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BALTIMORE – A judge ruled last week that two racketeering counts could be tried in front of a Maryland jury against The Coffee Beanery, its owners and two company officers.Those type of charges, seldom seen in franchising, are typically associated with the Mafia, illegal gambling and extortion.
In a previous article Chicago attorney Carmen Caruso said the same pattern of racketeering activity creates the potential for both civil and criminal liability. “You are now calling the franchisor a criminal, saying whatever they did here they should be in jail,” declares Caruso.
Attorney Harry M. Rifkin, who has represented the franchisees in this case for the past seven years agreed. “RICO (Racketeer Influenced and Corrupt Organizations Act) has both civil and criminal elements, the main difference being that a criminal case is brought by a [government] prosecutor and the legal standard is beyond a reasonable doubt,” states the attorney. “Our legal standard for proving our claim is clear and convincing evidence, which is a higher standard than normal non-fraud claims, that only requires a preponderance of evidence. That’s called clear and convincing evidence. But if a [government] prosecutor wants to look at this behavior, they may do so.”
In addition to the two racketeering counts, three other non-RICO counts remain: violation of Maryland’s Franchise Act, intentional misrepresentation, and negligent misrepresentation. While the judge ruled that two employees, Ken Coxen and Owen Stern, would be dismissed from the latter two counts, the other individuals named remain. The court also dismissed two RICO conspiracy counts and a claim of detrimental reliance. All will be tried on the remaining five counts, including owners JoAnne Shaw, Julius Shaw, and their two sons Kevin and Kurt.
Jeffrey E. Grell of Grell & Feist, representing franchisees Richard Welshans and partner Deborah Williams on the racketeering charges said going forward both sides have a lot to consider. “The most difficult part of it is the uncertainty that RICO brings into the equation. For the franchisee plaintiffs, RICO is a very complicated claim to prove, and there are a lot of elements to it. The plaintiffs bear the burden of proof. From their perspective it’s great to win against a motion to dismiss. But that doesn’t mean the battle is over. It’s far from over. There are a lot of hurdles that they need to cross,” Grell surmised.
The Minneapolis attorney said the big one would be a jury trial, if the case doesn’t settle before then. “That’s not an easy task. The complications of the statute and the facts, that are a very laborious thing from the plaintiffs’ point of view. You hope you get the chance to present your case to a jury but there is a risk that you are not going to sustain your burden of proof. In a RICO claim, that’s always a big consideration for the plaintiff.”
On the other side, Grell said the defendants always have a huge risk of failure. “If they fail at trial and the plaintiff sustains its burden and proves damages, then they will be facing triple damages, attorney fees and costs. In a situation like this, even now, the Coffee Beanery might face the prospect of litigation from other franchisees, because of the successful result of the motions to dismiss for Deborah and Richard. So, if the plaintiffs get a successful result at trial it would increase the chance of other franchisees suing,” Grell explained.
A “long and tortured history” of litigation
Franchisees Rick and Deborah Welshans have fought against The Coffee Beanery for seven years, beginning in 2003 when discussions began in purchasing a franchise. After the Maryland couple received the franchise disclosure documents, they realized the “cafe concept” in which they were investing was not distinguished from the usual coffee shop model. Omitted were the unaudited financials and other pertinent information related to operating a restaurant-type cafe’, including the expense of additional construction, meal preparation equipment, food and other expensive supplies.
Judge William M. Nickerson gave a recap of what he called the case’s “long and tortured history.” He explained that the legal dispute, filed in 2005, was subject of an eleven-day arbitration in Michigan, resulting in a favorable ruling to Coffee Beanery. It generated judicial opinions from the district court in Michigan’s Eastern District, the Sixth Circuit Court of Appeals and the Fourth Circuit Court of Appeals. Judge Nickerson said the case was eventually presented before his court, the District Court of Maryland, on remand from the Fourth Circuit.
In their March 2012 second amended complaint, the franchisees filed eight counts against Coffee Beanery, its owners and employees: (1) violating the Maryland Franchise Act, (2) detrimental reliance, (3) intentional misrepresentation, (4) negligent misrepresentation, and four counts of racketeering, two related to conspiracy. They claimed that the Coffee Beanery through its owners, officers and employees participated in the predicate acts, required to be proven under RICO law.
While franchise attorneys argue that racketeering charges are not easy to prove, RICO expert Grell had no problem laying out the allegations against Coffee Beanery in his complaint. “Since 1999 . . . JoAnne Shaw, Julius Shaw, Kevin Shaw, Kurt Shaw and Owen Stern, Ken Coxen . . . conducted, participated in, engaged in, and operated and managed the affairs of CBL [Coffee Beanery) through a pattern of racketeering activity . . . Under RICO, those persons constitute an ‘enterprise’ and their activity consists of acts of mail, wire and bank fraud.”
Grell explained that the Shaw family and other company perpetrators engaged in the fraudulent scheme over a substantial period of time, against a number of franchisees. He said today, they are still performing their acts of racketeering as a regular way of doing business, and threatening to continue it indefinitely.
Judge rules in the most logical way
After a firestorm of motions ceased this summer between parties, Judge Nickerson began his analysis of those filings “in what he considered the most logical way.”
