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McDonald’s Puerto Rican Franchisees Say It Broke FTC Rule

McDonald’s Corp. (MCD) franchisees in Puerto Rico say the company broke a Federal Trade Commission rule by selling its restaurants there to Latin American restaurant operator Arcos Dorados Holdings Inc. (ARCO)

McDonald’s, the world’s biggest restaurant chain by sales, is in violation of the FTC’s Franchise Rule, which requires disclosure of material information to franchisees, according to a complaint filed with the FTC yesterday on behalf of seven franchisees in Puerto Rico. When the company sold its Puerto Rican stores and the franchising rights to that market in 2007, it breached its franchise agreement, according to the complaint.

The granting of McDonald’s restaurants to nonlocal individuals in Puerto Rico runs contrary to the original franchise agreement signed with the operators, according to the complaint. The company also isn’t conducting sufficient sales analysis before new McDonald’s open, leading to locations becoming crowded with too many restaurants, the group alleges.

Arcos Dorados, based in Buenos Aires, is both the franchiser and a competitor to other store owners in Puerto Rico, hurting their sales by putting new locations near existing sites and selling different menu items, according to the complaint.

‘Bait and Switch’

“McDonald’s did a bait and switch” by changing the franchise system in Puerto Rico so that Arcos Dorados is in control, said Pedro Jimenez, a lawyer at Adsuar Muniz Goyco Seda & Perez-Ochoa who is representing the seven individual franchisees in Puerto Rico. “Now franchisees feel they are second-class operators.”

Lisa McComb, a McDonald’s spokeswoman, and Daniel Schleiniger, an Arcos Dorados representative, didn’t immediately respond to requests for comment. Frank Dorman, a spokesman for the FTC, declined to comment.

The franchisees sued McDonald’s in 2007 in the Puerto Rico Court of First Instance in San Juan for violating a law that limits the grounds under which a contract may be terminated. That case is ongoing. The plaintiffs are seeking damages of $66.7 million plus attorney’s fees and also want to stop Arcos Dorados from opening stores within a 3-mile (4.8-kilometer) radius of a franchisee’s restaurant. Sales at the franchisees’ stores have dropped and they’re losing customers as Arcos Dorados opens more restaurants, they say.

The FTC complaint adds to McDonald’s headaches in the U.S., where it’s facing a prolonged sales slump. The Oak Brook, Illinois-based company also has drawn protests this year from labor activists, who want its restaurants to raise wages.

Largest Franchisee

Arcos Dorados is the largest McDonald’s franchisee, with more than 2,000 stores. It has the exclusive right to own, operate and grant franchises of McDonald’s locations in 20 Latin American and Caribbean countries and territories, including Argentina, Brazil, Chile, Mexico, Peru, Puerto Rico and St. Thomas. The company completed a U.S. initial public offering in 2011.

The FTC rule requires companies to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers and other franchisees. If the commission brings an enforcement action for a rule violation, it could seek civil penalties of up to $16,000 per infraction.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net; Nick Turner at nturner7@bloomberg.net Nick Turner, John Lear

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