Franchisees might launch a class action against Retail Food Group Limited

Law firm Bannister Law announced this morning that it was contemplating launching a class action against Retail Food Group Limited (ASX: RFG) on behalf of Retail Food’s franchisees. Bannister Law previously launched a class action against Retail Food Group on behalf of RFG shareholders, following the company’s downgrade and share price fall in December.

While investigating the shareholder class action, it seems that the plight of franchisees also came to Bannister Law’s attention and they are now considering a separate class action on behalf of RFG franchisees. Here is the media statement that was released to their Facebook page this morning:

source: Bannister Law Facebook page. Click to enlarge.

This is an interesting class action from a shareholder perspective. Most class actions involve shareholders suing a company for misleading information or some other behaviour. This class action however involves Retail Food’s key business operators (its franchisees) potentially suing Retail Food for poor disclosure and other concerns.

I think it will be a tough ask to convince a court that Retail Food Group is taking advantage of its franchisees, given that they presumably sign strict contracts regarding the operations of their business. For example, there are likely strict requirements relating to investments into the marketing fund, or requiring that franchisees source ingredients only from RFG.

However, given that this possible lawsuit strikes directly at the heart of RFG, I believe the franchisee class action, if it goes ahead, is far more concerning. Class actions typically take years to resolve and it is unlikely that there will be an immediate impact on Retail Food’s business.

However, it’s likely that the reputational damage has already been done and I suspect it will be hard for Retail Food Group to attract new franchisees. The number of franchisees that ultimately sign up to the potential class action, which may become apparent in the next few months, will speak to the degree of discontent within the RFG network.

This also raises interesting questions as to whether Domino’s Pizza Enterprises Ltd. (ASX: DMP) may face a similar class action. Domino’s relations with franchisees were under question even before Retail Food Group’s were. Whatever the case, I think the Australian franchisee sector may struggle until these accusations are resolved. As a result I’d be inclined to take a very conservative approach when evaluating these companies from an investment perspective.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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