Franchise Litigation Ties Up The Athletes Foot in Italy

PALERMO, Italy (Blue MauMau) – Winsport in Italy is suing The Athlete’s Foot and in turn The Athlete’s Foot (TAF) is suing Winsport. Over the past six years The Athlete’s Foot has been dragged through Italian courts and had franchise development stopped dead in its tracks by Italian master franchise Winsport slc. In fact, the court hearings in Palermo, Sicily may continue for years to come, with the next appeal set for December 20.

Fellow Italian franchise owners and candidates have been able to follow TAF’s legal battle in the media. Italy’s leading franchise journal, AZFranchising in March featured a story (pdf, Italian) that covered the lawsuit, showing two opponents fighting it out (see photo).

Italy Stumbles after Fast Start

Winsport opened five stores within an 18-month period from 1998 until 2000, only to have its agreement eventually terminated for not opening enough stores in Italy as per the franchise agreement’s development schedule. The fledgling Italian sports chain vehemently complained that development goals could not be met because it was not receiving the products and support promised in the agreement by The Athlete’s Foot Marketing Europe, the European arm of The Athlete’s Foot. And so in June of 2001, Winsport filed a lawsuit for roughly US$3.5 million in Palermo, Italy against Athlete’s Foot Marketing Europe S.A. (AFME), alleging breach of contract of the Master Franchise Agreement dated May 6, 1998. In the suit, Winsport says The Athlete’s Foot did not meet the clear terms of the franchise agreement, namely, it failed to:

• Organize a master franchise committee
• Provide any special make-up products (products with customized cosmetics for the Italian master franchise)
• Provide retail operating software
• Negotiate service agreements with suppliers

Clauses in the agreement in which Winsport says the terms were not met are listed here.

In response, AFME filed a countersuit.

Says Winsport’s CEO Giuseppe Musso, “I tried to settle in a friendly way, asking The Athlete’s Foot several times to give us what was stated in the contract, but with no success. Despite all the meetings with TAF’s middle management around the world in Washington, Lisbon, Milan, Munich, we never had the chance to meet with top management, who had the power to close this unpleasant litigation. This situation caused us a massive loss of money because of the purchase of the Master and the Start-up, and now it is costing us in terms of legal expenses.”

But NexCen Brands has distanced itself. Despite The Athlete’s Foot signs that once hung out on the Italian store fronts, Susan Goodell, a spokesperson for The Athlete’s Foot and NexCen, declared to this journal in October, “the franchise agreements are between AFME and Winsport, and have nothing to do with The Athlete’s Foot or NexCen Brands.”

Winsport’s CEO disagrees.

Emphasizing that AFME is an arm of The Athlete’s Foot, Musso states, “It is true that Winsport signed the contract with AFME, but the master franchise contract itself states that AFME belongs 100% to The Athlete's Foot. Mr. Robert Corliss is President of The Athlete's Foot USA and at the same time President of AFME.” He continues, “The contract states that AFME belongs to AFMAI LLC, which is the company that owns and runs The Athlete's Foot. And moreover it is TAF that pays the Italian lawyer and it is with them that we had talks to find an agreement, not with AFME. Specifically we had contacts with Mr. Dan Benton and Mr. Marty Amschler that are TAF USA employees."

Financial statements provided last year to the SEC declare AFME as a subsidiary of The Athlete’s Foot, which is now part of NexCen’s portfolio of franchise companies.

Franchisor Undergoes Bankruptcy, Buy Out, then Closes the Doors of Its European Subsidiary

But much has changed since legal proceedings slowly rolled forth in 2001. TAF went through Chapter 11 bankruptcy filings in 2004, where the organization and its debts were restructured and forgiven by the federal court in order for the company to survive. In its efforts to be solvent, TAF’s company stores were liquidated.

Then a year ago the Atlanta-based franchisor was bought by NexCen Brands, Inc. of New York City, acquiring some 600 franchise locations in some 40 countries.

Businesses often acquire companies “free and clear,” buying the assets of distressed companies without an accompanying mountain of liabilities.

A representative of NexCen did not reply to this reporter’s recent inquiries or to elaborate on these issues.

Carl Zwisler, an attorney for Haynes and Boone LLP specializing in international franchising, guesses that the franchisor may have been discharged of obligations because of its bankruptcy procedures, not to mention its recent acquisition.

Says Mr. Zwisler, “all litigation is generally stayed and cases must be brought in the bankruptcy court. At the conclusion of the proceedings, except for claims approved by the court, all others are discharged. If Winsport filed claims against the US company which was in Chapter 11, its claims probably have been discharged. To the extent that the party which signed the contract with Winsport was an affiliate of the company which filed for bankruptcy protection, but did not make such a filing itself, its direct liability for contract claims should not be affected. When a buyer negotiates the purchase of a company, it generally tries to avoid all liability for past and pending claims against the target company.”

Unfortunately, Italy is not the only master franchise who has experienced difficulty with The Athlete’s Foot.

When this journal called the Athlete’s Foot master franchise in France to elaborate on the issues that the master franchise has had in Italy, Mr. Erwann Neirinc, who helps run Serec S.A.R.L., the French master franchise since 2005, stated he was greatly distressed with the lack of support he had received from AFME. “Things are a mess here. I have gone from 20 stores to now just 5 remaining. And I just found out a few days ago that as of last month AFME, who is also located in France, has quietly shut its doors and is no longer here.”

Lessons Learned and the Future

Musso thinks it is unfortunate for all that the Athlete’s Foot could not come to a gentlemen’s agreement to resolve the issue. “A competitor, Athlete's World, has opened 100 stores in 5 years in Italy, a market that could have been TAF’s. But now we and they are stuck in a long court process,” says Winsport’s CEO.

There may be some lessons in this case for international master franchisee buyers. Says Zwisler, “Franchisees need to know whether the entity granting franchises has the resources to fulfill contractual obligations.”

He warns about purchasing an international franchise from a new franchisor that drops legal obligations and liabilities. “Information about a parent or affiliate which has no contractual obligations to an international franchisee will not likely be the basis for viable claims if the international franchising entity does not fulfill its commitments.”

There are other lessons too. (Read Carl Zwisler's Lessons From The Athlete's Foot in Italy).

Although Winsport lost its first court judgment for lack of merit, vows Musso, “The December trial is the second grade [an appeal court] and because we know we are right we will appeal until the third grade if necessary.” In Italy both litigants could be tied up in court for several more years. Winsport says they will be there, but will AFME or NexCen?

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Additional readings:

• NexCen Brands Has Plans For The Athlete's Foot
• The Athlete’s Foot Files Chapter 11 Bankruptcy
• Winsport Master Franchise Claims The Athletes Foot Not in Compliance With Agreement
• Lessons From The Athlete's Foot in Italy