Wendy’s 3-year battle with franchisee resolved through sale of 140 restaurants

A 3-year lawsuit between Wendy’s International and DavCo Restaurants LLC and DavCo Acquisition Holding, Inc. (together “DavCo”) was resolved on June 1, 2017, through a sale of 140 restaurants operated by DavCo to NPC International and its wholly-owned subsidiary NPC Quality Burgers, Inc.

BACKGROUND: BREACH OF FRANCHISE AGREEMENT?

On Dec. 22, 2014, Wendy’s International filed a complaint against DavCo Restaurants LLC and DavCo Acquisition Holding, Inc. (together “DavCo”) in the Court of Common Pleas of Franklin County, Ohio. Wendy’s alleged that DavCo breached its franchise agreement by failing to comply with Wendy’s demand to refurbish its franchised restaurants and by failing to purchase an Aloha point of sale system. 

DavCo (through its predecessors) was a franchisee of Wendy’s since 1976 and operated 152 Wendy’s restaurants in Maryland, Virginia, and Washington, D.C. DavCo alleged in its counterclaim that it had invested over $325 million to build its restaurants in addition to paying tens of millions of dollars to Wendy’s in the form of royalties, advertising contributions, and other payments. DavCo further alleged that the capital costs required by Wendy’s to refurbish its restaurants and to purchase the Aloha POS substantially exceeded its income and internally generated cash flow. DavCo additionally alleged that Wendy’s Image Activation program required structural changes and modifications to leasehold improvements that are not required under the terms of the franchise agreements. 

RESOLUTION

NPC agreed to remodel 90 of the acquired restaurants in the Image Activation program format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Wendy’s reported that it received franchise fees of $6.4 million at closing. 

NPC International, Inc. currently operates 386 Wendy’s units in seven states and is the largest Pizza Hut franchisee operating 1,136 Pizza Hut restaurants and delivery units in 28 states.