Coffee Beanery’s attorney William “Bill” Killion of Faegre Baker Daniels, who just recently took over the case, asked the court to dismiss all claims against the individual Coffee Beanery parties arguing that the Maryland district court may not have jurisdiction over them. But the Welshans opposed that notion, stating that by not asserting their defense earlier Coffee Beanery waived the franchisor’s claim. The judge agreed stating, “As the individual defendants did not raise the personal jurisdiction defense in their original motion, it has been waived and can no longer be asserted.” He said to allow it now would undermine the purpose of the law that governs, which is to avoid “time-consuming, piece-meal litigation of pre-trial motions. He denied Coffee Beanery’s supplemental motion to dismiss, giving the franchisor and its counsel a tongue lashing.
Judge Nickerson said he had been troubled by the franchisor’s motion. Although the Welshans suggested it was “frivolous” and was a “deliberate scorched earth strategy employed to cause expense to the franchisees and delay resolution,” the judge said he would not be so quick to jump to that conclusion. But he warned Coffee Beanery and attorney Killion that the court would not in the future tolerate any type of strategy that would result in “unwarranted delay in the case or cause the court to waste resources.”
Regarding the franchisees’ motions to sanction Coffee Beanery and Killion for that behavior, the judge said they would be denied, because he did not feel they were presented for any “improper purpose.”
Moving on to other motions
Another motion filed by Coffee Beanery attorney Killion asked the judge to take notice of Coffee Beanery defendant Kevin Shaw’s felony conviction, which he failed to disclose to franchisees in disclosure documents. Killion insisted it was a misdemeanor crime of grand larceny under $100 and not a felony as the arbitrator stated in her decision. Shaw now states he has a sealed certificate showing it was a misdemeanor. The Minneapolis attorney asked that the allegations be stricken by the court on the “felony” versus “misdemeanor” matter.
But the judge wasn’t buying it. The certificate provided by Coffee Beanery does not specify from what conduct the larceny resulted or verify the absence of a felony conviction on Mr. Shaw’s criminal record. The judge said he would not strike it. He described that even though this issue has apparently taken on some importance to Killion, in the scheme of this entire lawsuit the stealing of traffic cones twenty years ago is a rather minor point. "The real issue has to do with the allegations related to Coffee Beanery's failure to disclose or [its] fraudulent misrepresentation of information," he declared.
Attorney Killion said they were pleased with the judge’s decision. “For years now, the plaintiffs have claimed that Kevin Shaw was convicted of a felony. And for years now, Kevin has denied the claim. Kevin even went to the court in Michigan and got a certified document that proved that he had pled guilty to a misdemeanor (not a felony) of theft of traffic cones at a construction site.”
Killion issued this full statement (click here).
Analysis of Coffee Beanery’s racketeering scheme
The judge gave a thorough analysis of all the necessary elements related to supporting RICO claims according to the statutes. To prove liability under RICO a plaintiff must establish four essential elements: conduct; of an enterprise; through a pattern; of racketeering
Judge Nickerson said the franchisees had outlined the alleged scheme to defraud, a time frame for the scheme, who was targeted by the scheme, the contents of the allegedly fraudulent communications that were sent using the mails and wires, and what Coffee Beanery defendants hoped to obtain through the scheme. They also explained the role the various defendants played in the Coffee Beanery organization and that the Individual defendants, as members of the management team, continued to promote the café concept and send out fraudulent UFOCs even though they knew that the concept had not been successful. Judge Nickerson ruled, “. . . coupling these specific allegations with the broader allegations, that the defendants used the mails as part of the scheme to defraud other unnamed potential franchisees is sufficient to meet the requirements of the RICO statute.”
On the claims of conspiracy under RICO, Judge Nickerson said, “. . . to allege a conspiracy claim, a plaintiff must allege that “each defendant agreed that another coconspirator would commit two or more acts of racketeering. Furthermore, survival of a claim for conspiracy is dependent on a plaintiff first successfully stating a claim . . .” The judge said the franchisee plaintiffs had not alleged that the individual RICO defendants were acting outside the scope of their authority, that they were in the highest level of management. Judge Nickerson asserted, “Presumably they are the individuals steering the ship, so their authority is largely without limitation, and, as the scheme to defraud allegedly became the “regular way in which Coffee Beanery does business, such conduct was likely within their scope of authority.”
Harry M. Rifkin, who has represented franchisees Richard Welshans and Deborah William for the past several years said he was happy with the ruling. “Unfortunately, I am not going to be totally happy until my clients get their day in court and get the relief they are entitled to. But this is another step in a long war, hopefully one that brings us closer to finally concluding this matter. Until Rick and Deborah are fairly compensated for their losses, the nightmare doesn’t end for them.”
W. Michael Garner who recently joined Rifkin’s team agreed that the franchisees’ side were pleased. He added, “This is a decision that breathes life back into RICO for franchisees. Going back to the early 1990s, there were some decisions where franchisees made good claims against franchisors for RICO violations, but then the courts cut back a lot on civil RICO. There hasn’t been anything for quite some time. So this is a very significant decision in that respect.”
|Coffee Beanery Memorandum Opinion of Judge Nickerson.pdf||116.34 KB|
|Coffee Beanery Order on motions.pdf||25.66 KB|