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Coffee Beanery Franchisees Fight On Despite Losses
Franchisees Say, "Franchisor Allowed to Sell Flawed Concept"
ANN ARBOR, Mich. (Blue MauMau) - After losing their arbitration with The Coffee Beanery on March 28, 2007, Deborah Williams and Richard Welshans say they will continue their fight against the franchisor any way they can because they feel a terrible injustice has been done to them and the franchise system. Williams said that 75 innocent people have lost everything and yet The Coffee Beanery is still allowed to sell its flawed concept. After being devastated by the Arbitration Award, which ordered them to pay almost $150,000 to The Coffee Beanery, they now have to sell their home and file for bankruptcy. She said, "We did everything right. We broke no laws. We are citizens who have always worked and paid our taxes." Now at age 54 she said they will never be able to work long or hard enough to retain the money they lost or to get back their excellent credit rating.
The legal battle started because of disclosure issues after the franchisees opened their unit in 2004 in Maryland. The franchisees alleged that Coffee Beanery did not differentiate between the traditional coffee shop model and the newer cafe concept in disclosure documents. Harry M. Rifkin, their attorney, felt it had been a "bait and switch" situation where they originally wanted the coffee shop model, but after Discovery Days at Coffee Beanery headquarters they were convinced to switch to the cafe concept. When they realized the total difference in the two concepts they immediately started encountering problems. The cafe began generating a loss and did so every year they were in operation.
Since the arbitration award was made, their legal battle has continued by filing another motion to reconsider with the U.S. District Court, Eastern Division of Michigan. On May 23, Judge Patrick J. Duggan issued his first opinion and order confirming the arbitration decision, citing that the franchisees had failed to state a ground for vacating the award. Now in their second reply brief to a motion for reconsideration, they await a new order from Judge Duggan.
Attempt to Overturn Arbitration
The franchisees voiced their objections to the arbitration from the beginning in sending a strongly written letter to the American Arbitration Association by Rifkin outlining why the hearing should not move forward. One reasons. Among them was the nature of the administrative proceedings in Maryland brought by the Securities Commissioner against The Coffee Beanery and what impact it would have on his clients. The Attorney General's office had issued a Consent Order on September 2006. In the end, he said that nothing that the AAA says or does in any proceeding will stop or influence the administrative action by the Maryland Securities Commissioner if it finds a violation and if the state court determines that the finding is proper.
He also stated that the franchisees had strongly objected to AAA’s selection of the arbitrator because of her ties to the franchisor. After it was revealed that the arbitrator shared the same accounting firm with The Coffee Beanery, Rifkin expressed that the credibility of the accountants could be at issue in the arbitration, because they had prepared the audited/unaudited financial statements contained in the franchisor’s Uniform Franchise Offering Circular.
Arbitrator's Disregard for State Laws
But in this latest brief, Rifkin supported his original motion and showed that The Coffee Beanery violated the Maryland and Michigan franchise laws in the sale of the franchise to his clients, and that the arbitrator showed “manifest disregard” in her award of the applicable laws. According to the brief, The Coffee Beanery admitted in the arbitration that it broke Maryland and Michigan franchise laws on numerous occasions in its failure to disclose in its offering circular mandatory programs such as the Gift Card Program, the DMX music/security system and the Pepsi contract. Although the arbitrator rejected the franchisor's admission that the programs were mandatory and then refused to accept that they were required to be disclosed even when faced with the statutory language, is a patent "manifest disregard of the law."
He also noted the fact that the franchisees’ testimony went unchallenged when they stated in the hearing that they would not have purchased the franchise in the first place if these contracts had been disclosed. But in refusing to participate in these “illegal” Coffee Beanery marketing programs they were in default of their contract, and the arbitrator, in her logic, barred them from seeking relief for the disclosure violations. According to the brief, under laws of the two states, the franchisees should have been entitled to rescission and other relief.
In answer to Coffee Beanery’s response that the franchisees did not make a timely rescission offer because their café remained open, Rifkin explained that his clients requested a rescission in January 2005 and as with all subsequent rescissions, they were rejected by the franchisor. Because of their long-term franchise agreement and lease, they are obligated to fulfill both even in the face of continuing losses. But also included was the demand for full and unconditional rescission following the issuance of a consent order by the Attorney General’s Office in Maryland, . But Rifkin explains that this court and the arbitrator both erred in holding that his clients were barred from seeking rescission and restitution, or from seeking other relief or damages. He said there is nothing in those laws that would bar a claim just because they continue to operate the franchise.
