Part 1: Judge Rules for Peaberry Coffee and Attorneys, Franchisee Counsel Sees Future Victory

DENVER (Blue MauMau) - A group of ten Peaberry franchisees were dished out a major loss in a Colorado district court. The franchisees had taken to the court system alleging that they lost millions of dollars because of a fraudulent franchise system and that they had been misled to buy a franchise by Peaberry’s false claims.

In spite of a district judge rendering a decision that Peaberry Coffee Inc. (PCI) defendants actively concealed material financial facts from the franchisees with the intent that the franchisees purchased their franchises ignorant of the true facts, he nonetheless still ruled for the franchisor. Although Judge William D. Robbins shows that franchisees would have been entitled to $4,211,467 in damages to put them back into the position they were in before purchasing their franchises, he instead surprised many and ordered the franchise owners to pay Peaberry for back-royalties and incurred attorney fees.

In response to the decision, Hugh Q. Gottschalk, Wheeler Trigg Kennedy, LLP, representing Peaberry Coffee said, "I was very, very pleased for my clients. I truly believe they were wrongfully accused and had done nothing wrong. It was a long difficult battle, so I'm very happy for Peaberry and its management, who I think were trying as hard as they could to succeed in the franchising business."  He feels the significant aspect to the judge's decision was that he found that the franchisee plaintiffs had not reasonably relied on all the evidence that they alleged had been made. He said the judge also found that there were many other statements and testimonies that he did not find to be misleading or misrepresented.

But while Peaberry Coffee defendants are basking in the glow of their victory, franchisee attorney Richard B. Podoll, Podoll & Podoll, shines a different light on the decision saying, "We're confident we'll ultimately prevail. We just have to straighten out a very faulty legal construction." He explained, "Once you find a duty to disclose and a failure to disclose, you can't find that the document induced by the fraudulent concealment somehow makes it unreasonable to rely on the omitted material. It is legally inconsistent."  Podoll asks, "How do you find active intentional fraud on the part of the franchisor and then let them escape?" Although he knows the decision is a setback for his clients who have been economically devastated, he is confident they will recover well.  He insists, "This is a temporary condition."  After filing a notice for appeal on January 19, Podoll remarked, "Sometimes cases can be intelligently resolved, but sometimes you have to do it the hard way. This just seems to be one of those cases."  

Lawsuit Claims Peaberry Was Not Viable for Franchising

The lawsuit filed in 2006 against Peaberry Coffee and its founder-CEO Bill Tointon and franchise development VP Jim Orr, was brought by the ten franchisees who allege they have lost millions of dollars due to a faulty franchise system. But also at the center of the lawsuit is the law firm that Peaberry relied on in developing its franchise program, not only acting as its legal counsel but also advising the company as its business consultant. In 2002, Tointon retained Kim McCullough of Perkins Coie to help him pursue his dreams of building a franchise system. The law firm had advertised its services as counseling businesses just embarking on a franchise program or exploring alternatives to franchising as a method of expanding. The brochures quote McCullough saying, "The value we bring is a mastery of the franchise regulatory system, combined with business sense and experience to help clients make good business decisions."

Perkins Coie prepared Peaberry's Uniform Franchise Offering Circular (UFOC)—now referred to as the Franchise Disclosure Document (FDD)—for the years 2003, 2004, and 2005, and formed Peaberry Coffee Franchise, Inc. (“PCFI”) as a wholly owned subsidiary of PCI in November 2002. Although the company had 18 coffee shops that were failing to operate at a break-even level, alleged in the lawsuit, Peaberry sold ten franchises between December 2003 and June 2004. The complaint further asserts that McCullough drafted the UFOCs in a manner intentionally designed to conceal material facts from prospective buyers.

In his second amended complaint filed in Denver district court in October 2007, Podoll alleged that Peaberry was not viable for franchising, that it had not been profitable since 1998, and had lost considerable money in each of the last five years. He further claimed that it failed to meet even minimal franchising benchmarks. Other allegations were that Peaberry's financials were not disclosed in the UFOC, but instead included a chart of gross sales information for its retail stores under three ranges: high, medium and low, and that the Peaberry defendants had made false representations about the company to induce prospects to purchase a franchise.

After the five-week trial, Judge Robbins concluded that the claims brought against Perkins Coie had been stayed pending the resolution of the claims against the Peaberry company defendants, and that the findings and conclusions, to the extent applicable, were binding on Perkins Coie. The franchisees' first, seventh and eighth claims of relief had previously been dismissed. His decision addresses the remaining claims and the counterclaims made by Peaberry Coffee.

In response to the final judgment entered on January 13 in favor of Peaberry and Perkins Coie, Podoll said he was going to ask for remand for further trial proceedings for damages, and for determination of Perkins Coie's liability.

Reporter's Note:  Part 2 of the Peaberry Coffee litigation will describe relevant aspects of Judge Robbins' decision. Part 3 will report on the issues to be raised in the franchisees' appeal. 

--

Related reading:

Experts weigh in on franchisees' lawsuit against Peaberry Coffee (Franchise Times)

Attachment	Size
Peaberry—Judge's Decision.pdf	109.42 KB
Notice of Appeal.pdf	33.83 KB
Second Amended Complaint (Colorado Coffee Bean et al. v. Peaberry Coffee Inc. et al.).pdf	307.22 KB