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CHICAGO — After Seattle’s Best Coffee terminated a franchisee’s licensing agreement for breach of contract and filed a lawsuit against him, the shop owner fought back. He has now added racketeering claims in his amended answer and countersuit, and is naming Starbucks Corp., which has been the owner of the chain since 2003.
Dady & Gardner law firm, representing Amit Patel and his company Devesh, Inc., claims in its latest court filing that Seattle's Best, Starbucks, its officers and directors violated the Racketeering Influenced Corrupt Organization Act. They state that the franchise system under Seattle’s Best and Starbucks is an association-in-fact “enterprise,” which conducted its affairs through a pattern of racketeering activity. They explain that the license agreement under Devesh, Inc. imposes the “hierarchical” structure of that enterprise.
To further prove racketeering claims, documents detail that Starbucks has had control over the revenue earned from its sale of products to Seattle’s Best Coffee licensees since 2004. Starbucks requires franchisees to purchase supplies from its chain at higher prices than what they agreed to pay. Without the legal existence of Seattle’s Best licensees, Starbucks would not have been able to “effectuate its scheme of operating” the enterprise in a manner to defraud Patel’s company.
Lead franchisee counsel John D. Holland said, “We think it’s peculiar that Seattle’s Best Coffee is supplied by Starbucks. We have material questions about how that relationship has functioned and if that disadvantaged our client in this case.”
The Dady attorneys also assert that Starbucks and Seattle’s Best used acts of extortion, mail and wire fraud, required under RICO violations. Among them, Starbucks fraudulently induced licensees to sign agreements by making misrepresentations and omitting facts that were vital to the success of their business.
Seattle’s Best allegedly devised a scheme to defraud franchisees by concealing Starbucks’ role in the Seattle’s Best system in purchasing products and supplies. They were required to buy at prices that were typically 30 to 50 percent higher than wholesale, and drastically higher than the price prevailing in the industry. Devesh, Inc. claims Starbucks sold identical products to Seattle’s Best franchisees at prices that were up to 80 percent lower.
Seattle’s Best then required shop owners to sign releases of all claims against the coffee franchisors.
In implementing the scheme, Starbucks used the U.S. mail, interstate wires (electronic fund transfers) as means of extortion, knowing that licensees were located nationwide. The coffee giant’s acts took place with the domain of interstate commerce and across state lines.
Starbucks allegedly used extortion by demanding Devesh, and possibly other licensees, sign a release under the threat that failing to do so would result in economic injury to the franchisee. The coffee giant then reinvested the racketeering income that was derived from defrauding franchisees into operating, maintaining and sustaining Seattle’s Best, and allowing Starbucks to continue its racketeering activity. Starbucks’ predicated acts against certain franchisees began in 2008 and continue to present. They contend those acts against Devesh started in 2010 continue to present.
History of the alleged extortion
As background, Amit Patel purchased his Seattle’s Best Coffee cafe on August 27, 2009, after receiving a copy the franchise disclosure document, referred to as the FDD. He then signed a ten-year lease for his selected location at 55 East Monroe Building in Chicago. After certain mandatory changes were made, Seattle’s Best approved the lease for 1,931 square feet of space. On that document, the franchisor insisted that, if Devesh’s franchise was terminated, Seattle’s Best would have the option to assume the lease.
Another requirement by the franchisor was that Amit Patel had to personally guarantee the lease, although signed in his company name Devesh, Inc. The franchisee then expended approximately $225,000, including sales tax, in development costs and opened his Seattle’s Best Coffee cafe in November 2011.
A year after signing his license agreement, Starbucks opened its own cafe one-half block away from the Devesh coffee shop. The franchisee claims the Starbuck’s Cafe is virtually identical to a Seattle’s Best Cafe in terms of layout and equipment. Patel immediately voiced his concern, explaining that the franchisor led him to believe that they would not face any competition from the company’s owner Starbucks. The only response he received was that Seattle Best had no control over how Starbucks conducted its development.
During the next year, Patel’s company realized Seattle’s Best did not sell them a viable, profit-producing franchise, and contested certain practices of the franchisor. Seattle’s Best then terminated his agreement on August 2, 2012, alleging Devesh had defaulted under its license agreement. Patel argues that he was terminated for contesting certain practices of Seattle’s Best.
When Patel’s attorneys discovered the franchisor failed to provide him the correct disclosure document, the one registered in Illinois, he knew the information he relied on when purchasing his franchise was not accurate. The Franchise Disclosure Document given by the franchisorcontained mathematical errors and a guaranty and subordination agreement that he was required to sign, unlike the registered document.
Seattle’s Best also did not disclose Starbucks Coffee as its parent or affiliate in its documents, nor its 10-year litigation history. Starbucks had been held liable in a civil lawsuit alleging it was engaged in predatory practices constituting antitrust violations to prevent others from opening locations that offered specialty coffee beverages. The case settled out of court after Starbucks lost on summary judgment. Those terms should have been disclosed.
Amit Patel also alleges that Seattle’s Best did make financial performance representations to him and his company. In stating in its disclosure document that $10,000 to $15,000 of supplies and inventory would be adequate for one to two weeks of operation, franchisees could easily project potential sales and revenue. Now he questions those figures. Prior to his coffee cafe opening, company officials told him in a meeting that he could easily achieve sales of $2,500 per day.
Patel contends that Seattle’s Best solicited franchisees knowing the stores were “largely a failure” and unprofitable, and not disclosing the truth as to how many units it had in its system. Nonetheless, it sold franchises to minimize the losses Starbucks sustained from closing hundreds of locations. This information was not disclosed to Patel and other licensees.
Dady & Gardner filed five counts against the coffee companies, its officers and directors. They are asking for actual and punitive damages, costs, disbursements, interest and attorneys’ fees, including triple damages to be determined at trial. The law firm asks the court to grant Devesh, Inc. rescission of its license agreement and all other contracts.
Fredric “Ric” Cohen of Cheng Cohen, representing Starbucks, did not respond to a telephone call asking for comments regarding the latest claims of racketeering violations. His firm filed a motion to dismiss for failure to state a claim and failure to plead fraud with particularity on January 22. The next status hearing will be on March 20, 2013.
|Seattle's Best Coffee AmendedComplaint,RICO.pdf||503.2 KB|
|Seattle Best Complaint.pdf||68.5 KB|