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Puerto Rican McDonalds Franchisees Claim HQ Hung Them Out to Dry

Michael Kourabas
| Tuesday July 15th, 2014 | 21 Comments

13988001407_483efe4574_zA group of McDonald’s franchise operators in Puerto Rico is alleging that the fast food giant violated federal law and a Federal Trade Commission (FTC) rule that regulates the behavior of franchisors.

According to the Puerto Rican franchisees (the Plaintiffs), McDonald’s first violated the Franchise Rule when it sold its Latin American franchises — and, consequently, McDonald’s franchise rights in the Puerto Rican market — to the Latin American company, Arcos Dorados, in 2007.  Subsequent actions by Arcos Dorados in Puerto Rico have caused additional harm to the Plaintiffs, in further violation of federal law.

Plaintiffs allege the various harms and violations have occurred.  Specifically, they claim that McDonald’s “cut off all ties with Puerto Rico operators” after the sale to AD, after which the new owners (Arcos Dorados) began downgrading services to the franchise owners, absent disclosure to the FTC and in violation of FTC Act 5 Section 5 (unfair competition) and the Franchise Rule.  Plaintiffs further allege that AD is neglecting to conduct sufficient sales analyses before opening new McDonald’s locations, leading to areas with a glut of McDonald’s restaurants and the resultant supply-and-demand problems for Plaintiffs’ businesses.

More than McDonald’s, though, the real villain in this story is Arcos Dorados (AD), a McDonald’s franchising behemoth.

Spanish for “Golden Arches” (really), AD is the largest McDonald’s franchisee in the world, with more than 2,000 McDonald’s restaurants and exclusive rights to own, operate and franchise McDonald’s restaurants in Latin America and the Caribbean.  The company has more than 90,000 employees, was recently named the fourth best company in Latin America and had sales of over $4 billion in 2013.

AD went public in 2011, after posting $3 billion in revenues and $106 million in profits the year before.  As a result of the 2011 IPO, AD’s CEO, Woods Staton, become a billionaire.  Importantly, as McDonald’s has encountered recent domestic difficulties, AD’s profits have continued to rise.  Last quarter, AD reported sales up 10.6 percent for the quarter and 11.2 percent for 2013.  The company’s success in Latin America is due in part to its actively marketing to lower income residents and its aggressive growth strategy.

In other words, the preexisting McDonald’s franchisees in Puerto Rico believe they were sold a bill of goods.  The Plaintiffs expected that all Puerto Rican McDonald’s would maintain a certain standard of quality, thereby ensuring that their business would reap the benefits of the McDonald’s brand (whatever it is); and they expected that future McDonald’s restaurants would not open in close proximity to their original franchises, thereby syphoning off potential customers.  According to their complaint, Plaintiffs’ (reasonable) expectations were not met in either case.  If true, these allegations suggest questionable behavior on the part of Arcos Dorados, and of the type of competition that could typically be classified as “unfair.”

Importantly, this is not the first that AD or McDonald’s has heard from the Puerto Rican franchisees.  In January 2007, several Puerto Rican franchisees brought a suit in Puerto Rican court against McDonald’s and certain subsidiaries which AD purchased, seeking, among other things, to prohibit AD from opening new restaurants within a three-mile radius of a franchisee’s restaurant.  In September 2008, AD countersued, attempting to terminate the franchise agreements with these franchisees, and a trial commenced on Sept. 10, 2012. According to its most recent annual report, AD “does not anticipate that the trial hearings will conclude in the first semester of 2014.”

At the very least, the Puerto Rican franchisees have been singing a similar tune for years.  Yet, it is hard to square these seemingly poor business decisions in Puerto Rico (why bother saturating the market and, in effect, competing with yourself?) with the otherwise successful conduct of AD elsewhere in Latin America.  If the FTC buys what the Plaintiffs are trying to sell, then the Commission may order AD to change its behavior in Puerto Rico and/or pay potentially heavy fines.  Both the FTC proceeding and the 2007 suit could impact the way McDonald’s — and other multinational franchises — compete in the Latin American market, and the outcomes deserve attention.

