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Franchisee Group Sues Cold Stone

Franchisees say its time for Cold Stone Creamery to give an accounting of Gift Card
A Cold Stone Creamery, photo/blue maumau; Gift Card/Cold Stone web site

MIAMI – The law firm of Zarco Einhorn Salkowski & Brito, PA filed a lawsuit today on behalf of an independent franchisee association against franchisor Cold Stone Creamery for failing to give its members an accounting of monies collected from third-party vendors and the franchisor's gift card program.The suit, filed in Miami-Dade County, Florida, is for declaratory relief in resolving disputes between the parties. The complaint states that the National Association of Cold Stone Creamery Franchisees (NIACCF) has standing.

Lead counsel for the franchisees, Robert Zarco, said: “Kahala and Cold Stone Creamery left the NIACCF with little choice other than to allow the courts to settle their differences.”

NIACCF, which has an open membership to all current Cold Stone franchisees and area developers, was formed October 6, 2010. The association states its mission is “to help increase store profitability and build asset value of stores for franchisee benefit and the possibility of future resale. The purpose in doing this will ideally be to work with corporate where it is possible to make changes to benefit franchisees and independently where necessary and within our legal right as franchise owners.”

A recent memorandum from NIACCF’s outgoing president Rudy Puig stated that the association had pushed hard to work with Cold Stone Creamery, an entity under Kahala Corporation in Arizona, to be more transparent. “To date, our letters and requests to Kahala have pretty much fallen on deaf ears, but that is not going to deter us from our mission.” He said Kahala would love to see the NIACCF die on the vine, but that the franchisees would prevail. “We will press forward in 2012 with our strategic goals and we will bring value to our members,” wrote Puig.

As part of the complaint, attorney Zarco asserts that the NIACCF members will be harmed by Cold Stone’s failure to provide the organization with an accounting of vendor rebates under its Flexible Marketing Program (FMP). Those funds are designated to be used for marketing purposes. “The FMP was specifically designed to build the Cold Stone brand reputation and create consumer awareness in the marketplace,” he states in the complaint.

Franchise owners are seeking an accounting of what percentage or amount vendor rebates that are earmarked for Cold Stone’s FMP are actually being used for marketing. Shop owners also want to know to what extent are the prices of supplies from vendors increased in order to offset kick backs to the franchisor.

The NIACCF states that the franchisor agreed to provide that information to store owners on several occasions, but it has failed to do so.

Profits from unredeemed gift cards

Another dispute between franchise owners and Cold Stone is what’s known in the industry as “gift card breakage”, referring to gift cards that have been sold but not redeemed. “Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards,” the complaint states.

Again, NIACCF has requested a detailed accounting of the amount that exists, and the accrued interest, but Cold Stone has not provided information, despite its promise to do so.

NIACCF’s counsel is asking the court to require Cold Stone to provide the detailed accounting of the vendor programs and the revenue generated from the sale of gift cards and the breakage that exists, including interest. They are asking the court to award their costs of the litigation and for other relief deemed just.

Zarco law firm represents franchisee associations

A dispute arose a year ago, after CNBC television aired its documentary, Behind the Counter: The Untold Story of Franchising. Cold Stone refused to be interviewed for the documentary and was upset by what it perceived as a negative bent of the program.

The company then released a bulletin (pdf) to its franchisees, stating: “Let us begin by letting you know we are pursuing an aggressive PR campaign, as well as a potential legal campaign to clarify our position and correct the inaccuracies presented in the CNBC piece.” They stated that they had “engaged the legal counsel of Robert Zarco to represent the Cold Stone franchisees.”

Zarco received an initial retainer for services to the NIACCF. At that time, he stated to Blue MauMau, “I told Kahala and Cold Stone that they would have to sign a waiver of conflict of interest that they will never assert that my representation of the NIACCF and the NAB [National Franchisee Advisory Board] in this matter will constitute a conflict for me to represent franchisees and area developers in the future. They agreed.”  Zarco said that was the condition of his accepting Kahala's payment for legal representation of the franchisees. “It was very important for them to understand I am not creating a conflict of interest and not representing the franchisor against CNBC or the franchisees,” he explained.

In response to recent conjecture in regard to the law firm having received a retainer fee from franchisor Kahala/Cold Stone and speculation about whether the firm really represented NIACCF and Cold Stone National Franchise Advisory Board, Blue MauMau has received a copy of the retainer letter, dated December 27, 2010. The non-refundable initial fee to the Zarco law firm is in the amount of $50,000. Robert Zarco has stated that he and his firm have not received any other amounts from Kahala or Cold Stone and will not receive payments in the future. The letter clearly emphasizes that the firm is working on behalf of the franchisees and not the franchisor, Kahala/Cold Stone. It states, “This letter will confirm the understanding that the law firm of Zarco Einhorn Salkowski & Brito, P.A. will undertake representing the interests of the National Advisory Board (NAB) and NIACCF in the connection with their claims against CNBC and [former franchisee] Cecil Rolle.”


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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.