Jack in the Box is one of the US's biggest hamburger chains with more than 2,000 restaurants in 18 states. However, some California chains are having difficulties. The franchises formerly owned and operated by Abe Alizadeh have gone bankrupt and about 60 are scheduled to turn over to new owners in April. However, four of these restaurants will probably close because no one wants them.

The Legal Problems

These four restaurants ran into legal trouble several years ago and are currently managed by a bankruptcy court trustee. Workers accused the management of sexual harassment. Alizadeh responded by firing the manager, the regional manager and even the director of operations supervising that group. However, the Equal Employment Opportunity Commission (EEOC) decided to file a lawsuit based on these claims.

Why Did the EEOC Get Involved?

The EEOC could force regulations and penalties on the new owners of these four chains, resulting in no one wanting to buy these stores and the uncertainty that comes with managing them.

During bankruptcy, the restaurants were sold to the highest bidder in a court-supervised auction. The winning bidder found out the EEOC's requirements will carry over and rejected ownership. The second highest bidder was offered the stores, and he too declined. Four potential buyers declined the purchase.

While the stores still generate profits and none of the managers involved in the sexual harassment allegations still work at Jack in the Box, the bidders of these stores don't want to take the risk.

The EEOC hasn't clarified exactly what is required from the new owners, resulting in even more fear. As a result, the four restaurants will likely close, leaving about 200 people out of work.

Who Is the EEOC?

The EEOC is a government organization with five commissioners appointed by the president for five-year staggered terms. The Senate confirms all appointees, and employees in district offices conduct investigations.

The commissioners set EEOC policy and approve the final lawsuit filed on the EEOC's behalf.

The EEOC enforces laws existing to protect workers including:

The EEOC's laws protect employees from discrimination based on race, color, religion, sex, national origin, disability or age. A person filing a complaint based on these laws or participates in an investigation of complaint based on EEOC enforced statutes is protected from retaliation.

The EEOC's role in this lawsuit is based on the restaurants' history of poor management and it needs to protect these workers. However, none of the management under investigation is currently working there. While protecting workers is necessary in some situations, here it seems to come at the expense of the business' history.

Buying a Business and Liabilities

This raises an interesting issue. When you buy a business under investigation or a pending lawsuit, what liabilities can be passed on to you? The answer is any, but why would you buy it?

Lawyers and business people deal with these issues on a regular basis when helping clients buy and sell businesses. Most businesses have pending lawsuits against them that need to be considered. And businesses can be in various states of disrepair or upkeep.

Sometimes the selling price is reduced to reflect these existing liabilities. However, in some cases, the potential problems may be too large it doesn't makes sense to go forward with the transaction.

While the restaurants are profitable and changes seem to have been made years ago, no purchaser wants the risk of the unknown issues down the road on these Jack in the Box restaurants.

Whether the EEOC takes this into account is uncertain, but future buyers would rather not take this chance. As a result, the workers and patrons of these stores suffer.

Questions for Your Attorney

  • How do I report discrimination to the EEOC?
  • Can I remove liability for prior issues by contract while purchasing a business?
  • How do I determine the value of a business if it currently has problems or is involved in a lawsuit?

Tagged as: Business Law, Buying and Selling of Businesses, franchise loss, franchise lawsuit