Pizza pugilists

June 1, 2004

Little Caesar Enterprise, parent company of the Detroit-based Little Caesars pizza chain, is suing 40 of its franchisees for using what it claims are unapproved pizza-related ingredients.

According to a five-count complaint filed in the U.S. District Court of Eastern Michigan in early May, the franchisees are accused of one count of trademark dilution, two counts of trademark infringement and two counts of breaching franchise agreements. In essence, Little Caesars contends those franchisees' use of food ingredients that don't meet company specs has harmed the brand irreparably.

Jeff Welsh, president of the Independent Organization of Little Caesars Franchisees, called the claims "unfounded." The lawsuit, he added, is Little Caesars' attempt to get back at franchisees who've stopped purchasing supplies from its company-owned distributorship, Blue Line; now those operators buy supplies from broadline distributor Vistar.

"To me, the foundation of the situation is that Little Caesars owns a distribution company, and if a franchisee begins purchasing from somebody other than their distribution company, they are losing revenue," Welsh said.

Welsh also called the lawsuit a surprise since franchisors typically don't use the courts as a primary punishment for franchisees deemed in default of their contracts. More often, he said, franchisees in default get a 30-day "cure period" in which to rectify any problems. Though Little Caesars'

What's Important

Little Caesars is suing 40 franchisees it claims are using sub-par pizza products and thus hurting the brand.

Franchisees in the suit claim the pizza company is punshing them for doing exactly what a 2001 lawsuit settlement said they could do: purchase products from an approved outside distributor, and not Little Caesars' distributor, Blue Line.

Little Caesars won't comment on the litigation, but the franchisees' representatives say the case has no merit given the guidelines of the 2001 settlement.

agreement provides that cure period, Welsh said the company did not exercise it.

Little Caesars' spokesperson Laura Burgess said the company doesn't comment on pending litigation.

Here we go again

The legal spat marks the first break in a hard-earned peace formed between Little Caesars and its franchisees in 2001, when the two groups settled a class-action lawsuit filed in 1998 by more than 200 franchisees (see Little Caesars settles lawsuit with franchisees and A Fair Deal for All). Among the suit's multiple complaints was a charge that Blue Line's prices were not only much higher than open market prices, but higher than prices paid by franchisees of comparable-sized pizza companies.

The judge in the case agreed, and in the settlement franchisees received the right to source supplies from Vistar, which Little Caesars approved as an outside purveyor. The settlement also required franchisees to give Blue Line a minimum of six months' notice if they planned to stop purchasing its goods.

In June of 2003, nearly two years after the settlement, the IOLCF formed the Advance Purchasing Cooperative in order to assist franchisees seeking to buy from Vistar. In that same year, Welsh said APC's 39 members—representing some 300 Little Caesars units—told Blue Line they would no longer be its customers in 2004. Welsh said the notice came well in advance of the six months required by the settlement and that Blue Line had "more than enough time to react" to the change.

In May, all 39 APC members, plus an additional franchisee who was purchasing from Vistar independently, were sued by Little Caesar Enterprises for using food products that don't meet its specifications, a claim Welsh denies.

Additionally, Michael Garner, an attorney representing the franchisees in the lawsuit, said APC members never received official product specs from Little Caesars. All were forced, therefore, to take products purchased from Blue Line to outside suppliers for replication.

"If there's some reason that they don't meet the specifications, the franchisees are perfectly happy to get the specifications and have them meet the specs," said Garner, of Dady and Garner, in Minneapolis. "But Little Caesars has not been forthcoming about the specs."

Garner, whose firm specializes in franchise law, said Little Caesars' treatment of its franchisees is the latest proof that the company is "out of step" with contemporary franchising practices. Modern franchisors view franchisees as allies rather than adversaries, he said, and both should work together to conquer the competition, not each other.

"For years Little Caesars has been selling to its franchisees at inflated prices through Blue Line," Garner said. "Nobody's done business like that for two three decades except for Little Caesars."

Venue dispute

Though Little Caesars filed its complaint in a Michigan court, Garner and Welsh said the 2001 settlement states that the court in San Antonio, Texas, (where the document was approved) maintains jurisdiction over all future actions between the parties.

Garner has submitted a motion and brief to the Michigan court informing it that Little Caesars consented in the settlement to the Texas court's jurisdiction. He now hopes the Michigan court will dismiss the case or refrain from taking action.

"This is one of the classic legal ploys that lawyers sometimes have their clients do; if you don't like one court, you go to another court," Garner said. "I view it as a situation where Little Caesars didn't like what the court in Texas was saying so they're trying another court."

Despite the lawsuit, Garner said the franchisees will continue purchasing supplies from Vistar, and that for now, it's business as usual.

"They're not losing business because of it, but it's certainly the case that they are distracted by it," he said. "Any lawsuit takes the attention of all sides away from running their businesses."

Topics: Little Caesars

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