Dozens of former McDonald’s franchisees have filed a discrimination lawsuit claiming the fast-food giant placed Black owners in substandard restaurants that were likely to fail and then refused to provide financial support for operations in inner cities, according to news reports.
The legal action was filed Monday in the U.S. District Court for the Northern District of Illinois on behalf of 52 former owners from 18 states, including Georgia. It seeks $4 million to $5 million in compensation for the owners of 200 stores that are no longer in operation.
The suit alleges the world’s most popular hamburger chain purposely set up Black franchisees in locations notorious for lower sales and higher operating costs, The Wall Street Journal reported. Many of the former owners said they were forced to close restaurants during the last four years as their average annual sales continually fell hundreds of thousands of dollars short of the national average.
McDonald’s Corp. issued a statement Tuesday denying the allegations.
“We are confident that the facts will show how committed we are to the diversity and equal opportunity of the McDonald’s system, including across our franchisees, suppliers and employees,” the company said in a statement Tuesday, according to The Wall Street Journal.
McDonald’s Chief Executive Chris Kempczinski also issued a rebuttal, saying in a company-wide video message Tuesday morning that, “Based upon our review, we disagree with the claims in this lawsuit and we intend to strongly defend against it,” he said, according to the Journal.
What the lawsuit alleges
The suit alleges a variety of discriminatory practices.
Once Black franchisees owned a store, they would be asked to rebuild or remodel within a shorter period than white franchisees without the rent relief and other financial support given to white franchisees, the lawsuit says. Black franchise owners were also denied the chance to buy more profitable stores in better neighborhoods, it says.
As a result, the plaintiffs averaged sales of $2 million per year. By comparison, McDonald’s average U.S. store brought in $2.7 million annually between 2011 and 2016 and $2.9 million in 2019, the lawsuit says.
In one case, a Black owner in the Atlanta area asked the corporate office to pay for armed security and to reduce his rent because of the store’s location in an underperforming area, but McDonald’s refused, according to the Journal.
Another Black franchisee claims the company would only allow him to purchase locations inside Walmart stores, which are notorious for lower sales.
The suit also accuses McDonald’s of “providing misleading financial information to Black owners to induce them to purchase the least desirable locations and required them to invest in rebuilds or renovations within short time frames not required of white franchisees,” the Journal reported.
McDonald’s denied all the claims, with Kempczinski saying in his message to employees “I’m proud of the work we’ve done as a company to foster entrepreneurship, economic growth and mobility.”
Attorneys for the owners first reached out to McDonald’s about the lawsuit in June, and the two sides had been in talks for an out-of-court settlement but those negotiations ultimately broke down, the Journal reported.
The number of Black McDonald’s franchisees in the U.S. dropped from 377 in 1998 to 186 in 2020 due to the company’s discriminatory practices, the lawsuit claims, stating: “McDonald’s intentionally and covertly deprived plaintiffs of the same rights enjoyed by white franchisees.”
At the same time, the number of franchised restaurants has more than doubled to 36,000.
McDonald’s, however, says the total number of Black franchisees remained mostly the same as the company consolidated many locations in recent years. The company also claims the former owners were placed in a variety of communities and that many retired after turning huge profits, the Journal reported.
“These allegations 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,” the company said. “Not only do we categorically deny the allegations that these franchisees were unable to succeed because of any form of discrimination by McDonald’s, we are confident that the facts will show how committed we are to the diversity and equal opportunity of the McDonald’s System, including across our franchisees, suppliers and employees.”
McDonald’s has a troubled history with Black franchisees. In 1969, activists boycotted four McDonald’s in Cleveland until the company sold them to Black owners. In 1983, a Black franchise owner from Los Angeles sued the company for discrimination; McDonald’s eventually paid him $4.5 million.
In 1996, McDonald’s leadership acknowledged that Black franchisees weren’t achieving parity with their white counterparts and resolved to make changes. Don Thompson, the company’s first Black president and CEO, served from 2012 to 2015.
But the latest discrimination suit comes amid other legal troubles for the company.
The shadow of Steve Easterbrook
In January, two senior-level executives for McDonald’s filed a lawsuit claiming African Americans were systematically pushed out of senior leadership roles under the company’s former chief executive Steve Easterbrook, who was fired in November 2019 for having a relationship with an employee in violation of company policy.
Vicki Guster-Hines and Domineca Neal, both of whom are African American, are seeking millions of dollars in damages and lost pay after they were demoted.
The January suit, filed in the same Illinois jurisdiction, claims McDonald’s conducted “a ruthless purge” by either firing or demoting 35 high-ranking African American executives, including Guster-Hines and Neal, during Easterbrook’s tenure.
McDonald’s has denied the allegations, saying the company decreased the number of all officer-level positions, not just those held by African Americans, during the last five years.
“At McDonald’s, our actions are rooted in our belief that a diverse, vibrant, inclusive and respectful company makes us stronger. In the U.S., in particular, almost half of our Corporate Officers are people of color — an increase of nearly 10 percent from 2013 — and all 10 of the U.S. Field Vice Presidents are people of color,” the company said in a statement at the time.
Kempczinski came on board with Easterbrook in 2015 as the head of the company’s U.S. business.
Guster-Hines and Neal said the alleged discrimination began after the arrival of Easterbrook and Kempczinski.
The suit also claims “strong-arm tactics” by the senior leadership which led to a major drop in the number of African American franchisees.
“The disproportionate loss of nearly one-third of the African American franchisees in the Easterbrook and Kempczinski era was intentional or, in the alternative, it was in reckless disregard of plainly foreseeable consequences of business decisions made by Easterbrook and Kempczinski and their minions,” the complaint alleges.
McDonald’s fired Easterbrook on Nov. 3 after the executive admitted he engaged in a consensual relationship with an employee. Easterbrook told the company at the time there were no other similar instances. An initial search of his cellphone confirmed that. The company’s board said in a statement that Easterbrook had “demonstrated poor judgment.”
Based on what the company knew at the time, McDonald’s board approved a separation agreement “without cause” that allowed Easterbrook to keep nearly $42 million in stock-based benefits, according to Equilar, which tracks executive compensation. Easterbrook also collected 26 weeks of pay, amounting to compensation of about $670,000.
Easterbrook, 52, who had served in the role since March 2015, acknowledged his transgression in an email to employees. “This was a mistake,” he wrote. “Given the values of the company, I agree with the board that it is time for me to move on.”
But in early August, McDonald’s sued Easterbrook to recover tens of millions of dollars in compensation and benefits, alleging he covered up relationships with three other employees and destroyed evidence.