Franchisees in Puerto Rico Claim McDonald's Broke FTC Rule

In letting McDonald's biggest franchisee open up shops in Puerto Rico, local franchisees say the fast-food giant violated FTC rules.

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By Kate Taylor

Opinions expressed by Entrepreneur contributors are their own.

It's McDonald's versus McDonald's in Puerto Rico.

McDonald's franchisees in Puerto Rico say that the franchisor broke the Federal Trade Commission's Franchise Rule by selling restaurants to Latin American restaurant operator Arcos Dorados, reports Bloomberg.

According to a complaint filed by seven franchisees with the FTC on Wednesday, McDonald's failed to disclose material information to franchisees. The franchisees claim that when the company sold its stores and franchising rights in Puerto Rico in 2007, it breached its franchise agreement with existing franchisees to only grant McDonald's restaurants to local individuals in the Puerto Rican market.

Related: Survey: McDonald's Has the Worst Burger in America

Arcos Dorados is the largest McDonald's franchisee worldwide, with more than 2,050 stores. The publicly traded company owns restaurants in 20 countries and territories in Latin America and the Caribbean. Local Puerto Rican franchisees argue that Arcos Doratos has hurt their sales by opening new locations near existing franchises and offering different menu items.

In 2007, franchisees filed a lawsuit against McDonald's and Arcos Dorados- owned subsidiaries in the Puerto Rico Court of First Instances. Franchisee sought $11 million, which later grew to $66.7 million plus attorney's fees in damages. Additionally, franchisees wanted to prohibit Arcos Dorados from opening restaurants within a three-mile radius of franchisees' restaurants. In 2008, Arcos Dorados filed a counter-suit requesting the termination of the franchise agreement with these franchisees. The cases are still ongoing.

Puerto Rican franchisees aren't the only McDonald's owners struggling to make ends meet. McDonald's same-store sales fell 1 percent in May in May, extending a slump that began in October. While international markets have helped boost sales, in the first quarter of 2014 McDonald's reported a profit of $1.2 billion, down 5.2 percent from the same period in 2013.

Related: McDonald's U.S. Sales Slump Continues

Kate Taylor

Reporter

Kate Taylor is a reporter at Business Insider. She was previously a reporter at Entrepreneur. Get in touch with tips and feedback on Twitter at @Kate_H_Taylor. 

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