The franchisees' brief also alleges additional perjury by founder/CEO JoAnne Shaw, the first woman chairperson of the International Franchise Association inducted in 2000. In the arbitration, she testified that The Coffee Beanery lists the most current home addresses and phone numbers for terminated franchisees in Item 20 of the UFOC. But in its 2005 offering circular not a single address or phone number is listed for terminated franchisees, only for those that have closed. Although the company had the termination listings, Rifkin stated that Coffee Beanery chose not to use them, making it harder for prospective franchisees to contact terminated franchisees.
Franchisees allege Shaw also lied in her testimony regarding store closures, stating that there was only one cafe' that closed in the 12-month period prior to its 2005 UFOC registration. Several stores she represented as not being cafes concepts were cafes, according to the brief, and were closed in the mentioned 12-month period. The Reply Brief states: "This perjury was not a mere slip up; it was obviously intentional and part of the attempt to make cafes appear more successful than they are and to defeat Respondents' (franchisees') claims of fraud under the common law and the anti-fraud provisions of the Maryland Franchise Act and Michigan Franchise Investment law."
Coffee Beanery's Response
When attorney Karl V. Fink, Pear, Sperling, Eggan & Danielsor, filed his response for The Coffee Beanery in opposition to motion, he stated that the franchisees' decision "not to accept the rescission offer in the administrative proceeding in Maryland barred their rights to seek rescission and is clearly in manifest disregard of the law and must be rejected by the court." And, he adds that they again fail to cite the specific law that they claim the arbitrator disregarded and that they must show that "the relevant law is clearly defined and that the arbitrator consciously chose not to apply it."
Fink did confirm that the arbitrator did divulge prior to the hearings that she did use the same accounting firm that The Coffee Beanery used. He said they are now waiting for a decision from Judge Duggan on the Motion for Reconsideration. When asked If the judge rules against the franchisees again, would the franchisees have further recourse, Fink said he is not the person to ask, that the answer would have to come from Rifkin.
When Fink was asked if Coffee Beanery was properly registered in certain states, an issue Williams brought up, he could only answer that another attorney there in his office, Paul Fransway, would have to answer that question. After he checked with him, Fink said that the franchisor was registered in Maryland but could not confirm that it was in compliance with the state law. In attempts to find out that information and the status of registration in Illinois, Minnesota and Hawaii, Fransway did not return calls.
JoAnne Shaw also did not return calls.
Dale Cantone, assistant Attorney General in Maryland, stated, "We can't say a company is violating the law until we complete an investigation to a formal action." But he said he could not confirm or deny any investigation.
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Related Articles:
| Attachment | Size |
|---|---|
| Motion to Vacate Arbitration Award.doc | 113.5 KB |
| Opposition to Motion to Confirm Arbitration Award.doc | 92 KB |
| Order of Judge Duggan.pdf | 41.43 KB |
| Motion for Reconsideration.pdf | 78.21 KB |
| Signed Award.pdf | 272.84 KB |
| Coffee Beanery AG Letter.pdf | 490.56 KB |
A New Twist
Heres a thought. The Coffee Beanery complied with all disclosure requirements up until 2000. In 2001 there is no evidence of a UFOC being registered. 2002 a new law firm and a new accounting firm are in place. The UFOC registered in 2002 is the first time The Coffee Beanery has serious disclosure problems. The new law firm advised The Coffee Beanery on what to and what not to disclose. The Coffee Beanery is hit with an Order To Show Cause which led to them entering into The Consent Order, all based on advice from new lawyers. This same law firm now advises on disclosure in the 2006 UFOC and The Consent Order is in violation. Should The Coffee Beanery hold the attorneys accountable for bad advice, or are they both responsible?
Gift Cards and question for CB guest
I'm putting my question on this over to the Coffee Beanery forum, since it didn't really deal with Item 20.
You asked where that two cents per swipe for 'insufficient funds' goes. I can only base this on the set-up that the zor I worked for had (I didn't set it up so I don't know if our agreement is similar to others), and why the 2 cents were taken per swipe.
The way that our company had it set-up, was that the store that sold the card had that money deposited into their bank account through the gift card terminal. That money stayed with that store until the card was redeemed, not necessarily at the store it was purchased. At the time of redemption, the store that it was redeemed at had money placed into the account for the amount redeemed and the store that the card was sold at, had the money taken out. In theory two bank accounts should be maintained, one for operations and the other for gift cards (if the activity warrants it). Now what would happen, is that a customer would redeem the gift card, and the store that issued the gift card (maybe a couple of years earlier) was closed and the bank that the money should be drawn from had closed. The two cent insufficient swipe account was set-up to take care of situations like this, and if the insufficient account was lacking they charged the franchisor.
