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Starbucks Suit Heats Up with Seattle's Best Store Owner

Starbucks
A Starbucks coffee shop in New York City. photo:steinberg

CHICAGO – A franchisee is embattled in litigation not only with franchisor Seattle's Best Coffee but also with coffee conglomerate Starbucks, guarantor of the franchise system.He claims the franchisor scammed him into buying a Seattle Best franchise, knowing the system was unprofitable. As part of the alleged fraud, the franchise company did not give him the correct franchise disclosure document, the one registered in the state of Illinois.

After Seattle Best terminated Amit Patel’s Devesh, Inc franchise for default on royalty and other payments, the company sued him for failure to comply with his post-termination requirements. By continuing to operate his coffee shop under the Seattle Best Coffee name, the franchisor alleges he is infringing on its trademarks. At the end of August, Devesh’s Chicago coffee cafe closed down and signs were removed.

The franchise owner answered the complaint late August and filed a countersuit through attorneys Dady & Gardner, also naming Starbucks as owner. Patel contends that Seattle Best gave him a franchise disclosure document (FDD) that was different than the one registered in the state of Illinois, and that both documents contain a multitude of misleading information. Had he known the truth about the system, Patel proclaims he never would have invested in Seattle Best’s franchise opportunity.

The Starbucks’ Connection

Amit Patel alleges that Starbucks, owner of Seattle Best Coffee, should have been listed in the franchise disclosure documents as an affiliate, showing the relationship. He states that a Starbucks cafe is virtually identical to a Seattle Best Coffee cafe in terms of store layout and the equipment used.

As background, the lawsuit states that Starbucks began its operation in 1970, roasting and distributing premium coffee, and opening shops by licensing its products and system worldwide. By 2008, Starbucks had over 16,000 locations around the world.

The mega-coffee operation also owns Seattle’s Coffee Company, which acquired Seattle’s Best Coffee in 2003 from AFC, better known as America’s Favorite Chicken, franchisor of Popeye’s and Church’s Chicken in Georgia. AFC had franchised the coffee chain, building it to numerous locations, franchised and company-owned. At the time of the acquisition, Starbucks did not engage in soliciting franchises for Seattle’s Best Coffee. Instead, the corporation entered into a licensing agreement with Borders Group Inc and its affiliates. At the end of 2008, Seattle’s Best had grown to 564 locations, compared to the 161 units it had in January 2006. Of those 564, Borders owned 483 stores.

At the beginning of 2008, Starbucks conducted an in-depth analysis of its portfolio and made the decision to close certain Starbucks stores. While the study identified 100 as being unprofitable, the company then evaluated locations. Although profitable, they were deemed to become unprofitable in the near future. Six hundred Starbucks fit that description and were shut down. Starbucks anticipated a pre-tax charge of $200,000,000 as a result of closing the 600 stores.

Seattle Best ramps up franchise program after closing 600 stores

Patel’s countersuit states that a few months after the closings took place, Starbucks’ Chairman Howard Shultz announced the company’s intention to expand the franchising of Seattle’s Best locations. The chairman stated that the real estate from the Starbucks closings could provide an attractive conversion opportunity to potential Seattle’s Best franchisees, in addition to the costs savings that Starbucks would enjoy.

Seattle’s Best hired Marie Gill as its director of franchise/business development to again start selling franchises, even though system-wide sales for 2008 were less than $200,000 per unit, with the minimum operating expenses being $210,000 annually.

Seeing the coffee chain’s solicitations, Amit Patel inquired about the Chicago location and received the franchise disclosure documents.  After he signed his license agreement on August 27, 2009, Patel executed a 10-year lease for his coffee cafe and, as required, personally guaranteed the lease. He also complied with Seattle Best’s request to assume the lease in the event his franchise was terminated. Patel’s company then invested $450,000 in the development of the coffee cafe.

Devesh’s sales in 2011 amounted to approximately $225,000, including sales tax, while the operation of the chain came to approximately $210,000. In August 2009, Starbucks signed a lease to open a Starbucks coffee shop just one-half block from Devesh’s Seattle Best Coffee cafe. Patel claims the franchisor led him to believe his store would not face competition from Starbucks. When he voiced his concern, Seattle’s Best officials said they did not have knowledge or control over where Starbucks opened its shops.

After operating for a period of time, Patel realized that the products sold by Seattle’s Best were not sold at a bona fide wholesale price. Rather, it was 30 to 50 percent higher than the prices prevailing in the industry. Starbucks, as a comparable wholesaler, sold identical products to its own licensees at a price that was up to 80 percent lower than products sold to Patel’s company, Devesh, Inc.

The store owner contested the way Starbuck’s was marking up the prices of its products. When Seattle’s Best asked him to sign a release of claims against the companies, he refused. The franchisor then terminated his license agreement. Patel feels that asserting his rights did not constitute good cause for termination.  

Franchisee claims fraud, incomplete disclosure

In addition to claims of breach of contract and implied covenant of good faith and fair dealing in selling products beyond industry pricing, Patel’s attorneys make two other assertions. They allege Starbucks and Seattle Best used deception, fraud, false pretense and promises, misrepresentations and concealment of material facts to defraud Patel and his Devesh Inc company, in violation of Illinois consumer law. 

The countersuit also claims the two coffee chains violated the Illinois Franchise Disclosure Act in not providing full and fair disclosures so that Patel could make an intelligent investment decision on the franchise opportunity being sold.

Allegations include misstating the initial investment of costs and supplies; failing to disclose that Starbucks was an approved supplier, and misrepresenting the number of approved suppliers for equipment; failing to disclose that Starbucks could open a competing location in franchisee’s territory; and making financial performance representations outside of Item 19, by providing inventory sales figures that translate into projected profits. The franchisor made representations that Devesh’s cafe would easily achieve sales of $2,500, and did not disclose that its franchise system was failing and not profitable.

Attorneys Dady & Gardner are asking for actual and punitive damages, attorney fees and costs, and for the rescission of Patel’s license and agreements.


Related Articles:

AttachmentSize
Seattle Best Complaint.pdf68.5 KB
Patel DeveshCounterClaim_Answer against Starbucks.pdf176.86 KB
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