U.S. franchisees have again sued Tim Hortons, this time accusing the brand of “price gouging” operators on supplies they’re required to buy to run their restaurants.
The Great White North Franchisee Association-USA filed the lawsuit in a federal court in Florida against Tim Hortons and its parent company, Restaurant Brands International (RBI), among others.
The lawsuit argues that Tim Hortons began taking more rebates from suppliers as the brand struggled in the U.S., which led to considerably higher prices for food and other supplies.
Tim Hortons said the federal lawsuit is similar to a lawsuit filed in a Florida state court but was dismissed a few months ago. "This lawsuit was filed by the same group that recently tried to pursue a case in Florida state court," Mary Lowe, head of communications for Tim Hortons, said in a statement emailed on Friday afternoon. "Today's filing appears to be a second attempt to pursue similar claims with a different court."
Tim Hortons has lost traction south of the Canadian border. In 2014, when the brand merged with Burger King to create Restaurant Brands International, the chain operated 883 locations in the U.S.
By the end of 2019, according to data from Restaurant Business sister company Technomic, the number of U.S. locations had fallen to 715. In other words, nearly 1 out of every 5 Tim Hortons locations have closed over the past five years.
Many of the locations that closed more recently were in Minnesota, Ohio and Michigan, markets Tims considered important for the chain’s U.S. future.
In their lawsuit against the company, franchisees say Tim Hortons used a “fraudulent strategy to convert the Tim Hortons franchise system into a supply chain business disguised as a franchise system.”
“Their earnings on supplies sold to franchisees is so much greater than what franchisees are paying,” said Adam Wasch, managing partner of the Florida law firm Wasch Raines and one of the attorneys for the association. “They’ve shifted their focus on how to maximize revenues and profits in the supply chain business while the franchise business is tanking.”
The lawsuit says the company limited the suppliers that franchisees could use to sole suppliers or those affiliated with RBI, the Canadian parent company of Tim Hortons, Burger King and Popeyes Louisiana Kitchen.
Suppliers paid rebates to RBI, helping the company reap “outrageous price gouging [of] U.S. franchisees on all goods necessary to operate Tim Hortons restaurants.”
Rebates are common in the restaurant and franchising business. Franchisors often ask suppliers to pay rebates in exchange for their business, and the supplier will charge higher prices to make up for the payments. These rebates are typically split between the brand and the operators.
The lawsuit argues that these rebates led suppliers to charge excessive prices for goods and services, which hammered franchisees’ profits.
“RBI’s illegal and fraudulent scheme exploits the overwhelming economic power it holds over the association’s franchisee members by creating a captive artificial consumer market, comprised of all of the U.S. Tim Hortons franchisees,” the lawsuit says.
The lawsuit argues that Tim Hortons conceals its relationship with suppliers.
The association also accused the brand of misappropriating marketing fees and hurting the value of franchisees’ restaurants with new requirements in the franchise agreements operators are required to sign when they renew.
Wasch said that marketing funds are “not being used for the benefit of the franchise system in the U.S.”
Tim Hortons’ new franchise agreement requires operators to sell restaurants back to the franchisor, but only for the depreciated value of the assets in the restaurants, like the building and equipment. Wasch says that depresses values of restaurants and reduces how much equity operators have in their business.
“They’re left with essentially nothing,” he said.
The lawsuit is only the latest legal action between Tim Hortons and its U.S. franchisees. The association sued the company in 2018 and amended that complaint last year, when it accused the coffee and doughnut brand of forcing association members out of their stores in a bid to intimidate the group.
UPDATE: This story has been updated to include comments from the franchise association's attorney. It has also been updated to include a response from Tim Hortons.