I'm not sure how the Coffee Beanery had their's set-up. Was this similar to how your gift cards worked? If so, how are the cards that you issued being redeemed now that you are out of business? If not, how was it set-up?
SORT IT OUT
Sounds like a case of serious under representation to me. If their lawyer educated them properly, they might not be in this situation. I know Judge Duggan. He is maybe the best judge on that bench - a real serious no nonsense knowledgeable judge.
If they are going to file for bankruptcy, they certainly don't have to lose their home, as that is exempt property. Sounds like their lawyers aren't really trying to educate their clients.
Richard Solomon
www.FranchiseRemedies.com
Mandated Arbitration and Due Process of Law
When you read the article written by Janet Sparks, above, you realize how Arbitration works against the best interests of franchisees.
Franchisees don't realize, of course, that they are signing away their rights to due process of law when they sign the contracts of adhesion.
If juries are a crap shoot, arbitration is just the crap, I guess, that generally protects the franchisor and his unbargained contract of adhesion.
Consent Order
I guess that we would all like to know why they didn't take advantage of the consent order. That sounded like a no-brainer to me.
Michael Webster PhD LLB
Misleading Advertising Law
Is it typical?
To sign the franchise agreement and write the check for the initial franchise fee the same day as discovery day? I don't remember that ever happening at the zor that I worked for.
Flawed Business Plans ----The big Lie of the UFOC's
Do UFOC's permit franchisors to sell flawed business plans to consumers with impunity? First-generation franchisees who lose everything to build the physical units to wear the brand name are tucked away in the transfer columns of the UFOC and count as "successes" for the franchisor in research that is used to sell franchises to new "marks" who will not learn the actual risk of the investment from anything required to be disclosed by the franchisors in the UFOC's.
The so-called references in the UFOC are supposed to be the substitute for any hard statistics concerning failure of the franchised business plan. The government itself indicates that franchisors cheat and often give you false references, and the government indicates that they don't read the the UFOC's and don't know whether they are correct anyway.
It is obvious that the government, the fTC and the state regulators, know that the disclosure laws are weak and ineffective and that "innocents" are sacrificed to predatory franchisors with flawed business plans. It is obvious that government must know there is a lot of false hype and false research concerning franchising that makes it appear much less risky than it is. It is obvious that government knows that Entrepreneur, the magazine for the franchisee entrepreneur, pushes unviable business plans to the public. It is obvious that government must know that the SBA Registry/FranData/FranVet and the SBA Default List on Franchises presents a false picture of endorsement to veterans who are prospective franchisees.
It appears that it is government, itself, who does not want franchising to be regulated at least as well as securities are regulated. It is obvious, of course, that public policy concerning franchising has been shaped by the IFA who is very happy with the status quo. It appears the IFA does have a tube that goes directly into the FTC.
Government, who wears blinders, does nothing and cooperates in permitting unviable business plans to be sold to unsuspecting members of the public, and government cooperates in the implication that that the franchise agreements cannot be bargained and that the UFOC's are the bottom line underlying the "standard" unilateral contracts of the franchisors.
The UFOC's are the same as a lie for what they do not disclose ----but this is public policy supported by our elected officials and the Executive and the Judicial Branch of the government who doesn't make the laws, but is charged with their enforcement.
Any good attorney will tell you that you mustn't get morality mixed up with the law because the two are in no way synonyomous in the industry of franchising.
My country 'tis of thee!
Bitter Coffee
I was working with a propect two years ago in New Jersey that owned a high traffic location and was looking to open a coffee shop (drive thru) or fast food franchise. This prospect was a street savvy business operator that had previously owned Dairy Queen and other food franchises.
Franchise Perfection is affiliated with a couple of coffee franchises and I have the right to represent them, though most of the time I choose to stay out of the coffee franchise arena because there are so many regional brands its hard for me to identify the good, the bad or the ugly. I did refer him to the Coffee Beanery and he decided to investigate, and he came to a negative conclusion fairly quickly.
He visited a store in a nearby mall, he found the store to be disorganized and poorly run, his order took too long to complete and was put together wrong. Now that experience in itself though a concern, was not enough to derail his interest.
What turned him off the most was the lack of interest or concern that was expressed by the franchise development department, they just shrugged it off and said "we can't control every transaction". That was a big red flag for my prospect, his comment to me was, "if they don't care about an observation or complaint from a prospective franchisee, as a franchisee why should I ever expect them to care about my obeservations or complaints."
His due diligence was over before he ever saw the UFOC.
