Franchisees filed a lawsuit against Round Table Pizza this week, accusing the pizza chain of “intentional mismanagement” of the marketing fund since its 2021 acquisition by the fast-food chain operator Fat Brands.
The Round Table Owners Association, in a lawsuit filed in Los Angeles County, says that the chain’s average unit sales have fallen at their worst rate in “decades” this year after marketing “collapsed” following a missed payment to a marketing consultant in March.
Even before then, however, the association in its lawsuit said that the quality of marketing has deteriorated since Fat Brands acquired the chain in 2021. “Previously reliable and well-coordinated marketing campaigns gave way to disjointed initiatives lacking clear strategy, measurable performance and meaningful brand direction,” the lawsuit says.
The lawsuit comes less than a week after the Beverly Hills, California-based Fat Brands said in a filing with the Securities and Exchange Commission that it was in danger of bankruptcy.
That came after Fat Brands did not have enough available funds to make a payment on its debt, prompting the trustee overseeing its securitized financing to demand full payment of nearly $1.3 billion in bonds.
Fat Brands said in an email that it does not typically comment on “franchise disputes or litigation,” but added that, “We continue to honor our obligations to our franchise partners and vendors.”
Fat Brands acquired Round Table as part of its purchase of Global Franchise Group in 2021. That acquisition was one of nearly $900 million in deals Fat Brands engineered over an 18-month period, all of which were financed using securitized financing. The deals left the franchisor deeply in debt.
Fat Brands is currently negotiating with UMB Bank, the trustee overseeing its bonds, to restructure its debt. Franchisees own all of Round Table’s 385 locations.
Restaurant Business first reported Round Table franchisees’ concerns about the use of the marketing fund last month.
Round Table franchisees pay 4% of their revenue into a national advertising fund. Those funds are supposed to be used to advertise and market the brand. Operators have accused Fat Brands of using $800,000 from the marketing fund to pay for the company’s Fat Summit in 2022, a conference available to each of the chains owned by Fat Brands.
Round Table franchisees in their lawsuit are accusing Fat Brands of using company assets “for purposes other than supporting Round Table franchisees.” The operators note that, since 2021, Round Table has been transferring tens of millions annually to “affiliates” that were supposed to be returned. This year, the entire amount—$56.9 million—was deemed a permanent transfer and will not be returned.
Franchisees in their lawsuit say they have been requesting an audit of the marketing fund every year since 2023. But both Round Table and Fat Brands have refused to allow for one.
In addition, operators accused Round Table of using creative financing to increase the amount of rebates vendors send the company. Round Table’s franchise agreement prevents the franchisor from getting more than 3.8% of gross annual revenues in the form of rebates.
Round Table reclassified marketing funds as gross revenue, an unusual move, which the lawsuit says enabled the company to skirt that 3.8% limit and take in a higher amount of rebates.
This is not the first lawsuit that a Fat Brands-owned chain has faced over its marketing fund. Hurricane Grill & Wings operators accused the company in that case of misusing the fund.
The Round Table Owners Association is represented by Miami franchise attorneys Robert Zarco and Robert Salkowski along with the Los Angeles attorney R. Michael Ghilezan.
UPDATE: This story has been updated to add a comment from Fat Brands.
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