no limit to the fees that HR (Hardee’s Restaurants) could subject Paradigm to, Paradigm would be abandoning its expressly granted menu-price control, and if store operating hours are imposed by HR, it would force Paradigm to ignore other system standards and destroy the unit economics of the restaurants where modified hours are critical.”
Hardee's would not comment on the lawsuit, citing a policy not to comment on ongoing litigation. Attorneys for Paradigm did not respond to a request for comment.
Hardee's challenges
Paradigm has been a franchisee of the Hardee’s system since 2000 and according to the lawsuit the franchisee has won numerous awards and is “one of the most profitable and successful operators in the Hardee’s brand.”
The chain itself has struggled for years. A typical Hardee’s location generates less than $1.2 million per year, lower than any of its primary competitors. By comparison, Burger King does $1.6 million, Wendy’s $2.1 million and McDonald’s nearly $4 million. All four have similar business models, with all three dayparts and restaurants with drive-thrus.
Hardee’s average unit volumes are lower than they were a decade ago. The chain has closed 200 U.S. locations over the past decade, including 150 over the past three years. The brand’s domestic system sales are down 12% since 2014, according to data from Restaurant Business sister company Technomic.
More recently, the brand has cycled through executives. Since 2017, the brand has had five CEOs, and turnover among other C-level executives has also been high over that period, including six chief technology officers and six CFOs. “This level of C-Suite turnover is unheard of and has been incredibly disruptive to the brand,” Paradigm said.
Lenders, meanwhile, refuse to make loans to the brand, citing Hardee’s as too risky. That included Paradigm’s own lender, BMO Harris, which in 2021 said it was no longer interested in funding Hardee’s, according to the lawsuit.
The lawsuit lays much of the blame on Roark Capital, the private-equity firm that acquired the brand in 2013. “Since Roark’s purchase of CKE, the Hardee’s brand has steadily deteriorated,” Paradigm said in its complaint.
The lawsuit argues that franchisees will default on their loans or franchise agreements, forcing them into bankruptcy. Hardee’s then takes over the stores and sells them to other franchisees, which have the same problem and also end up in bankruptcy or distressed business sales.
The termination
Paradigm has been in discussions with Hardee’s over many of the franchisee’s business practices since 2021, according to the lawsuit. The operator claims that executives would “express understanding or agreement” with the franchisee’s reasoning behind its early closures or technology refusals.
Hardee’s also certified that the operator was “in good standing under the franchise agreement” when Paradigm sought a $23 million loan under a new lender in 2022. “Every action that HR now claims supports its right to terminate Paradigm’s franchise agreement existed prior to that” certification.
But Hardee’s began taking a harder line last year, according to documents in the lawsuit.
In January, Hardee’s declared Paradigm in default of its franchise agreements. The letter cited “numerous failures to comply with franchise agreements.” Hardee’s sent a notice to the franchisee last year, warning of the violations.
The franchisee argues that it should not be forced to pay a fee for technology it does not use, particularly when using technology like third-party delivery would hurt its profitability. It also notes that the fees were not disclosed in the franchise agreement. Instead, they were implemented through amendments to the company’s operating manual.
Paradigm cited FTC staff guidance issued last year, which said that fees not included in the franchise disclosure document or franchise agreement could be “an unfair act or practice” in violation of federal regulations.
The original operating manual did include a mandate on operating hours, but the franchisee argues that Hardee’s traditionally waived this requirement due to differing regional operations. This has been particularly true in recent years as labor shortages made it difficult to staff restaurants that long.
Paradigm argues that Hardee’s challenges have made it necessary to operate with fewer hours to ensure the restaurants are profitable. And the lawsuit argues that Hardee’s own company restaurants often do not comply with that mandate.
“Modified hours are not only necessary,” it adds, “they are often the only option for restaurant survivability.”
UPDATE: This story has been updated to add a response from Hardee's.
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