Have you seen The Founder¸ a recent film exploring how Ray Kroc transformed a successful California burger stand into what for decades was the world’s largest and most successful franchised restaurant chain?
A key scene in the movie comes when Kroc (played by Michael Keaton) realizes the ultimate value of franchising the McDonald’s restaurant concept comes not from earning a royalty on each sale of a hamburger or milk shake, but from owning the real estate on which the retail sales will be made.
Fast forward to 2017. The Service Employees International Union (“SEIU”) has called upon state officials in Illinois and California to investigate whether McDonald’s Corporation has been violating federal and state franchise disclosure laws by hiding the formula it uses to determine rent it charges to its franchisees for operating their McDonald’s® on land owned by the franchisor.
Among the disclosures mandated by the FTC Franchise Rule, Item 6 entitled “Other Fees” requires the franchisor (the party selling franchises) to disclose “all other fees [beyond the “Initial Fees” that are paid to acquire a franchise] that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party” during the term of the franchise agreement. (See 16 CFR §436.5(f)). For a company such as McDonald’s that requires its franchisees to rent the franchised location from McDonald’s, Item 6 requires accurate disclosure of the way McDonald’s will calculate the rent.
The SEIU is asking California and Illinois regulators to sanction McDonald’s for not accurately disclosing the formula used to set rents – a situation that, according to the SEIU, results in McDonald’s franchisees paying higher than industry average costs for possession of their premises. Whether the SEIU will be proven correct, or whether McDonald’s franchisees will act on these allegations by bringing claims against McDonald’s remains to be seen.
In assessing these allegations, some important legal principles come into play. As Carmen D. Caruso Law Firm recently established in Dissette vs. Pie Five, a franchisor cannot defend against an alleged disclosure violation merely by arguing its disclosure was literally true. As a matter of law, a “seller has a duty to disclose facts which materially affect the value or desirability of the property, are known or accessible only to him, and that he knows are not known or accessible to a diligent buyer.” Wash. Courte Condo. Ass’n-Four v. Wash.-Golf Corp., 267 Ill. App. 3d 790, 815, (1st Dist. 1994). Likewise, whether a representation is materially misleading depends on “the sense in which it is reasonably understood” given “all the facts and circumstances of a particular case” (Schrager v. North Community Bank, 328 Ill. App. 3d 696, 704 (1st Dist. 2002)); and “’a half-truth is sometimes more misleading than an outright lie.’” Thomas A. Schutz Co. v. Eng’g & Testing Servs., 1997 U.S. Dist. LEXIS 10973, at *11-12 (N.D. Ill. July 22, 1997).
Carmen D. Caruso Law Firm invites all franchisees who suspect possible disclosure violations or other wrongful conduct to contact us for a confidential assessment of their case.