Legislation

Mexico – Hard Rock terminates Mexican franchise agreement

By Phil - 16 December 2013

Hard Rock International has terminated its franchise relationship with Operadora DB Mexico, S.A. de C.V., Hard Rock Cafe franchisee in Mexico, after several years of disputes relating to non-compliance with franchise standards and franchise payment obligations.

The termination follows the successful outcome of arbitrations in Mexico and final adjudication by Mexican arbitrators under the oversight of the International Chamber of Commerce (“ICC”) in Paris.

In 2001 Robert Earl, owner of the twice bankrupt Planet Hollywood chain, acquired controlling interest in Grupo ECE Mexico, S.A. de C.V., and its subsidiary Operadora DB Mexico, S.A. de C.V.

Over the last decade, Operadora DB Mexico, S.A. de C.V. locations throughout Mexico have deteriorated dramatically and subsequently defaulted on obligations under the master franchise agreement.  The franchisee frequently failed to pay merchandise vendors and landlords, did not upkeep Hard Rock Cafe quality standards and defaulted on its obligations to pay royalty payments to Hard Rock International. There have been additional issues regarding the scope of the use of the brand permitted for the franchisee.

Prior to the current ICC ruling, Hard Rock International engaged in arbitration in 2008. The ICC rendered final judgments, determining the limited scope of rights provided under the Hard Rock Cafe master franchise agreement and confirmed that Hard Rock International could continue its successful brand expansion into luxury hotels in Mexico, which had previously been challenged by Operadora DB Mexico, S.A. de C.V.

In 2011, following numerous years of perpetual brand mismanagement and abuse, in addition to defaults on royalty and supplier payments, Hard Rock International pursued a second ICC arbitration for the termination of the entire master franchise agreement and ancillary contracts. As a result of this arbitration, the tribunal found in favor of Hard Rock International effectively finding that the termination was valid given the master franchisee’s numerous defaults.

“This case sets a landmark precedent for franchise operators in Mexico, and demonstrates that in Mexico, legal certainty is available for investors and laws are enforced,” said Luis Rubio, a partner with the law firm Greenberg Traurig in Mexico City who represented Hard Rock International. “It acknowledges that a defaulting party can be penalized with not only closure of specific venues, but also the termination of an entire franchise system and business model.”

“After years of mismanagement and tarnishment of the Hard Rock Cafe brand in Mexico, we applaud the ICC’s landmark ruling,” said Michael Beacham, Vice President of Franchise Operations for Hard Rock International. “We look forward to reinvesting in the brand, growing it and bringing the high-standards of the Hard Rock Cafes back to Mexico.”

Operadora DB Mexico, S.A. de C.V. and some of its subsidiaries continue to operate several Hard Rock Cafe restaurants in Mexico, namely, cafes in Cozumel, Cancun, Acapulco and Cabo San Lucas, in violation of the ICC’s ruling.  Hard Rock International has commenced legal action to ensure that the ICC’s order is properly enforced.