When Is A Franchisee's IT Obsolete?

It just got a lot tougher for franchise chains to crack the whip when it comes to IT mandates. A Florida judge has said Burger King can't immediately shut down several franchisee stores for missing a deadline to purchase new POS systems. The $2.5 billion chain will now have to go though more legal proceedings and possibly a trial. Or it can settle what has become the most visible case in a set of messy disputes over IT upgrades that should have been installed by the end of 2009.

Burger King hoped to get quick legal leverage by canceling its franchise agreement with Al Cabrera, one of several franchisees who Burger King sued last year over the tardy IT upgrades. But Burger King's franchise agreement wasn't really written with IT in mind. The contract requirements for replacing obsolete equipment were written for broilers and refrigerators, not POS units and routers. That leaves open the question of whether Cabrera's old POS units even qualify as "obsolete" under the franchise agreement—and whether Burger King can down shut the franchisee.

"Clearly, the new POS system makes it easier for [Burger King] to monitor royalty payments and to audit sales," Magistrate Judge Edwin G. Torres wrote. "However, whether this ability makes the older POS system 'obsolete' is a much closer and debatable question that should be resolved on the full record and at trial if necessary. In today's rapidly growing world of technology, new creative inventions are uncovered on [a] nearly daily basis. Each new invention, although it may be a clear improvement over the older version of the same product, does not necessarily make the older product 'obsolete.'"

Uh oh. A judge is now trying to decide what retail technology qualifies as obsolete? It's already hard enough to get franchisees to toe the line when it comes to IT mandates from a chain. The threat of swift legal action is the biggest weapon in a franchisor's enforcement arsenal. If a franchisor's IT department can't dictate technical obsolescence—and back it up with a credible threat—how can any IT mandate stick?

Burger King is now rewriting its franchise agreement to make it even clearer that if a franchisee doesn't make required IT changes in a timely way, the franchisee is in default. But that won't help in the current case.

You'd think that agreement revision wouldn't have been necessary. After all, Burger King laid out a timeline in April 2008 for franchisees to upgrade their POS systems. Units more than 10 years old would have to be replaced by the end of 2009, and all POS units would have to be replaced by the end of 2013. That seems pretty clear. And when hundreds of Burger King stores didn't meet the first deadline a year ago, the chain sued those franchisees.

Most of those lawsuits have since been settled—but not the one over Cabrera's 10 Miami-area Burger King stores. Cabrera, who once was one of Burger King's largest franchisees, didn't get the new POS systems installed until a few months after the deadline.

That's right—this is a lawsuit over an IT problem that has since been fixed.

That's right—this is a lawsuit over an IT problem that has since been fixed. In that respect, Burger King's legal threat has already gotten the desired result.

But Burger King is still trying to get a court order to shut down the 10 restaurants. And, as is so often the case in lawsuits, that attempt has turned out to be a risky road. First, six of Cabrera's stores had to be removed from the shutdown list because there's no clear evidence that their POS units were more than 10 years old—which would mean they hadn't violated the Burger King upgrade mandate.

Then Burger King couldn't offer direct evidence that the remaining four stores had POS systems that were at least 10 years old. And now, after almost a year of preliminary wrangling, Burger King has failed to convince the judge that a technical mandate to replace POS systems is the same as declaring those units "obsolete" under the terms of the contract as it was originally written.

That may mean it's time for all franchisors to consider sharpening up the language of their franchise agreements. No, that's not IT's department. But it's much easier to demonstrate that kitchen equipment is obsolete or faulty than it is to show that IT equipment falls into that category. If a broiler can't be used to produce products on the chain's standard menu, it's obviously obsolete, and the chain can credibly threaten to put the franchisee out of business.

But if a POS terminal works fine and can sell anything on the menu but doesn't fit into the franchise's IT roadmap, it's less obvious that a judge or jury will think it's obsolete—and that's going to make the nuclear option harder to use.

Of course, Burger King has another problem too: It may want to make an example of a franchisee who dragged his feet on a required IT upgrade. But to shut down that franchisee's stores with an injunction requires showing that Burger King has been irreparably harmed.

That's a tough sell. After all, the franchisee did install the new POS units only a few months behind schedule and has actually been using other technology required by Burger King's roadmap years ahead of schedule. No one is suggesting that the franchisee isn't following Burger King's food-preparation or service procedures, or that there are health or safety issues, or that the franchisee isn't able to offer the full Burger King menu, as some recent Burger King lawsuits against other franchisees have alleged.

No, this one's just about IT—and it's about an IT problem that has been fixed.

"Other than the alleged breach of the Franchise Agreement related to the untimely compliance with the new POS policy that has already been cured, it appears that Defendant's restaurants continue to operate properly with no harm whatsoever to the goodwill of the Burger King brand," the judge wrote. "On the other hand, an injunction would essentially put Defendant out of business and cause hundreds of people to lose their jobs. Thus, in light of the fact that this case is a very close call on the merits, balance of hardships and public policy weigh against injunctive relief."

Translation: "You want me to put him out of business for this? Sorry, Burger King, you'll have to convince a jury to do that."