Chain denies claim it was discriminatory, steered franchisees to subpar locations

By Heather Haddon 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 2, 2020).

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 Black former 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 video 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 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 U.S. 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 would 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.

The relationship between McDonald's and its Black franchisees became strained over the years. McDonald's began selling restaurants to Black entrepreneurs 50 years ago, earlier than many other chains. In the late 1990s, however, McDonald's came under pressure from Black owners to do more to help them boost sales----and company executives agreed, according to the suit filed Tuesday.

Tom Dentice, a former McDonald's executive vice president, wrote in a letter included in the suit that the company's philosophy on franchising had resulted in many Black owners buying stores that didn't allow for the same level of success as other operators. "I am personally tired by the lack of progress by my company," wrote Mr. Dentice in 1996 to the chairman of the National Black McDonald's Operators Association at the time.

Black owners said in the lawsuit that they saw improvements in their businesses in the years soon after a parity agreement was made between the company and franchisees around 1996. But by 2002, the National Black McDonald's Operators Association went back to the company to negotiate for more, according to a letter included in the suit, and progress further 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 Operators Association, in a letter sent to the company last year, also included in the complaint.

James Ferraro, one of the lawyers representing the franchisees, said 17 plaintiffs originally signed on to the lawsuit in February, a month after the separate suit filed by the two Black executives alleging they were demoted amid a hostile climate for Black executives and franchisees at McDonald's.

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 broke down, Mr. Ferraro said. More franchisees joined in the weeks after that, he said. McDonald's declined to comment on any negotiations before the suit's filing.

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 to 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 heather.haddon@wsj.com

 

(END) Dow Jones Newswires

September 02, 2020 02:47 ET (06:47 GMT)

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