Image credit: Flickr/jeepersmedia


▼▼▼      21 Comments     ▼▼▼

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  • Miguel Mujica

    Go Puerto Rico franchise owners, you are right. I wish you the best with the legal suit but remember you are fighting a big business monster. It is unbelievable that the McDonald’s Co. is doing these kind of practices that only harms them, shareholders and PR McDonalds franchise owners. In my opinion to the Co. try to settle this out of court.

  • anacorider

    Another example of Puertorican incompetence. The answer is not to always go to court to defendy your ignorance and incompetnoore

    • NME

      Learn to write and then criticize the alleged incompetence of others.

    • Fyr

      And could you possible list all the “incompetencies” Puertorricans have committed? I wonder if you even know where Puerto Rico is located at, since you seem so opinionated. Why is it our incompetence if McDonald’s Headquarters “sold” us out to a Latinamerican franchise? In the first place, lady – and I use the term loosely – we are not part of Latin America. We are American Citizens by right of birth – and maybe you should look that up. It seems that you are part of the ugly American syndrome – not only ugly but also ignorant with no desire whatsoever to learn!

      • Alberto González

        Well said, friend! Ignorants and the worst, without desire to learn.

      • Erre

        You’re right in most of your arguments but failed in one or two… Puerto Ricans (This is the correct way to write it) are part of Latin America but are US Citizens (not American Citizens because every person en America is American Citizen) at the same time.

    • Armyz

      Stupid people and dead people are very similar, in both cases no of them know what they are.

  • Sergeant First Class, US Army

    It is obvious that the ugly US mainland ignorant folks are racists towards Puerto Ricans who have answer the call to defend the nation or better yet, drafted since WWI to present. But they only see us as His”PANICS” and with panic attacks because our ethnic class. At least we are not lazy and serve the Nation in times of war and try to make a decent living by owning a business and carry our own share of citizenship responsibility. We did not ask to become U.S. citizens we were forced to take it after 1898. We are not Mexicans who cross the borders illegally, get the facts straight folks.

    • Mark Willis

      Here are some straight facts for you
      45%of puerto ricans don’t work
      pay no federal tax
      1/3 of them are on food stamps about 2 billions worth

      • RJ

        most of that 45% of Puerto ricans no working are old people on Social Security, sick people, children and retire people.
        Everyone with 3 children or more, federal workers and people with business pay federal taxes, we are a US territory so we are no required to pay federal taxes cause of lower wages that on the mainland
        Last time i check their a huge lot of people on food stamps all over the US and PR is the one with a large populations and the smaller amount of money for food stamps.
        Next time you fell leaving a comment better check facts first before looking like a ignorant ass.

      • #lajibaraqnosecalla

        Yeah whatever you say, ‘your 2 billions worth are in the biggest franchise were we Puerto Ricans bring into ‘Your’ mainland which is Walmart,(the biggest earner) we the people of Puerto Rico, the ones who pay for the most expensive shipment service(American merchant marine) (yup, more american dollars for your mainland, stupid asshole…and last but not least we the people of Puerto Rico who 4 out of five have a college degree or more, myself included. Compare that to 2 out of five for the American idiot insert your name here please…..

        • Mark Willis

          What we have to do with your high shipping cost? maybe the problem is corruption. Its a third world Territory. How can you expect to get paid the same as the mainland? I cant really say anything about those things, I guess you guys don like facts, so here are a few more for you guys

          3 out of 5 girls are pregnant before they are out of highschool
          55% have a highschool diploma
          higher murder rate than Mexico!!!!!!
          20% drug user
          100 billion economy + 20 billion USA aid = 70 billion debt banana republic

        • Lamody

          This banana Colony been your’s since 1895, it’s all the United States fault nerd.

        • Andres Guerra-mondragon

          No sir its not the US fault. Its the fault of the Popular Democratic Party founded by Luis Munoz Marin ,my great uncle Miquel Guerra Mondragon ,included that gave birth to the Estado Libre Asiciado de P.R. A political wonder that served Puerto Rico well at the time but has become an albatross in the neck of all Puerto Ricans who have become more educated and long for better economic conditions.

