What’s underneath that Tilted Kilt?
Tilted Kilt restaurants are known for their good-looking servers dressed in skimpy Celtic outfits, but lift the skirt a bit in Chicagoland and you’ll find an ugly battle brewing.
The Tempe, Arizona-based franchisor sued the Barouds—brothers Robert, Emil, Anthony and Peter of Arlington Heights, Illinois—asking a U.S. District Court judge last November to terminate their area development agreement.
Tilted Kilt alleges the Barouds made illegal financial performance representations to prospective franchisees, dating back to 2009. Tilted Kilt execs say they didn’t learn about those claims until May 2015, when the lawyer for a pair of franchisees in Kenosha, Wisconsin, told them about a revenue projection made by Anthony Baroud, and demanded a refund of the fees they’d paid and a release from their contract.
The restaurant opened on March 25, 2013. “It never performed financially at the levels Anthony Baroud projected, and sustained significant losses rather than the profits Baroud projected,” says the lawsuit, called Tilted Kilt Franchise Operating v. 1220 LLC, the Barouds’ company name.
When Tilted Kilt learned of the allegedly illegal FPR, “it did what any responsible franchisor should and ought to do,” says Tilted Kilt’s outside attorney, Ric Cohen of Cheng Cohen in Chicago. “And that is took steps to protect prospective franchisees, by asking the federal court in Illinois to declare that good cause existed to terminate the relationship. It’s just that simple.”
Well, not exactly, because the Barouds’ lawyer is hitting back hard, and with an attention-grabbing weapon. Carmen Caruso, of Carmen D. Caruso Law Firm in Chicago, has asked the court to appoint a receiver to take control of the entire Tilted Kilt franchise system and kick out Tilted Kilt management—a move usually reserved for creditors when a firm is financially insolvent.
“We will be blazing new trails if it gets upheld,” Caruso says, referring to the appointment of a receiver. “I don’t ask for receivers all the time. I allege that the breaches of the franchisor are near complete, and that their failure to perform threatens every franchisee and every area developer in the system. If things continue unabated there will be irreparable harm.”
Caruso alleges in his claim that Tilted Kilt has been trying “for years to find a way to terminate 1220 as an area developer,” because Tilted Kilt “has coveted for itself the revenue stream that 1220 is entitled to receive” under its area development agreement.
“In Chicago, it started with the Barouds,” Caruso adds in an interview. “We believe they’re taking actions against other area developers around the country,” seeking termination.
It’s not the kind of publicity any franchisor wants, and Cohen indicates that is particularly true for Ron Lynch, Tilted Kilt’s CEO and owner, who’s a former Oklahoma Sooners basketball standout, according to an article in the Oklahoman describing his turn three years ago on a reality TV show.
According to the newspaper, Lynch got a call from CBS to participate in the popular “Undercover Boss” show in 2012. “I said, I’m 6-foot-6, 250 pounds, with white hair,” Lynch said. “I’m going to be recognized immediately.”
CBS said they knew what to do, according to the Oklahoman: They gave Lynch a brown wig and a thick brown beard. “I looked like the dude from the Big Lebowski,” Lynch said. “Actually, that’s what they started calling me on set. They’d say, ‘Cue the dude.’
“The Tilted Kilt is edgy and deals on sex appeal. And we won’t back down from that or apologize,” Lynch told the Oklahoman.
Cohen defends Tilted Kilt vigorously. “You have to understand the Tilted Kilt culture. It’s owned and run by a guy who was on the other side of the fence for a long time. Ron Lynch was a Schlotzsky’s franchisee and developer…he’s a wonderful human being.”
Cohen says Tilted Kilt took the accusations of an illegal FPR very seriously, because “it’s a serious thing,” if a prospective franchisee is duped into investing in a franchise. “We sometimes get too comfortable with it because we litigate it all the time,” he says, but consequences for the small-business owner are real.
As for Caruso’s request to appoint a receiver, “it is extremely extreme, and I think the only conclusion you can draw from the fact it’s included in the complaint, is it’s directed at people like you,” Cohen says, meaning reporters. “It accomplished exactly what he wanted to accomplish. It does not faze Tilted Kilt in the least.”
But Caruso maintains the problems in the Tilted Kilt system go beyond one area development agreement. The contract with the Barouds, signed in 2007 and continuing until 2032, covers 29 counties in northern Illinois, southern Wisconsin and northwest Indiana. 1220 paid $150,000 to become an area developer, and also committed to spending its own money ($600 per 1 million people living in the defined area during each six-month period) to promote the brand in the territory.
Under the agreement, 1220 gets 40 percent of the initial franchise fees paid to Tilted Kilt by each new franchisee, plus 33 percent of the royalty fees collected by Tilted Kilt—payments that Caruso claims Tilted Kilt would like for itself.
1220 claims Tilted Kilt has “made grossly unreasonable or bad-faith decisions” regarding products and equipment franchisees are required to purchase; “abused vendor rebates” so that franchisees are “at a severe competitive disadvantage”; and in July 2015 canceled the advertising program that had been established in Chicago, and “likewise canceled” ad programs in other markets across the country. The list goes on.
“I think the problems in the system have been brewing for a long time,” Caruso says. “For whatever reason, Tilted Kilt wants to make a pre-emptive strike with this attempt to terminate our client, the area developer in Chicago, and therefore we have struck back.”
He adds one more flourish: “They’re simply letting the whole thing go down the drain.”
Beth Ewen is editor-in-chief of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.