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LOUISVILLE, Kentucky – A judge has granted franchisees of a co-branded Long John Silver's/A&W restaurant franchise the right to proceed with new depositions of Yum Brands. The order will now force the company to produce critical documents surrounding its sale of the two concepts.
When Yum failed to comply with the first court order in August 2013, franchise owners Sandra and Robert Jankovich, under Janko Enterprises, filed another motion through attorney W. Michael Garner. They also asked the court to award costs and fees for their current effort to enforce the prior order of the court.
With Yum losing its argument that the information requested was “overbroad or unduly burdensome,” the judge also granted franchisees’ request to have Yum attorneys pay to franchisees all expenses associated with having to retake the depositions.
Magistrate District Judge Dave Whalin ordered Yum! to now release pertinent documents from 2006 to 2012 that surrounded the company’s decision to divest its interest in Long John Silver's and A&W Root Beer. He determined the information was highly relevant to the franchisees’ lawsuit claims that Yum senior representatives, including former president Emil Brolick and former CFO Cheryl Balkenhol*, mislead them about the success of the dual-branded franchise. Yum allegedly knew the concept was not viable, and was in the process of selling off the two companies.
Yum Brands argued that the documents it previously submitted in depositions, including the Goldman Sachs Offering Memo of January 18, 2011, outlining the sale of the Long John Silvers and A&W chains, should suffice. Judge Whalin disagreed. “The discovery documents produced to date appear to . . . be materially incomplete. The Court has broad discretion over the control of discovery, and its decisions in this respect are not lightly set aside.” He further scolded, “Any documents of Yum! that refer to the possible sale or divestiture of the LJS brand during 2006-to-2011 time frame fall within the scope of request . . . and should have been produced by the Defendants [Yum] in a timely fashion.”
Janko, through its motion to compel further discovery, also wants Yum to “select a company representative with sufficient knowledge” to testify to the relevant issues in the case. Those three issues surrounding Yum’s decision are to divest Long John Silver's and A&W; the true performance of the company-owned Long John Silver brand; and the company’s decision not to continue franchising A&W and LJS stores, combined or separate.
Janko further claimed that the previous depositions of Yum’s treasurer William Lawrence Gathof were not sufficient. They contend he was not knowledgeable about “significant business decision” by company officers to sell the two brands, even though that pertinent information should be well-documented by Yum. Gathof did testify that Long John’s president Brolick and former CFO Balkenhol would be examples of senior corporate leaders who would be involved in the decision to divest. And that the decision would also have to be approved by the board of directors.
The judge agreed. The court order explained that Yum, under notice for a deposition (Rule 30(b)(6) is also obligated to produce witnesses knowledgeable about the information surrounding the company’s decision and to prepare them to testify not simply to their own knowledge, but the knowledge of the corporation.
In their lawsuit, franchisees Sandra and Robert Jankovich claim they were fraudulently induced by Yum executives from the start when they were researching what franchise they wanted to purchase. After they began contacting the company about a Taco Bell restaurant, Yum highlighted its other brands. Pointing mainly to its new dual concept of a Long John Silver's and A&W restaurant, it promoted it as “a unique opportunity that could offer seafood and hamburgers under one roof.”
Encouraged by the rosy predictions at Discovery Day in Louisville, the Jankovich couple proceeded with their purchase of their franchise. Yum then sent the prospects its Uniform Franchise Disclosure Document (UFOC) in June 2006, outlining the co-branded franchise under Long John Silver's and A&W Root Beer. A representative then visited the couple in Florida, showing them company-owned and franchisee-owned restaurants in their area, allegedly indicating the stores were making at least one million in sales.
The UFOC provided to the Jankovich couple, under the control and direction of Yum, failed to disclose required material facts concerning the role of the National A&W Franchisee Association (NAWFA).
While the UFOC stated that A&W was “unaware of any agreements currently in effect which significantly limit franchisees’ right to use or license the A&W trademarks, in reality agreements between A&W and NAWFA “substantially limited their use in co-branded stores with Long John Silver's. NAWFA’s role also included the right to review and approve or reject all proposed co-branding programs, including operation aspects, menu, interior or exterior design, and the use of logo-ed supplies.
In addition, the disclosure did not state that A&W had agreed that its products would not be co-mingled or made available on the same menu boards as LJS products in a co-branded restaurant. And that it would not permit in cross-brand promotions of the two brands.
The franchisees contend that if they had known about the A&W agreement with the franchisee association, with all the limited conditions, they would not have purchased the franchise.
Soon after signing their franchise agreement, the Jankoviches maintain that Yum Brands dragged its feet in approving their building layout, and delayed construction of their restaurant, shuffling them from one employee to another from February 2007 until April 2009. The company also failed to provide Janko Enterprises with the necessary documents to receive the financing it needed.
Yum! then ordered a “hold” on all Long John Silver's projects for construction of restaurants, stating all company-owned stores were being sold off as Yum! was determining whether or not LJS should be sold.
After three years of delay on the part of Yum and LJS, the franchisor advised Janko in March 2010 that it would no longer be supporting the co-branding of the A&W/Long John Silver's restaurants because the concept was not profitable. They also informed the franchisees that A&W would terminate their part of the agreement with Janko, although Yum! would allow them to develop their restaurant under Long John Silver.
Janko was never able to complete the construction of its building, and in January 2011 Yum! and LJS terminated its franchise agreement, purportedly because Janko did not proceed with the construction of its restaurant, and for violating other terms of its contract.
Janko Enterprises filed a lawsuit on June 22, 2012 against Yum! Brands and Long John Silver, claiming fraud, breach of contract, tortious interference with contract by Yum, breach of good faith and fair dealing, and violation of Florida Franchise Act and Florida Unfair and Deceptive Trade Practices Act.
While the judge said stated in his latest order that Yum had fought hard against the latest motion to provide additional documents in depositions with one of its high-level company officers, he emphasized, “Common sense indicates that the [Yum] Defendants did not wait until Jan. 18, 2011 to decide to sell Long John Silver,” the date of the Goldman Sachs’ Offering Memo. He said the decision “would hardly have been a casual, off-the-cuff, or undocumented one.”
He asserted that logic suggests that just the opposite is true. A significant business decision to sell an entire brand such as Long Johns Silver's and A&W, which Yum Brands had never done before, would have been thoroughly considered by top company officers based on their review of hard financial data and would be well-documented.
Prior to publishing, Blue MauMau received an update on the lawsuit. Franchisee attorney Michael Garner in Minneapolis said cross-motions for summary judgment have now been filed and one is pending. He expressed, “I think this court order filed in April has put us in a good position to mediate with Yum Brands.
Garner said the re-take of the deposition has already occurred. The company’s designated person to be deposed was Richard “Rick” Carucci, who served as president of Yum from May 1, 2012 to March 31, 2014. Prior to that, he was Yum’s chief financial officer from March 17, 2005 to May 1, 2012.
Some highly sensitive documents had been produced in deposition. They are subject to claim of confidentiality and under protective order.
Yum Brands and its outside counsel Jeremiah Byrne of Frost Brown Todd in Louisville, Kentucky did not respond to Blue MauMau’s emails and telephone calls requesting an interview or comments for the article.
**Writer's Note: Due to error in legal documents, the name of Yum Brands former CFO has been changed to Cheryl Balkenhol.
|Janko v Yum Order Granting Mot to Compel (96) (Filed 4-3-14).pdf||97.89 KB|
|Janko v Yum Order Granting Mot to Continue Dep (97) (Filed 4-3-14).pdf||160.87 KB|
|Janko Second Amended Complaint (47) (Filed 6-26-13).pdf||125.37 KB|