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Franchisees Sue Papa Murphy's for over $23M; Allege Fraud, Misrepresentation

BMM_6378 VANCOUVER, Washington – Twenty franchisees have filed a lawsuit against Papa Murphy’s Take N Bake Pizza chain, alleging the company induced them to purchase their franchise through fraudulent disclosure documents and misleading financial performance information.

The franchise owners accuse Papa Murphy’s of misrepresenting the financial performance representations (FPRs), in other words the earnings of its an average franchise. Worse, they were allegedly required to waive their legal rights, a clear violation of state law. They say the were also routinely overcharged by the franchisor for mandatory local marketing. Because of the company’s wrongful acts, they are seeking an award of $23 million plus treble damages. The franchisees state that Papa Murphy’s also encouraged them to invest their personal money into their franchises, draining their 401(k) assets and other retirement savings.

The lawsuit (pdf), which was filed in Superior Court of the State of Washington by attorney Howard Bundy, names Papa Murphy’s International and various other entities, including majority owner Lee Equity LLC. Company officers and employees are also named in the legal action, specifically those who were directly involved in the franchise sales process, including the creation and approval of the relevant franchise disclosure documents and agreements.

Among them are CEO/chairman of the board John D. Barr, CEO Ken Calwell, CFO Janet Pirus, and other directors of the company. Also included are senior vice president VP of strategy Jayson Tipp and senior vice president of development Kevin King. Victoria Blackwell, Papa Murphy’s senior vice president and general counsel is also named, stating that she was likely hired by the franchisor because of her knowledge and experience in law.

The franchisees bring multiple allegations against the country’s fifth largest pizza chain. Among them are fraud, negligent misrepresentation, breach of contract, and violations of Washington Franchise Investment Protection Act and Washington Consumer Protection Act. The franchisees, from eight states, consist of single and multiple-unit owners, including some who have signed area development agreements for specific territories.

The lawsuit emphasizes that “the FDD is the primary source of information for the prospective franchisees and is strictly regulated by federal law under the Federal Trade Commission and by the Washington Franchise Investment Protection Act.” It further declares that state regulations make it clear that under the law franchisors cannot make any untrue statement of fact about the franchise.

That is precisely what the franchisees claim Papa Murphy’s franchise chain did in selling them their franchise businesses. They assert that many of the officers and employees involved in Papa Murphy’s franchise sales and development knew that the financial performance representations in the Franchise Disclosure Document did not represent those of the franchisees’ regions. They claim company officials knew they were mischaracterizing store performance in those regions.

Core issues of the litigation

Financial Performance Representations:  Franchise industry expert Rob Bond, author of “How Much Can I Make?" stated earlier this year, “The single most important task for a prospective franchisee is to prepare a realistic cash flow statement that accurately reflects the economic potential of a franchise business. In order to do that buyers must be able to receive historical sales, expense and/or profit data on actual franchise operations to establish a solid basis upon which to make these critical financial projections.”

Papa Murphy’s, one of sixty-seven percent of franchise companies that do provide financial performance representations to prospective buyers, is now defending itself in this lawsuit against allegations from franchisees, many surrounding the information given in its FPRs.

The complaint against Papa Murphy’s alleges that at no point during its sales pitch to franchisees did Papa Murphy’s company officials disclose that the overwhelming majority of stores in the lowest performing tier were located in the same geographic region in which they were considering purchasing franchises. In April 2012 the franchisor added another table to its Item 19 titled “Benchmark Costs.” That illustration divided the stores into three performance based tiers and provided the average sales, operation cost and profits for each tier of “Benchmark Stores.” Franchisees claim that misleading data represented only a fraction of the outlets in the Papa Murphy’s system.

“The ‘Benchmark Costs’ table was the only place in the FDD in which the defendant [Papa Murphy’s International] provided any information regarding the average annual profits for its franchised outlets,” the lawsuit states. At no point was the table disclosed in the financial performance representations. And company officials never disclosed that the “Benchmark Stores” were not representative of all outlets or the outlets of their region. Instead, the annual profits shown were dramatically inflated and not representative of either the Papa Murphy’s system in the franchisees’ region or the system as a whole.

Attorney Bundy expressed his view on the importance of franchise earnings data, stating: “I have long been a proponent of more disclosure of the historical financial performance of existing franchised outlets. Unfortunately, as the number of Item 19 FPRs increases, we are seeing more artfully written disclosures that appear to be designed to obscure the true performance as it relates to the people who are investing.  Nearly sixty percent of the FDDs I have reviewed in the last year fit into that category.  It gives truth to a rough paraphrase of one of Harry Truman’s favorite sayings:  there are lies, damn lies and statistics . . . in that order.”

Required advertising expenditures: Another core issue in the legal complaint alleges that Papa Murphy’s knew the required local marketing and promotion expenditures, including advertising cooperative fees and required print media purchases, exceeded the required local marketing expenditure described in Item 6 of the FDD. The allegations state, “At no point in the sales process did [Papa Murphy’s] disclose to [franchisees] that they would be required to spend as much as twice the amount stated in the FDD or in the franchise agreements (or more) on required local marketing expenditures.”

Unlawful Waivers: The franchisees also allege that Papa Murphy’s tried to write provisions in the contract to circumvent state law. They allege the franchisor knew that the waiver of treble damages in the franchise agreement was unlawful under Washington Investment Protection Act. Several store owners state that they were required to sign waivers titled “Notices and Miscellaneous” containing provisions that “expressly waive any claim for punitive, multiple and exemplary damages.”

In responding to Blue MauMau’s request for an interview with a company official or attorney, a Papa Murphy’s International spokesperson stated, “At this point the company has not received or seen a copy of the lawsuit filing and, therefore, cannot comment on its contents at this time.“

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PapaMurphysComplaint.pdf1.85 MB
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