The federal government on Monday filed a civil lawsuit against the collapsed fast-casual franchise Burgerim and its founder Oren Loni, accusing them of overselling a franchise to veterans and other mostly inexperienced investors and then reneging on promised refunds.
The lawsuit, filed in a federal court in California, is a rare instance of the federal government taking action on a problem franchise in years. It follows Restaurant Business’s detailed investigation of Burgerim’s problems in 2020, followed by a $57 million fine levied against the company by the State of California—the largest fine ever levied against a franchise.
Burgerim continues to advertise the franchise opportunity on its website today.
“Defendants’ unlawful activities have harmed people across the country,” the lawsuit says. “Many franchisees find themselves crushed by substantial debt or ruined credit, in addition to the time and effort they exerted to make their entrepreneurial aspirations a reality.”
According to the lawsuit, Loni and Burgerim began selling franchises in 2016, offering the right to open a franchise for a fee between $50,000 and $70,000. Some paid $40,000. The company also targeted veterans for fees between $10,000 and $15,000.
Some 1,500 prospective operators signed onto the brand between 2016 and 2019 using what insiders described as boiler room tactics to get as many people to sign up for franchises as possible. Most of those people were unable to either get financing or a location and then were not given refunds the company promised—promises the lawsuit says were made to assuage concerns of would-be franchisees and convince them to pay their franchise fee.
Some of the operators were able to get financing backed by the U.S. Small Business Administration.
Burgerim undersold operators on the risks of opening a franchise, the lawsuit says. “Defendants make it a point to undersell the risks and difficulties of opening a franchise.” The lawsuit also says that the company promised to assist franchisees to find a location, acquire an architect and contractors and get licenses to open the restaurant.
The lawsuit also argues that Burgerim often made financial performance promises, even though the company did not make a financial performance representation on its financial disclosure document, or FDD.
The federal lawsuit says the company received “tens of millions in franchise fee payments” since 2017.
The lawsuit also says the company withheld information from its franchise disclosure document and often contradicted information sales representatives gave to prospective franchisees.
It’s uncertain exactly what the lawsuit can accomplish at this point. Loni, the company’s founder, quietly closed up shop at Burgerim in late 2019, leaving phones unanswered and mail sitting unopened in the company’s California office. An attorney for the company later told franchisees Burgerim would file for bankruptcy, but that never happened.
Loni himself fled the country and is believed to be in Israel. California ordered Burgerim to give franchisees the right to leave the brand and get a refund. The franchise’s president at the time, however, said there was no money left and that franchisees who opted for refunds can expect to receive “pennies on the dollar.”
For more details on Burgerim and its problems, check out The Fall of Burgerim.
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