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When Is A Franchisee’s IT Obsolete?

Written by Frank Hayes
January 19th, 2011

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.


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