Pizza Hut is currently embroiled in a back-and-forth legal battle with one of its largest franchisees. The multinational pizza chain is suing EYM Pizza over alleged underperformance and financial mismanagement, according to a report from QSR Magazine. EYM Pizza currently operates 140 restaurants across Georgia, South Carolina, Illinois, Indiana, and Wisconsin.
The suit comes in the wake of EYM abruptly closing 15 locations across Northwest Indiana, according to the Times of Northwest Indiana.
Under their franchise agreement, Pizza Hut grants EYM the right to operate its business and sell and distribute restaurant goods and services associated with Pizza Hut’s trademark. EYM is also responsible for maintaining specific operational standards, making timely payments, and taking on “necessary restaurant upgrades and transitions to delivery-focused models,” as explained by QSR. However, much of that agreement began to fall through from 2019 to 2023. Pizza Hut’s same-store sales increased seven percent during that time. On the contrary, EYM’s same-store sales decreased 10%.
In the suit, Pizza Hut claimed EYM’s performance is “among the worst of all large Pizza Hut franchisees.” Between Feb. 2023 and Feb. 2024, more than 12% of EYM’s restaurants failed inspection. That is four times the average failure rate, Pizza Hut said in the lawsuit.
Pizza Hut also alleged EYM repeatedly fell behind on royalty payments along with payments for advertising fees, and vendor services. By December 2022, EYM was over $3 million in debt and ultimately paid that amount in full. Pizza Hut consequently issued multiple default notices throughout 2022 and 2023 following EYM’s financial mismanagement.
In August 2023, Pizza Hut entered into a forbearance agreement with EYM. The agreement was issued to give EYM more time to catch up on its royalty payments and sell its restaurants. Despite the terms and conditions listed in the agreement, EYM failed to comply. EYM repeatedly missed deadlines for required payments during the forbearance period, QSR reported. EYM’s restaurant locations continued to underperform, so much so that they didn’t meet Pizza Hut’s sales and operations metrics. EYM also delayed putting two of its restaurants (one in Georgia, the other in South Carolina) on the market and failed to pursue several letters of intent from potential buyers, per QSR.
The breaches led Pizza Hut to terminate the forbearance agreement in February. In April, Pizza Hut implemented a Limited Term Reinstatement Agreement (LTRA), granting EYM a second chance to comply with the aforementioned terms and conditions. EYM once again failed to comply, which prompted Pizza Hut to send final termination notices in June.
Court documents specified that since 2016, EYM has spent $46.6 million to buy and renovate Pizza Hut restaurants nationwide. EYM was $23 million in debt as of March.
Back in March, EYM sued Pizza Hut In an attempt to keep the restaurant chain from terminating its franchise agreement. “Pizza Hut has no distinct identity like others,” EYM said in its lawsuit. “Pizza Hut has no image or identity that sticks with patrons.” The franchisee blamed COVID for causing delays in new restaurant projects slated between 2020 to 2022. It also cited pandemic-related inflation for high food and management costs.
In April, EYM’s lawsuit was dismissed by a judge who ruled in favor of Pizza Hut.
