The Franchise Owner's most trusted news source


Log In / Register | Apr 23, 2014

Court Rules for Coffee Beanery Franchisees

Shuttered Kentucky shop. photo/bmm

ANN ARBOR, Mich. – Franchisees Deborah Williams and Richard Welshans scored a victory yesterday in their eight-year battle against The Coffee Beanery and its officers when the Fourth Circuit Court of Appeals ruled in their favor.The three-judge panel filed its unpublished opinion stating they “reverse and remand” further proceedings to the district court, denying the franchisor’s arguments for appeal.

In hearing the appellate decision, Harry M. Rifkin, attorney representing the franchisees, said, “It’s a very good opinion and I think we anticipated their arguments. I only hope that Coffee Beanery comes to its senses and finally decides that it’s time to make a fair and substantial settlement offer. But it is going to have to be substantial.”

Rifkin said if they don’t settle, he and his clients will be looking forward to their day in court before a jury of their peers. “We are confident that the outcome of any trial will confirm that the behavior of the Coffee Beanery and its officers was outrageous. This has already been a very long battle but we are prepared to continue it to a conclusion,” he exclaimed.

The former franchise owners have long stated that they have lost everything due to Coffee Beanery inducing them to enter a franchise agreement for a coffee cafe in 2003. They claimed it was a broken business model. They attributed their losses mainly to the franchisor misrepresenting and omitting material facts about the company’s cafe concept when they first negotiated the purchase of their Annapolis shop. From the beginning, they asserted their store generated significant cash losses each year of its operation, despite all their efforts.

In December 2005, the franchisees filed legal action against Coffee Beanery and its officers, alleging violations of Maryland Franchise Law, detrimental reliance, intentional misrepresentation, and negligent misrepresentation. They also claimed that Coffee Beanery’s franchise disclosure document, then known as the Uniform Franchise Offering Circular (UFOC), was incomplete and inaccurate. Williams and Welshans asserted that Kevin Shaw, an officer of the company and son of founder JoAnne Shaw, made false statements regarding the operation and earnings of the franchise. Williams and Welshans also filed a complaint with the Maryland Securities Commissioner. 

The Coffee Beanery defendants compelled arbitration and filed a motion in court to dismiss the lawsuit or stay it pending arbitration in Eastern District of Michigan.  Maryland’s commissioner entered into a consent order with the franchisor following its investigation. Although the commissioner found that Coffee Beanery violated Maryland’s Franchise Law and directed it to “permanently cease and desist from offering and selling" franchises in Maryland or to any prospective Maryland franchisees, and to make rescission to the franchise owners, Coffee Beanery consented without admitting or denying the commissioner’s statement as fact.

After arbitration proceedings were held, the arbitrator found “no intent on the part of Respondents [Coffee Beanery defendants] to mislead” or misrepresent the franchise system to the franchisees. The district court then confirmed the award and entered a judgment ordering Williams and Welshans to pay Coffee Beanery $152,766.73. The court then entered an order in March 2008 dismissing the action.

After the judgment was appealed, in November of that year the Sixth Circuit court reversed the judgment and vacated the arbitration award, and held that the arbitration agreement was unenforceable because of fraud in the inducement. It also held that the arbitrator’s decision that Kevin Shaw’s grand larceny conviction need not have been disclosed showed a “manifest disregard for the law” because a grand larceny conviction involves misappropriation of property. It held that the franchisees were not bound by the arbitration clause because Coffee Beanery’s failure to disclose Kevin Shaw’s conviction deprived them “of a mandatory, statutorily required notice” prior to signing the agreement, finding the franchisees were “fraudulently induced into signing the franchise agreement.” 

In light of the Sixth Circuit decision, the franchise owners asked the district court to reopen their case. In June 2009 their request was denied. Williams and Welshans, through their attorney, appealed that decision to the Fourth Circuit court.

Coffee Beanery argued against the appeal, stating it should be barred because the franchisees did not appeal the district court’s original dismissal order on March 3, 2008, which was based on the Eastern District of Michigan judgment. The appeal court judges shot down that notion saying that at the time of the original dismissal order the district court judgment enforcing the arbitration award was still operative and therefore, there was no viable basis for appealing that court’s dismissal of the case.

Coffee Beanery also argues that the franchisees’ motion to set aside judgment and reopen the case was untimely. But the Fourth Circuit judges stated, “We reject this argument, too, as WW, LLC (Williams and Welshans’ company) filed its motion soon after the Sixth Circuit’s mandate became final, which was the basis for its motion to reopen this case.”

The circuit judges stated that because the district court failed to apply the pertinent federal rule that a case can be reopened with a prior order or dismissal based on a judgment that has been subsequently overturned. 

Attorney Rifkin said the opinion shows personal liability on behalf of the officers of the company and therefore, regardless of the condition of Coffee Beanery, he thinks there are other resources from which they can draw.

Rifkin also stated that the opinion reflects that the officers of Coffee Beanery are personally liable for violations of the Maryland Franchise Law, as well as for the common law fraud they committed. “Their behavior virtually destroyed my clients’ lives. Unfortunately, Coffee Beanery has done this to other franchisees as well. Without this judgment and a fair substantial settlement, my concern is that they will continue to engage in the types of illegal behavior they have used in our case,” he asserted.

In a call yesterday to Coffee Beanery CEO JoAnne Shaw, she said she was not aware of the Fourth Circuit Court’s opinion, but would contact her attorneys. Coffee Beanery attorney Karl V. Fink of Pear Sperling Eggan & Daniels said they had no comment.

--

Related Articles:

AttachmentSize
Coffee Beanery 4th circuit opinion.pdf28.81 KB
Your rating: None Average: 5 (3 votes)