Pizza Hut Franchisee Dispute – a slice by slice examination

You have probably read about the Pizza Hut franchisees taking their franchisor, Yum!, to Court following mandatory pricing implemented by the Franchisor whereby pizza’s had to be sold for $5 a pop. After deducting slices of that $5 for raw ingredients, labor, rent, franchise fees, and all the other costs that go into running a franchise pizza shop, the Franchisees claim all that was left for them from that $5 was, well, just the crumbs really.

While the franchisee dispute case is currently before the Court, and we don’t therefore have a decision yet, the nature of the claim nonetheless provides some valuable reminders for franchisors, as follows:

1. Be careful about changing your Operations Manual – Franchisors are, generally, entitled to update their Operations Manual and enforce the terms thereof. But in doing so, franchisors must be mindful of the terms of the franchise agreement, including implied terms, and duties owing to the franchisees.
2. Consider the needs of franchisees in making mandatory changes to the franchise system – while the $5 a pop pizza strategy may have made Pizza Hut competitive with Domino’s, and thus allowed the Franchisor to maintain its market share, the nature of the current legal proceedings indicate the mandatory changes were made without proper consideration of the franchisees and their bottom lines;
3. Actually listen when your franchisees complain – yes, you may have a contractual right to enforce certain changes, but as a franchisor you are also required to work with your franchisees and listen to what they say. The obligation of good faith in franchising relationships now forms part of the franchising code of conduct, and will apply to communications between the parties and their resultant actions;
4. Try and test proposed changes – even if something works on paper, its practical operation may be a different story. Proposed significant changes to the system or pricing structure should be tried and tested before enforced against all franchisees.
5. Don’t think you won’t get sued – just because your franchisee may have limited funds, don’t think you won’t get sued. Litigation funding is a common way for franchisees to band together to take on their franchisor, and it doesn’t take anything to complain to the ACCC.

We will be following this case carefully to see what the Court finds and, more importantly, what it means for our franchisor and franchisee clients. Even before that decision has been handed down, however, it is important you consider these points in updating or changing your Operations Manual or enforcing mandatory changes to the franchise system, to avoid ending up in court, too.