By Nicole Harris in Atlanta and Mike France in New York
They're suing franchisers to gain power--and winning
When Meineke Discount Muffler Shops Inc. used to hit up franchisee Mark J. Zuckerman for 10% of his sales to help pay for marketing, he expected to see top-notch ads. But in 1990, the Trumbull (Conn.) resident started noticing that newspaper advertising was waning and TV spots were appearing after midnight. Zuckerman and 19 other franchisees began asking questions. To their shock, they eventually discovered that the Charlotte (N.C.) franchiser (a division of British-based GKN PLC) had been pocketing 15% of the communal ad funds--while Zuckerman's group thought it was taking only 2%. From 1986 to 1996, Meineke's take totaled $17 million.
In 1993, the franchisees sued for this and other acts of alleged bad faith. And on Dec. 18, a jury in federal district court in North Carolina awarded all of the chain's franchisees $347 million--the biggest verdict in the history of franchising. The penalty could ultimately hit $741 million, if the company is also found guilty of violating North Carolina trade practices law. Meineke says that its actions were authorized by the company's franchising contracts and that it will appeal.
The suit has thrown a scare into the massive franchising industry, which accounts for nearly $1 trillion in annual sales. Applying a groundbreaking legal standard to Meineke, Judge Robert D. Potter said that the company had a fiduciary duty to ensure that franchisees' funds were properly managed. If more judges were to rule along the same lines, franchisers warn they would be reduced to little more than babysitters for their franchisees. ''You wouldn't be in business for yourself. You would essentially be in business for the franchisee,'' grumbles Joyce G. Mazero, a Dallas attorney representing franchisers..........
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