Black Ex-Franchisees Sue McDonald's In Racial Discrimination Case

McDonald's is facing a new lawsuit from Black former franchisees who say they faced decades of discrimination at the fast-food chain.

A complaint filed by 52 former franchisees on Tuesday in the US District Court for the Northern District of Illinois is seeking more than $1 billion, collectively, in direct damages from McDonald's.

Franchisees in the complaint said they faced "systematic and covert racial discrimination," with the company denying them the same opportunities as their white counterparts. McDonald's has to approve all new franchisees, and the lawsuit argues it "systematically steered" Black franchisees to buy locations in Black neighborhoods. These locations tend to have higher insurance and security costs while bringing in less revenue.

One franchisee said in the complaint that Black franchisees were at such a significant disadvantage that acquiring McDonald's locations as a Black franchisee was a "financial suicide mission."

The franchisees say they lost more than 200 McDonald's locations over the past decade because of misconduct by the company. The franchisees are seeking compensatory damages averaging $4 million to $5 million a store, with collective damages of more than $1 billion.

Dozens of other Black franchisees have been forced out of the chain over the past two decades, according to the complaint. The complaint says there are only 186 Black McDonald's franchisees, down from 377 in 1998.

"But for Plaintiffs' race, McDonald's would have offered Plaintiffs profitable restaurant locations, opportunities for growth and expansion, on equal terms as White franchisees, rather than forcing them out after decades of sweat and tears dedicated to the franchise," the complaint says.

McDonald's said that, while it has consolidated its total number of franchisees, the overall proportion of Black franchisees within the system is overall unchanged. (Business Insider previously reported that from 2007 to 2017, Black franchisees went from making up 13.4% of all McDonald's US franchisees to 12.5% of all US franchisees.)

"My priority is always to seek the truth," McDonald's CEO Chris Kempczinski said in a video message about the lawsuit to employees and suppliers on Tuesday morning.

"When allegations such as these occur, I want them investigated thoroughly and objectively," Kempczinski continued. "That's been our approach to this situation. Based upon our review, we disagree with the claims in this lawsuit and we intend to strongly defend against it."

McDonald's said in a statement to Business Insider that the company categorically denies the allegations, saying that they "fly in the face of everything we stand for as an organization and as a partner to communities and small business owners around the world."

Why McDonald's Black franchisees face inequalities

Last December, Business Insider reported that Black McDonald's franchisees made hundreds of thousands of dollars less a year, on average, than their white counterparts at the fast-food giant. Two of the plaintiffs in Tuesday's lawsuit spoke with Business Insider last year as part of the investigation.

Tuesday's complaint states that the plaintiffs' average annual sales of roughly $2 million were more than $700,000 lower than McDonald's national average of $2.7 million from 2011 to 2016 and $2.9 million in 2019.

"These differences are statistically significant and are the result of Defendants' racial bias and barriers within the McDonald's franchise system," the complaint says.

Conversations with five current and former Black franchisees over the past year, as well as the lawsuit filed Tuesday, indicate numerous reasons Black franchisees make significantly less than their white counterparts. The complaint says McDonald's:

• "Covertly" restricts Black franchisees to owning locations predicted to bring in less money. Black franchisees say they were offered only opportunities to own older stores in primarily Black neighborhoods. These locations tend to have higher insurance and security costs while bringing in less revenue.
• Excludes Black franchisees from growth opportunities while offering new white franchisees the opportunity to buy newer, more desirable locations.
• Enforces harsher renovation and rebuilding requirements on locations owned by Black franchisees than white franchisees.
• Deploys "targeted, rigorous, and unreasonable" inspections, forcing Black franchisees out of the business when they receive poor grades.
• Forces Black franchisees to sell stores at a loss by controlling which franchisees are presented as qualified buyers.

McDonald's denied allegations that the company limits where Black franchisees can operate, noting that the plaintiffs are from across the US and that the "overwhelming majority of business transactions involve a sale directly between franchisees." The company also said it has sold high-performing company-owned locations in "various communities to Black franchisees'

"We're always taking on the worst stores," Juneth Daniel, one of the former franchisees suing McDonald's, told Business Insider last year.

"They had serious problems with having to be staffed, if they weren't being robbed," Daniel added. "But you want into the system, you want it to be a McDonald's owner-operator. So, you took the bad to hopefully get to a better place.

The franchisees' attorney says McDonald's is 'more focused on PR' than doing the right thing

"It's my belief that our franchisee ranks should and must more closely reflect the increasingly diverse composition of this country and the world," Kempczinski said in his message on Tuesday morning.

Kempczinski continued: "At Worldwide Connection, we discussed an even more ambitious approach to attract diverse franchisees and to increase spend with diverse suppliers." At the time, McDonald's did not specify exactly how it planned to recruit more diverse franchisees.

Recently, McDonald's has been emphasizing the importance of values and diversity at the company. The company donated $1 million to the National Urban League and the NAACP in the aftermath of protests over George Floyd's death in Minneapolis. McDonald's released an advertisement in early June mourning the deaths of Black people killed by the police or in incidents of racist violence. Joe Erlinger, the head of the US business at McDonald's, said in an internal meeting at the time that "silence is not an option."

"We've probably — McDonald's has created more millionaires within the Black community than probably any other corporation on the planet, but there's still work to do," CEO Chris Kempczinski told CNBC in June. "We're certainly not perfect — we're talking with our franchisees about how do we continue to bring in diverse franchisees."

The franchisees' attorney James L. Ferraro told Business Insider in an interview that the chain had been on a "PR campaign" since he alerted the company of the coming filing in early June.

McDonald's is "more concerned about PR than they are about action, about doing the right thing," Ferraro said. "They're just purely about protecting their image."