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Report On Business Tim Hortons franchisee group looks to sue parent company

Pedestrians walk past a Tim Hortons in Toronto.

Fred Lum/The Globe and Mail

For the second time in less than four months, Tim Hortons franchisees are seeking class-action status to sue their parent company and its top executives on behalf of all its Canadian restaurant owners, saying the company is interfering with their right to associate.

The franchisees formed the Great White North Franchisee Association last March to represent them in their grievances against parent Restaurant Brands International Inc. (RBI), saying it's squeezing them with rising costs.

"In particular, the Tim Hortons system has been faced with ever increasing labour costs, supplier costs and increasing general operating and administrative costs," says the lawsuit, filed in Ontario Superior Court on Friday.

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Related: Tim Hortons' parent taking legal action against group of franchisees

Read more: Inside the brutal transformation of Tim Hortons

As expenses have climbed, RBI and its subsidiary TDL Group Corp. "have taken commercially unreasonable steps to pass on to franchisees its costs and to take other actions prejudicial to the interests of franchisees," it says.

Franchisees have been increasingly critical of RBI's aggressive cost-cutting efforts since the parent acquired Tim Hortons Inc. in late-2014 and merged it with its U.S. fast-food chain Burger King, saying the company moved quickly to push expenses on to its restaurant owners and, in some cases, modify products and operations to save money or boost profits.

In June, a Toronto-area franchisee filed a $500-million suit seeking class-action status against RBI and its top executives, claiming they misused money from the franchisees' ad fund.

On Friday, association president David Hughes of Lethbridge, Ont., who owns five Tim Hortons restaurants, and Mark Walker of Mississauga, who owns a few cafes, filed the latest lawsuit, seeking more than $1-billion. As board members of the association, they were among the nine directors who were issued default notices by RBI last month. The notices, based on alleged breaches of the franchisee contract and confidentiality requirements, could eventually result in the company pushing out the franchisees, franchise experts have said.

In an e-mailed statement, RBI confirmed it "recently issued default notices to a small group of restaurant owners who we believe are deliberately releasing confidential information to the media, which harms the businesses of the thousands of hard-working restaurant owners … This latest tactic of filing another unfounded lawsuit and sharing it with the media is yet another example of their disregard for the brand and our restaurant owners."

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RBI said it does not interfere with its franchisees' right to associate. "Our focus remains on continuing to work together with our restaurant owners."

The latest battle follows a Globe and Mail article last month about efforts by the franchisee association to get RBI to approve higher prices to help cover the cost of minimum-wage increases in Ontario and Alberta and possibly other provinces. The Globe story referred to corporate information it obtained that pointed to operating margins at 442 Tim Hortons restaurants in Central Canada having declined 1.48 percentage points to 12.48 per cent in 2017 from a year ago. "This is something we're not happy about and working to rectify for you but there is no easy, silver-bullet solution," the Sept. 7 internal e-mail said. The association board members deny they improperly disclosed confidential information, the lawsuit says.

It says RBI has set aside a $2-billion "war chest" to buy out franchisees who have joined the association – and has already started the process. Mr. Hughes said in an interview he knows of a few franchisees who have already taken the buyouts, and others who have been approached by RBI.

Among RBI executives named in the lawsuit are Daniel Schwartz, chief executive officer, and president Sami Siddiqui.

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