By Heather Haddon 

Several dozen former McDonald's Corp. franchisees sued the burger giant, alleging it unfairly treated Black owners by selling them subpar stores and failing to support their businesses.

The lawsuit, filed Monday night in the U.S. District Court for the Northern District of Illinois, accused McDonald's of steering Black franchisees to restaurants in undesirable locations in inner-cities for years. Those restaurants were destined to fail, and often had lower sales and higher operating costs, according to the lawsuit.

The former Black franchisees say their annual average sales of $2 million were $700,000 below the national average for U.S. McDonald's owners between 2011 and 2016, according to the suit. Many of the 52 former owners from 18 states, including Georgia, Texas and New York, said they lost their businesses in the past four years.

McDonald's denied the allegations of discrimination against franchisees and said they didn't reflect the company's work as a partner in the small-business community.

"We are confident that the facts will show how committed we are to the diversity and equal opportunity of the McDonald's system, including across our franchisees, suppliers and employees," the company said in a statement Tuesday.

McDonald's Chief Executive Chris Kempczinski said in a message to U.S. employees, franchisees and suppliers Tuesday morning that he personally takes seriously any allegations that the company hasn't lived up to its values. "Based upon our review, we disagree with the claims in this lawsuit and we intend to strongly defend against it," said Mr. Kempczinski in the video message viewed by The Wall Street Journal.

According to the lawsuit, the number of Black operators in the U.S. fell to 186 this year from a high of 377 in 1998 because of what it described as the company's racial discriminatory practices. "McDonald's intentionally and covertly deprived plaintiffs of the same rights enjoyed by white franchisees," according to the complaint. The suit seeks compensatory damages for owners of $4 million to $5 million per store for the more than 200 locations they once operated.

McDonald's said the allegations that it evaluates Black franchisees differently were false. It said the total number of owners fell amid consolidation in the past several years, but that Black franchisees as a proportion of the roughly 2,000 restaurant owners remain largely unchanged. It added that the former franchisees who are suing the company operated restaurants in a variety of communities, and many retired after regularly making profits.

The lawsuit comes at a sensitive time for McDonald's, which is under pressure to address concerns about its workplace culture. In January, two Black executives who say they experienced racial discrimination filed a lawsuit against the company, allegations McDonald's has denied.

McDonald's was among the companies that pledged to boost racial diversity following the killing of George Floyd while in the custody of Minneapolis police in May. In July, Mr. Kempczinski said the company will increase racial diversity across employees, franchisees and suppliers.

McDonald's is also embroiled in a legal battle with former CEO Steve Easterbrook. The company filed a lawsuit against him seeking to recoup tens of millions of dollars it paid in severance and benefits, alleging he lied to the board about sexual relationships with employees before his ouster last November. Daniel Herr, an attorney for Mr. Easterbrook, said in a filing two weeks ago that McDonald's lawsuit was meritless and misleading. Mr. Herr didn't comment directly on Mr. Easterbrook's alleged sexual relationships within the company.

Black owners and their attorneys had been in discussion with McDonald's about negotiating a settlement after they notified the company of an impending lawsuit in June, but talks later broke down, said James Ferraro, one of the lawyers representing the franchisees. McDonald's declined to comment on any negotiations before the suit's filing.

McDonald's began selling restaurants to Black entrepreneurs 50 years ago, earlier than many other chains. In the late 1990s, after facing pressure from Black owners, company executives agreed that McDonald's needed to do more to help those owners boost their sales to come closer to national averages, according to the suit filed Tuesday. Executives at the time said progress would be made in improving underperforming Black-owned locations, the suit said.

Black owners said in the lawsuit they saw improvements in their businesses through continuing negotiations with the company, but that progress stalled in recent years.

"The trajectory of the treatment of African American owners is moving backwards," wrote Larry Tripplett, head of the National Black McDonald's Owners Association, in a letter sent to the company last year included in the complaint.

The suit accused McDonald's of providing misleading financial information to Black owners to induce them to purchase the least desirable locations and required them to invest in rebuilds or renovations within short time frames not required of white franchisees.

In one example outlined in the suit, a Black owner in the Atlanta area asked McDonald's to pay for an armed security guard and reduce his rent given the store's location. McDonald's refused, according to the suit.

Another Black owner was only given the option by McDonald's to purchase locations within Walmart Inc. stores, though these locations tend to have lower sales, according to the suit.

McDonald's said the company doesn't place franchisees into stores, and owners have the ability to select the locations they want to purchase. Most sales of restaurants occur directly between franchisees, and McDonald's makes store financial data available to owners before a purchase, the company said.

McDonald's said while some operators of all races have exited their stores amid challenges, it helps all of its franchisees try and succeed, including through financial help. Cash flow at Black-owned restaurants has been improving recently, it said.

"I'm proud of the work we've done as a company to foster entrepreneurship, economic growth and mobility," Mr. Kempczinski said in the employee message.

Write to Heather Haddon at


(END) Dow Jones Newswires

September 01, 2020 09:05 ET (13:05 GMT)

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