        • lechuguita

          Since you happen to like Stats…let me give you some:

          According to the kaiser foundation Puerto Rico teen pregnancy rate is less then of Texas, Mississippi, New Mexico, Arkansas. How can you talk about teen pregnancy when in most southern states it is equal or more then Puerto Rico’s? here is the link:

          http://kff.org/other/state-indicator/teen-birth-rate-per-1000/

          42% US drug users…the US is world leader in drug use and most of the illegal drugs coming from latin countries which explains the high crime rate in many Latin American countries…here is another link for you to cure your ignorance:

          http://www.cbsnews.com/news/us-leads-the-world-in-illegal-drug-use/

          As for your economy stats, the problem is that it seems on the surface that Puerto Rican are lazy or unproductive..but the same stats will contradict this….

          These are the facts behind the stats:

          The aid is largely coming from Social Security..which means that at one point all of these recipients worked. Unlike the US where you can qualified for SSI in PUERTO RICO YOU CANNOT so everybody who gets SS benefits in PR at one point in their lives they worked or their spouse did.

          Another very important fact and that is the labor participation rate..which has been very low and it is one of the main reason behind what ills the island economy FOR THE LAST 70 years.

          The question is how can a island with such high SS recipients also have a low labor participation? What gives?

          Answer: MIGRATION. The mayority of working age Puerto Ricans work..but not necessarily in the island, in fact I dare say that the majority working age Puerto Ricans work in the US but that is impossible to factor…the only time they are counted is when they get old and retire to the island which contributes to this perception that the islanders are lazy but the fact is that it is become geriatric. The current birth rate and increasing medium age of the islanders are bearing this out.

          Stick to what you know…Puerto Rico is a complex issue and your post only demostrates the typical dumb American.

      • Lamody

        Any Land who is a colony of another country similar to Puerto Rico and the Main Land, the United States, are subject to being economically strangled which causes unemployment. Strangled because the fact that even though we are not subject to federal taxation we have no senators or representatives in congress to legislate laws to benefits us in any way. We are subject to whichever President is choose by the people in the mainland, bad or good it is not our choice. We are subject to whatever Congress decides good or bad. Cost of living is way more expensive in Puerto Rico because everything is imported from the mainland, and by the way….we buy most of our goods and services from the U.S. which is good business for the mainland. We can’t use other than U.S. maritime for exporting or importing goods. Thing would be a lot more cheaper if we could contract Maritime service form Panama or Liberia for that purpose. Any way, if 1/3 of the people are on food stamps, it;s the Congress fault and I don’t blame them because they have to survive somehow. And if 45% of Puerto Ricans don’t work it’s because they just can’t find a job. Puerto Rican’s in the Island are Educated Because College here is relatively cheap and of best quality. People here have Bachelor Degree and sadly have to accept Wal Mart or McDonald jobs. Food stamps are only for food and a family of 3 getting $102.00 per month is not enough to live on, so don’t mention food stamps like it’s the greatest thing in the world. It helps but nobody can not live on it. Now what we should do? We should separate from the United States. It would be nice to run your own home for a change and not be subject to Congress rulings. Or be another State with full rights and obligations. We should decide soon. Dude don’t say things if you don’t have any idea of whats going on.

        • Andres Guerra-mondragon

          If you want to change this become the 51 state. You have had many chances to do this bit the smart people of Puerto Rico intimidated by taxation and changes in culture and language, an absurdity, give the vote to mantain the status quo. You have had several chances and you blow it. Dont complain you got what you wished for.

        • ts

          the best part is they don’t realize that what they’re paying in tax is already equal to or more than most states on the mainland!

        • Mark Willis

          The problem is that most of them want to live of the government . They want all the rights , but none of the obligations. Thats why it a USA territory. It will never vote to be a state because of the obligations and it will never vote for independence cause they dont want to lose the benefits.

        • Luis

          They are ready to vote. See this: http://www.thewire.com/politics/2014/01/tiny-step-toward-statehood-puerto-rico/357263/
          It’s Republican like you who are SCARE TO DEATH of Puerto Rico becoming a State. 2 more Senators and about 4 Rep for the Democrats!!!!

        • Mark Willis

          It will never vote to be a state because of the obligations and it will never vote for independence cause they dont want to lose the benefits.