Part 2: Relevant Aspects of Peaberry Coffee Decision

Denver Peaberry Coffee kiosk. Photo©Tim Sparks

DENVER (Blue MauMau) - Peaberry Coffee defendants, its law firm included, had a big win this month when a district judge in Colorado ruled in their favor in a lawsuit brought separately by ten franchisees, who represent one hundred percent of Peaberry's franchises. All owners claimed that they had been fraudulently induced in buying their franchises and were seeking million dollar awards for damages. But legal counsel to the franchisees was quick to say, "We're confident we'll ultimately prevail. We just have to straighten out a very faulty legal construction." Their attorney has filed a notice of appeal, describing the nature of the controversy and the issues to be raised, based on various aspects of the trial court decision and other previous court actions.

In further examination of related court documents, one element of the decision stands out. While it has become customary for judges in complex civil litigation to ask both sides to tender proposed findings of facts and conclusions of law prior to making decisions, according to legal sources, Judge Robbins obviously drew from the Peaberry defendants' proposal, using it almost word for word. But the judge didn't go along with Peaberry defendants on all its findings and conclusions.  

Judge Robbins stated in his decision that a significant amount of time during the trial had been spent on issues raised in a Denver Business Journal article dated October 13, 2003. The court found that Peaberry had included this news piece in marketing packets when it transmitted its UFOC disclosure documents to prospective franchisees. All but two franchise operators testified that they had received it from the company.  The DBJ article contained the following excerpts from statements attributed to Peaberry’s then-president Fred Nielsen, who was not named in the lawsuit: 

• Peaberry is profitable now, with yearly revenue of about $12 million. Of that, about $10.5 million comes from retail stores, which works out to an average of about $500,000 a year in sales per retail store.
• Funding growth through the company’s own cash flow has enabled it to add only two or three locations   a year.
• Our goal is 500 stores by the year 2010. That's very doable."

In their proposal, franchisee plaintiffs had stated that all of the above quotes were false. Attorneys for Peaberry defendants wrote:

The statement that “Peaberry is profitable now” is vague and ambiguous. It does not refer to any specific level of profitability. The statement is followed by references to Peaberry’s store revenue and its overall company revenue, but it does not indicate whether the phrase “profitable now” is related to Peaberry’s store operations alone, or to its overall operations. Fred Nielsen testified that the statement regarding profitability pertained to the aggregate profitability of PCI’s corporate-owned stores, which was a positive figure at the time. Given the ambiguity in the way the statement appears in the article, and Mr. Nielsen’s testimony regarding his intent with respect to the statement, I find that the ambiguity was unintentional.

But Judge Robbins rejected that notion declaring, "The statement . . . is not vague or ambiguous. It does not refer to any specific level of profitability, however there is no implication that any part of the operation is not profitable. I find that any fair reading of that passage suggests Peaberry, as a whole, was profitable. It was a false statement."

Regarding the rest of the statements made by Nielsen in the Denver Business Journal article, Judge Robbins accepted what Peaberry attorneys wrote in their Proposed Findings of Fact and Conclusions of Law. They stated:

"The statement that Peaberry’s approximate average sales per retail store was $500,000 is also not an actionable false statement of fact. Each Plaintiff testified it received, read, and understood Peaberry’s UFOC. The $500,000 approximation set forth in the article is consistent with the store revenue average identified in Peaberry’s 2003 UFOC. While the average identified in Peaberry’s 2004 UFOC is lower than the approximation in the article, it was clear that the article was published in 2003, and that the 2004 UFOC, published February 19, 2004, contained more recent and accurate numbers. Therefore, I find that the article’s statement of approximate average revenue per store does not constitute an actionable false statement of fact."

Other alleged statements in Judge Robbins decision came from the franchisees testifying that Tointon and Orr made claims that Peaberry was profitable, that stores made money after three months, and the company was financially strong with no significant liability. But he ruled, "Bill Tointon and Jim Orr denied making any of these statements or predictions, or otherwise providing any information regarding PCI’s financial history or the performance of its corporate-owned stores beyond the information contained in the UFOC. While Tointon and Orr’s testimony is consistent with the testimony from three of the eight Plaintiffs (that dealt directly with Defendants) who testified that no one from Peaberry would provide this information if requested, the fact that Mr. Tointon, on at least one occasion had to “be stopped” by Mr. Orr from making inappropriate statements, plus the diversity of the attributed statements, balanced against the flat denial of Defendants, lead the me to the conclusion that the above statements were indeed made by the Defendants and not fabricated by Plaintiffs."

False Impression of Fact

Judge Robbins, in his decision, gives his interpretation of how concealed facts in equity should be disclosed according to case law. He states that omitted facts must be disclosed  in the following circumstances:

• The defendant stated some facts, but not all material facts,
  knowing that they would create a false impression in the mind of the
  plaintiff; or
• the defendant knew that by his or her own unclear or deceptive
  words or conduct that he or she created a false impression of the
  actual facts in the mind of the plaintiff; or
• the defendant knew that the plaintiff was not in a position to
  discover the facts for himself; or
• the defendant promised to or stated an intention to perform an act
  knowing that undisclosed facts made her performance unlikely.

Judge Robbins stated, "Peaberry’s publication and statements of claim concerning its profitability, its cash flow all required that Peaberry disclose the facts which would have dispelled the false impressions created by its representations. These facts were material."

But he goes further saying, "The Court concludes the concealed facts in this case were material, and Plaintiffs had no knowledge of the true facts about Peaberry’s financial history and the performance of its stores. The concealed facts were also withheld with the intent that the Plaintiffs purchase their franchises ignorant of the true facts."

In addition to holding that Peaberry actively concealed material facts from plaintiffs, Judge Robbins concluded the UFOC (Franchise Disclosure Document]) does not shield the franchisor from a claim of fraud.

In summary franchisee attorney Richard B. Podoll said in an earlier interview, "Judge Robbins statements showed he understood the fraud and knew exactly what the Peaberry people did. He understood that Peaberry knew they couldn't sell franchises if they disclosed that their company was losing a million dollars a year, and retail store performance did not justify franchising.  So they concealed their historic levels of profitability and the performance of the stores, with the intent that the franchisees purchase their franchises ignorant of the facts." Podoll concluded saying, once you get to that point, the proper inquiry is, 'Had the franchisees known the true facts, would they have acted in a different manner?'  He firmly stated, "Their testimony is strong and positive from each and every one of them that they would have." 

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Related reading:

• Judge Rules for Peaberry Coffee and Attorneys, Franchisee Counsel Sees Future Victory
• Experts weigh in on franchisees' lawsuit against Peaberry Coffee (Franchise Times)