Restaurant Business Online: Franchisees Sue I Heart Mac and Cheese

According to a recent article on Restaurant Business Online, three franchisees have filed a lawsuit against the fast-casual chain I Heart Mac and Cheese (IHMC), alleging misleading sales tactics and violations of federal franchise disclosure laws. The lawsuit, filed in Florida state court, accuses the franchisor of using "false promises and illegal sales practices" to lure passive investors into the system. Franchisees claim they were misled about the business model's operational costs, profitability and risk factors. They also allege the company failed to disclose critical information, such as corporate store closures and evictions, in violation of franchise disclosure rules.

The lawsuit highlights several grievances, including that IHMC "deliberately omitted" information about widespread closures of corporate stores in Florida, Georgia and New York and failed to disclose litigation against its CEO, Stephen Giordanella. Franchisees also say they were misled about financial performance, with verbal assurances that one location generated $1,800 in daily lunch sales and that another store in Florida earned $700,000 annually. These claims were not documented in the franchise disclosure documents, a violation of federal rules. According to the lawsuit, "Defendants intentionally minimized and misrepresented the actual risks and operational challenges of operating an IHMC franchise."

Franchisees also argue that IHMC’s pricing structure and operational costs were unsustainable. For instance, they were told prime costs would not exceed 55% of revenue, which turned out to be false. Additionally, cheese costs fluctuated significantly, with a five-gallon bucket of cheese sauce increasing by up to 140%. The lawsuit also alleges that high menu prices, such as $23.99 for Lobster Mac, alienated customers, reducing business. Operators claim they were required to purchase supplies from designated vendors, who charged inflated prices and paid rebates to IHMC, further hurting franchisees' profitability.

The franchisees accuse IHMC of using marketing fund contributions, amounting to 3% of revenue, to finance franchise sales rather than supporting their operations. The lawsuit calls the franchisor’s promises "illusory," with the plaintiffs stating, "Plaintiffs invested substantial initial capital and continued to pay ongoing royalties for what has proven to be a fundamentally flawed and unprofitable business model." The case underscores ongoing tensions within the franchise system, as IHMC also faces regulatory actions in Indiana and California for disclosure violations.

Read the original article here.

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