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McDonald’s or Arcos Dorados?

Arcos_Dorados2The #1 McDonald’s franchisee is not an individual, but the Argentina-based company Arcos Dorados, which owns over 2,000 McDonald’s franchises. In 2007, Arcos Dorados bought all the McDonald’s franchises in Puerto Rico from McDonald’s, even though many were at that time in the hands of individuals. Those individual franchisees brought suit against McDonald’s, claiming that the move was illegal under Puerto Rican law.

McDonald’s effectively made Arcos Dorados into the franchiser by assigning the franchisee agreements to Arcos Dorados. The franchisees asked initially for $11 million plus in damages, and later amended their request to $66 million dollars.

In 2008, Arcos Dorados sued to end the agreements between McDonald’s/Arcos Dorados and the disgruntled franchisees, for “material breaches.” Arcos Dorados, which employs more than 90,000 people across Latin America,  has exclusive rights to own McDonald’s franchises in Latin America and the Caribbean — including Puerto Rico, even though Puerto Rico is a territory of the U.S. The case had still not been resolved.

Now, seven franchisees are bringing another suit against McDonald’s over their experiences with Arcos Dorados. They claim that Arcos Dorados allows franchises too close together and that this is harming them financially. They’ve also been saying that Arcos Dorados doesn’t provide the service McDonald’s did, and that McDonald’s isn’t supporting them at all any longer. The grounds for the new complaint is not Puerto Rican law, but a U.S. Federal Trade Commission requirement that franchisers alert franchisees and the FTC of any changes in the deal they offer. Puerto Rican McDonald’s franchisees believe that Arcos Dorados is harming the McDonald’s brand in Puerto Rico.

McDonald’s brand is having plenty of trouble in the U.S. right now, including falling sales as well as unhappy U.S. mainland franchisees, protesters, and image problems following the public display of some suggestions for how their workers could make ends meet by taking a second job.

But the Puerto Rican franchisees are not focusing on Arcos Dorados but on McDonald’s. They still consider themselves McDonald’s franchisees, not Arcos Dorados franchisees. They feel, according to their lawyer, like “second-class operators.”

Puerto Rico’s uncertain relationship with the U.S. enables this situation to exist. Arcos Dorados is in charge of McDonald’s franchises in Mexico and South America and in the Caribbean. However, these franchisees made their initial agreement with McDonald’s in the U.S. They are U.S. citizens and do not appear willing to be shunted off to another franchiser.

They may have no choice.

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