07/05/2013 04:45 EDT | Updated 09/04/2013 05:12 EDT

Sears Faces Class-Action Lawsuit From Hometown Franchise Owners

Shoppers walk into Sears in Peabody, Mass., Monday, May 14, 2012. Sears Holdings Corp. said Thursday, May 17, 2012, that it’s spinning off a stake in its Canada business, as the struggling retailer looks to focus on stemming declining sales at its remaining U.S. stores. The announcement came as the company reported that returned to a profit in the first quarter, as a result of a gain on the sale of its stores. (AP Photo/Elise Amendola)

TORONTO - Sears Canada Inc. (TSX:SCC) and its American counterpart are facing a class-action lawsuit by owners of its Hometown franchises, who allege the retailer has deprived them of the opportunity to make a reasonable profit.

The lawsuit was filed by the owner of a Sears Hometown store in Woodstock, Ont., on behalf of about 260 franchise operators across Canada.

It claims Hometown store dealers have seen their sales and profits erode over the past three years.

The lawsuit alleges that Sears lowered dealers' commissions, reduced advertising for local stores and bypassed the franchises by selling directly to customers who are located within their markets.

The dealers also claim that Sears is setting their compensation and work conditions, without abiding by labour laws or franchise protection laws.

The allegations have not been proven in court.

"We are tired of disappointing our customers because we lack the resources to serve them properly," said Jim Kay, the dealer who filed the class-action lawsuit, in a statement.

"We are tired of being fed scraps for the benefit of a U.S. hedge fund billionaire."

Sears Canada did not immediately respond to requests for comment.

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