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Franchisees Allege Pro-Cuts and Regis Made Bogus Store Earnings Claims

MINNEAPOLIS - Franchisees in Minnesota have filed a lawsuit against Pro-Cuts sports-themed hair care salons and parent Regis Corporation that claims the firms made illegal financial performance representations when selling the Pro-Cut franchise opportunity. The group of salon owners allege both firms violated the Minnesota Franchise Act, committed common law fraud and gave negligent misrepresentations to unsuspecting buyers.

Regis Corporation, NYSE:RGS, operates numerous brands in addition to their Regis Salons. They include MasterCuts, SmartStyle, Supercuts, Costcutters, Sassoon Salons, Cool Cuts 4 Kids, HairCrafters, Holiday Hair, Jean Louis David, Magicuts, mia & maxx, Mitchell's, Panopoulos Salons, and Roosters Men's Grooming. They tout that they are ten times larger than their nearest competitor. Regis owns, franchises or holds ownership interest in approximately 10,000 worldwide locations.

All franchisees purchased their franchises between April 2012 and January 2014. The franchise license gave them the right to operate the Pro-Cuts Sports salons in the Twin Cities area. All but one salon owner received a Franchise Disclosure Document (FDD) for Regis' Supercuts brand prior to signing their franchise agreement. They were told to refer to Item 19 for the financial performance data, showing what they could expect when they signed up for their Pro-Cut franchise.

Pro-Cuts also provided certain franchisees with a document, titled Supplemental Financial Performance Representation, to Item 19 of the Pro-Cuts Sports Franchise Disclosure Document, which was dated January 9, 2012. It gave further financial performance representations. Franchisees claim the Pro-Cuts Item 19 in its disclosure documents had misleading financial performance representations, and they failed to achieve anywhere near what the documents represented.

The complaint states that in late April, 2012, Karleen Bolin, Regis' director of franchise development, advised one franchisee that it would be difficult to "get a handle" on the financial performance of a prospective Pro-Cuts Sports franchise because only two salons were open, which meant there was limited financial information. Bolin allegedly said that Item 19 of the Supercuts FDD could be used as a proxy for financial information to be expected at a Pro-Cuts salon. She said Supercuts was a very successful brand and the franchisee could expect similar financial performance in the Pro-Cut franchise.

Bolin also gave a Pro-Cut franchise purchaser a list of Supercuts franchisees, not located in Minnesota, to contact regarding the Pro-Cut franchise opportunity. The complaint states, "Not surprisingly, these Supercuts franchisees painted a strong picture of their financial experience with the Supercuts brand, including short break-even periods."

Misrepresentations did not end there. Pro-Cuts also represented that their brand would be Regis' number one priority, and it would experience rapid growth, with 30 salons in the Twin Cities by 2013, and 900 locations in North America within 10 years. What the franchisees now assert in their lawsuit is that the Pro-Cuts brand has, in fact, been abandoned by Regis, and franchisees have been terminated.

Franchisees also claim Pro-Cuts misrepresented the marketing and advertising it was planning. The franchisor said it would engage in a $300,000 two-phase marketing plan in the Twin Cities. In reality, franchisees allege the company only completed the first phase. When Pro-Cut came out with advertising in late 2014, the salon owners asserted that it was "too little, too late." What franchisees had been left with was a failing brand, with little public awareness and a lack of advertising support from the franchisor to reverse the "death spiral."

On January 8, 2015, Regis' senior vice president and chief financial officer Paul Plate conducted a conference call with the Minnesota salon owners. He said he recognized that Pro-Cut franchisees were financially struggling and corporate-owned salons were experiencing similar problems, the amended complaint states. Plate also explained that additional Pro-Cut salons would not be added to the system, and the current company-owned locations would be sold to new franchisees for conversion to the Supercuts brand. The Regis senior VP and chief financial officer said, according to the complaint: "Pro-Cuts Sports franchisees' best chance for avoiding financial ruin was to convert to the 'different' Supercuts brand." He also expressed that neither Regis nor Pro-Cuts was willing to buy-back the franchisee's salons.

Through franchisee attorney J. Michael Dady of Dady & Gardner, the first amended complaint was filed in Minnesota district court, Hennepin County, on August 21, 2015. Franchisees claim Pro-Cuts distorted the operational, advertising, and financial services support they would receive, by telling the franchisees they would receive extensive support in the operation of their salons, that Regis' marketing team would provide the franchisees with marketing plans and support in carrying those plans out, and that Regis' financial services teams would monitor the franchisees' financial data and provide advice on improving performance. In reality, the franchisees were given little to no support from Pro-Cuts for advertising, operations, and financial services, the complaint alleges.

The lawsuit clearly states that the amended Federal Trade Commission Rule requires the following, "If the franchisor makes any financial performance representation to prospective franchisees, the franchisor must have a reasonable basis and written substantiation for the representation at the time the representation is made and must state the representation in the Item 19 disclosure."

It further states that the FTC Rule provides that "if a franchisor makes a financial performance representation, it must make certain disclosures. The representation must state whether historical performance data or projections are utilized for the representation and differing disclosure must be made depending on this basis."

The 56-page amended complaint asserts five counts. It claims violation of the Minnesota Franchise Act, violation of the Wisconsin Fair Dealership Law, common law fraud, negligent misrepresentation, and declaratory judgment. The franchisees seek rescission of the franchise agreements; restitution and other damages; judgment declaring that the franchise agreements do not contain a valid, enforceable agreement to arbitrate and that the plaintiffs are not required to arbitrate their claims; and an award of attorney fees, costs, disbursements, and interest.

Minneapolis attorney Michael Dady said Regis Corporation should know better, that they are a very experienced franchisor of many brands. "How could they have allowed this to happen? They seemed to be under intense pressure to sell a knockoff of SportClips, which has been very successful in attracting young males interested in sports. So they came out with Pro-Cuts Sports salons." Dady explained that their "sports" concept was a highly speculative investment, so they needed an extra boost to sell the risky venture. He said, "They needed tools to do it, and unfortunately, they used their Item 19 financial performance representations of their Supercuts brand."

Dady said it is incredulous that this happened, that it cost their clients millions of dollars because they invested all the money that they had and what they could borrow. He said, "Regis acknowledged what they did to our clients was wrong, so we are exercising our rights under the Minnesota Franchise Act, to precede together in litigation."

Blue MauMau reached out to Regis Corporation, asking for an interview with its legal counsel regarding the allegations. The only response sent was this: "Regis Corporation does not discuss pending disputes."

The case, Jason Ansari, et al. v Regis Corporation, was featured in the Commerce Clearing House Franchise Business Guide as one of its top stories in its Antitrust Law Daily Wrap Up, August 25, 2015.

 

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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.