KFC National Council and Advertising Cooperative, Inc. v. KFC Corporation: A Cautionary Tale

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The Delaware Chancery Court recently issued a decision severely limiting KFC Corp.'s right to control brand marketing in a case that offers several important lessons about managing franchisee relations.

The case, KFC National Council and Advertising Cooperative, Inc. ("NCAC") v. KFC Corporation, involved a suit brought against the international fried chicken franchisor by a special purpose entity formed to develop and manage the chain’s domestic advertising. The suit centered on the scope of the NCAC's authority to control brand advertising. KFC argued that the NCAC, which was controlled by a supermajority of KFC franchisees, only had the right to approve or disapprove on an "up or down" basis advertising proposed by the franchisor. The NCAC, in turn, argued that it enjoyed broader powers. These included, but were not limited to, the right to propose and approve alternative advertising plans even over the opposition of KFC.

The court sided with the franchisees in a ruling that provides some of the following important takeaways:

Importance of Franchisor Flexibility: In an era when franchisors increasingly work with franchise advisory committees ("FACs") for purposes of crafting and implementing a brand’s marketing strategy, it is important for franchisors to negotiate FAC authorizing agreements that allow the franchisor to maintain sufficient control over overall advertising strategy. While franchisee input into brand marketing is no doubt critical to the long-term success of a brand, maintaining franchisor flexibility is even more important. A franchisor should maintain the ability to easily adjust its advertising strategy in response to ever-changing market conditions and consumer demands.

Harmony is Imperative to Brand Success: Although the KFC decision was a victory for franchisees, the fundamental lesson to be drawn from the ruling is that franchisor/franchisee harmony is imperative to brand success. While acknowledging the powers afforded to the franchisees, the court in KFC also reminded franchisees of their responsibility to be "good shepherds" for the brand. Ultimately, both the franchisor and its franchisees are hurt when a brand is forced to "go dark" because of the parties' failure to reach consensus on an advertising strategy. To avoid this scenario, franchisors and franchisees should always work collaboratively to achieve the long-term best interests of the brand. Although marketing agreements between franchisor and franchisees can add tremendous value to a brand, any power sharing arrangement should allow a franchisor to maintain maximum flexibility over a brand’s overall marketing strategy. Achieving this balance begins with FAC agreements that not only consider a brand's present realities, but also afford franchisors the ability to make adjustments in the future.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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