Jeff Davis Root Beer

"Jeff Davis Root Beer"

Harvard Business School Case Study

Jeff Davis was the corporate counsel for A & W Root Beer Enterprises, a national franchiser of root beer stands. In exchange for royalty payments and subject to franchise rules, each franchisee was given administrative authority over a specific geographic area; a standardized menu, recipes, and blueprints; and corporate owned signage and equipment.

Prior to coming to the corporate office Davis had been the attorney for the franchisee operating A & W root beer stands in Mississippi. The Mississippi franchisee was one of 15 nationally who did an especially brisk business in root beer floats. For the remaining national franchisees root beer floats were a money losing or barely profitable menu item. Floats were controversial in some areas of the country and for many years underground organizations had been repeatedly defacing this menu item on root beer stand menu boards. Some franchisees even defied corporate policy by refusing to return the item to their menu boards, although Davis and others kept up pressure on the corporation to compel all franchises to do so.

When it came to Davis' attention that many franchisees were pressing to have root beer floats taken off the standardized national menu altogether, he contacted the 15 root beer float loving franchisees and warned them of this possibility. He then resigned his corporate position and returned home where they engaged him as their attorney. Two years later the hiring of a new CEO at the A & W corporate office made Davis' dire predictions appear more likely. Accordingly, he advised each of them to unilaterally walk away from A &W, maintaining that in his professional opinion the contractual language was ambiguous and in any case he doubted that the corporate people would aggressively oppose this action.

Eleven of the 15 agreed to his suggestion and unilaterally repudiated their A & W agreements. They set up their own confederation, changing the name and signage on all their root beer stands, and appropriating the corporate owned recipes and equipment. Some wanted to buy the recipes and equipment but the majority overruled this suggestion. The eleven entered into a less restrictive agreement of affiliation with each other, ending certain hated standardization requirements but specifically protecting root beer floats as a menu item. Davis was appointed president of this new confederation.

Contrary to Davis' expectation, A & W moved for injunctive relief against the new confederation. Interstate carriers were enjoined from transporting supplies and the confederation had to rely on in-state resources. Menus had to be to cut back and those items still on the menu often had quality issues. Business declined. Davis' two principle outside counsels advised him that the confederation was unlikely to prevail against the corporation, and that the only chance (if any) was to direct many more resources in their defense against the corporation's breach of contract litigation. Meanwhile the corporation's new CEO offered to "individually" settle with each of the fifteen franchisees, expressing a willingness to negotiate through arbitration a formula to compensate each for any lost profit expected from the deletion of root beer floats from the national menu.

At that point the eleven franchisees looked to Davis for guidance, still angry about their long-term grievances against the franchise system and under the influence of Davis' negative oratory that demonized the corporation. Davis probably recognized that emotions and miscalculations were to blame for their decision to unilaterally repudiate the franchise agreement, that future prospects were grim, and that reconciliation was in the best interest of everyone but himself. But he had stuck out his neck too far professionally and for him there is no turning back. So he doubled down on his demagoguery and grasped for the unlikely straw that would vindicate him. In year two of the dispute he addressed the cheering franchise owners, reflecting that:

"It was not deemed possible that anything so insane as a persistent attempt to subjugate these franchises could be made, still less that the delusion would so far prevail as to give the legal action the vast proportions which it has assumed. But hopes for a settlement have been dispelled by the malignity and barbarity of the A & W Corporation in the prosecution of the existing dispute. "