Marco's Pizza Cuts 30-Year Supplier, Sparks Feud

TOLEDO, Ohio – Sofo Foods, one of the largest food distributors in northwest Ohio, filed a lawsuit last month against Marco’s Pizza Franchising and its principals, and now concerned franchisees are weighing in on the legal fight.

Sofo and its entity A&M Cheese allege that Marco’s and its executives fraudulently induced Sofo into a business relationship, while the franchisor had no intention of entering into the promised contract. Instead, Marco’s started a competing vendor business through a scheme to defraud and eliminate Sofo as Marco’s preferred supplier, in spite of its 30 years of service to the pizza chain. Because Marco’s is officially cutting Sofo off as of June 30, the supplier has now asked the court for injunctive relief, and for a hearing on the matter prior to that date.

The suit filed in Ohio federal court brings thirteen counts, including tortious interference, defamation, fraud, conspiracy and racketeering violations, against the company and the principals named individually in the litigation. Sofo alleges that the enterprise formed under the direction of Marco’s Pizza’s president Jack Butorac, vice president Ken Switzer and CFO Don Vlcek recruited the company’s franchise development VP John Stephens and other employees to participate in racketeering. They assert that the executives enlisted others to make false and disparaging representations about Sofo Foods and A&M Cheese for the purpose of destroying the business relationships with franchisees, so that Marco’s newly established vendor Marco’s Pizza Distribution (MPD) could commence operation with a solid customer base taken from Sofo and A&M.

One undisclosed source, familiar with the case, said he feels the RICO charges could very well go forward if Sofo’s allegations are proven. He also thinks that the quality of the Marco’s pizza products will not be the same without Sofo. “The Sofo Foods network is one of the finest food purveyors in the country, if not the world. They were integral in the growth of the company from the beginning and I don’t think the great Marco’s pizza will remain the same without Sofo Foods.” He gives founder Pasquale Giammarco the credit, who entered into four master franchise agreements for Indiana, Florida and Ohio after the 2004 acquisition of his company. In an affidavit, Giammarco expressed his concern over the current management’s threat to cut Sofo off as its preferred supplier.

Other franchisees have also weighed in on the matter. In a May 24, 2010 letter addressed to Marco’s president John Butorac, attorney Graham A. Bluhm of Eastman & Smith stated, “The impact of the dispute between Marco’s Franchising, LLC and Sofo Foods on the franchisees should not be ignored or taken lightly.” He said franchisees were deeply troubled by the litigation because they rely on their strong relationship with Sofo for consistent service, quality and competitive pricing. Bluhm and his law firm are representing the Association of MPS Franchisees. 

Sofo attorney Anthony J. Calamunci of Roetzel & Andress this week filed his motion for preliminary injunction, requesting the hearing prior to June 30, to present witness testimony.  They claim that earlier this year Marco’s, under the guise of a quality control audit, documented Sofo’s methods of business, including confidential and proprietary information specific to the processes of Sofo and A&M Cheese, to convert those methods to its own newly formed Marco’s Pizza Distribution (MPD).  Sofo accuses Marco’s Pizza and its principals of creating a competing model “to steal business” from Sofo Foods. Other allegations include that Marco’s principals made numerous false, misleading and baseless statements regarding the quality of Sofo and A&M products, services and employees.

The motion also asserts that Marco’s principals informed numerous raw material suppliers that they are not to permit Sofo and/or A&M Cheese to purchase products that would enable them to create the Marco’s Pizza products for franchisees. They also notified franchisees that they were to purchase products from the Marco’s Pizza Distribution, placing franchisees in the precarious position of choosing between “their trusted supplier for over three decades or a company related to the franchisor that controls most of the aspects of their daily business and profitability,” according to legal documents. 

After the lawsuit was filed on May 12, Marco’s defendants, through their attorneys, agreed to honor Sofo’s status as an approved supplier and cease any interference with Sofo’s distribution through June 30, 2010 (originally set at May 31, 2010), according to the motion.

Alleged Scheme Leading to Termination

Following the acquisition of Marco’s Pizza in 2004, the relationship between the franchisor and Sofo Foods continued, where Sofo was the only recommended supplier for Marco’s. The contract gave the new franchise company the right to inspect the facilities and conduct financial audits of all invoices and purchase orders related to Marco’s proprietary products and individual franchise invoices, financial statements and other memos.

In May 2004, Marco’s instituted a price increase on food products supplied by Sofo and asked Sofo to enter into a Trademark and Product Standards Maintenance Agreement where Sofo agreed to pay a 1% trademark maintenance fee. In the agreement, Marco’s acknowledged that Sofo performed “purchasing, marking, warehousing, quality control, product research and development.”

By 2006, Marco’s owed Sofo Foods $150,000 for outstanding food product invoices associated with a Marco’s franchisee known as Grand Slam. After the Distribution and Trademark Agreements expired in May of 2007, Sofo and Marco’s continued to operate as if both agreements were still in force, as Marco’s promised Sofo a four-year renewal of the agreements. In June 2008, Marco’s president Jack Butorac, personally and on behalf of Marco’s, promised repayment of the Grand Slam debt, if Sofo discounted the amount owed to $100,000. Butorac again personally guaranteed the new amount to keep Grand Slam in operation. The amount has never been repaid by Grand Slam or Butorac.

Two other stores, owned by Stephens, Marco’s VP of development, became severely late on payments during 2008, and Butorac again personally and on behalf of Marco’s guaranteed the outstanding indebtedness of those stores, currently in arrears in excess of $54,646.36. Butorac directly contacted Sofo communicating a desire to keep the stores open for development purposes.

By June 2009, Marco’s finally identified the terms of the long promised four-year food distribution agreement, commencing in 2009, on the same terms of the 2004 agreement. Sofo accepted Marco’s offer to continue the relationship. In reliance of that promised contract, Sofo continued to increase business relationships with other suppliers and manufacturers to continue to provide quality service to Marco’s pizza stores. One included the infrastructure in Georgia at a cost of $5 million to Sofo Foods.

But on November 20, 2009, vice president Vlcek, on behalf of Marco’s, issued a major announcement to franchisees that unilaterally changed the approved distributor for Marco’s Pizza stores to its new vendor Marco’s Pizza Distribution. At that time, he thanked Sofo Foods for 30 years of service.

Since MPD commenced production and distribution of product to Marco’s franchisees, Sofo states it has lost business from many franchisees and some have stopped payments owed to Sofo because of MPD’s interference. The supplier now has accounts receivable of $950,000, and inventory of $1 million on hand to service franchised stores.

Sofo is asking the court to enter the requested preliminary injunction banning Marco’s Foods from its continued activities in harming Sofo’s operation, causing irreparable harm to Sofo and to franchisees. They ask the court to permit Sofo and A&M to continue as supplier services to Marco’s Pizza franchisees, and to retract any and all derogatory comments about Sofo and A&M.

Response from Parties

Marco’s Pizza refused an interview regarding the Sofo Foods lawsuit. Peter Wise, vice president of marketing, would only say that Marcos Pizza has dialed-in focus on growth and does not comment on litigation.”

Sofo attorney Calamunci said this case was about choice of the franchisees. “Sofo Foods is clearly an approved supplier for the system and has been for 30 years and that’s what this case is all about.” He thinks its going to be a case of first impression, that it is probably going to set the standard by which franchise companies change distributors and/or mandatory or preferred vendor suppliers. He added, “I think this will be the leading case of that issue when it gets resolved.”