Jim Coen
Email: Jim@franchiseperfection.com
Blog: Lets Talk Franchising
Kevin Shaw's Larceny Conviction
Anyone know the details of this? Is there info online?
the coffee beanery
A Coffee Beanery franchise agreement is for 12 years
You are required to sign a 10 year lease
Our UFOC disclosed that The Coffee Beanery had been offering cafe franchises since 1985
The State of Maryland was able to establish that the first cafe franchise was not offered until 1997
Maryland started an investigation in 2005, We have been able to locate almost 100 cafe owners since then.
Of 100 cafe franchises there are only about 30 that remain open.
Of the thirty open there is 1 that opened in 1999
2 That opened in 2000
2 That opened in 2001
2 That opened in 2002
The remaining 23 opened in 2003-2007
The Coffee Beanery only disclosed 54 locations during the investigation by the state of Maryland.
There are still cafe owners that have not been identified.
The comments that are posted by people who are taking all of this so personally can relaxe. None of this is about you.
Although our experience has been less then pleasent we are not whinning to you or anyone else. We do not think that all Zor's are bad. We do not think that all Zee's who fail are victims. We did our Due Diligence. I think the problem all of you who remain in franchising have is how to seperate your selves from the likes of The Coffee Beanery. You have to realize that the only people who know of the existance of services like Richard's are already in franchising. Just ask a stranger on the street what they think of the class action brought by the Quizinos franchisees. They will tell you they have never heard of it. The franchise industry is so closed off from those who are not already involved that people really don't know that a UFOC needs to be taken to a Franchise Attorney. You don't have to take my word for this. You haven't taken our word for anything up to this point. When you have nothing left to lose there is not much that can rock your world. All of the comments posted on how we deserve what happened just don't seem to sting the way the once would have. There are so many GOOD ZORs out there. There are happy ZEEs out there. Until the good guys seperate from the bad guys all of the comments posted in this verbal masturbation marathon is not helping you over come the stigma that a Zor like CB is leaving on you.
There are potential franchise prospects, who no matter how much Due Diligence is done, will still have no way of knowing who the good guys are. Due Diligence is only as good as the disclosure.
We, as I'm sure you have figured out, will no longer be a part of the franchising industry, but we truly hope that the good guys can figure out how to make sure the bad guys don't continue to reflect on everyone. We already know that a Zor like The Coffee Beanery is not the norm. I think that some of the zingers that have been thrown our way is out of frustation for feeling that you have to defend your self. I don't know what to say about that. I would probally be as defensive if I thought I was being compared to the likes of Coffee Beanery. That was never our intention. Looking for sympathy or whinning was never our intention. It was our intention to help create an awareness of what can happen to good people. I will sign of now and leave you all with a question. Is Joanne Shaw really the kind of Zor you would want representing you?
Coffee Beanery Cafe
I was a Coffee Beanery Cafe owner. My cafe was bankrupt in 6 months. I have talked to Deborah and Richard many times. Thier goals through out all they have been through have never changed. 1) Stop The Coffee Beanery from selling any more cafes
2) Do everything they can to stop forced arbitration.
I don't have thier courage. All of you can learn from what has happened. Those of you who can't are in for rough roads ahead.
Williams/Welshan v. Coffee Beanery AAA Award
I've read the award and it seems a reasonable on its face.
The CB Cafe concept may very well be a poor concept, it could be that Williams/Welshan were poor operators or a combination thereof. But an arbitor was presented evidence from both parties and made a desicion based on that evidence. And I don't care what Sparks or Z thinks about it.
It is unfortunate that Williams/Welshan lost their investment. It is challenging to compete in coffee business against behemoths like SBUX and all the other competitors in the market. I don't understand why Williams/Welshan did not notice the obvious.
Williams/Welshan, you should lick your wounds and get on with your lives.
This is Recission
Rescission
(n) Rescission is the mutual agreement between the partied to an agreement or contract, deciding to nullify, cancel or otherwise terminate the agreement entered among them and restore the position prior to that agreement
I read Luke
It would take more then Richard to "scare" us off. Anyone reading his posts realize that for someone who makes so much monery he sure does waste a lot of time in here sucking up the FREE ADVERTISING. If he is such a smart guy why doesn't he realize that not to many potential franchisees know that this web site or 100 more like it even exist.
Richard you keep talking like you have all the facts surrounding this case, so why don't you share them with us.
So far you have been wrong about everything.
Who told you Harry is not getting paid?
What killer Due Diligence do you think you could have done that our attorney didn't do?
How would you even be able to answer the question or even attempt to comment, since you don't know?
Every comment from you is the same, everyone failed because they didn't consult with you first.
You might try reading the facts in this case.
No one would hire a Killer Due Diligence Attorney, when it's obvious that you don't take the time to research facts on a case that you claim would never happen to one of your clients. If you aren't concerned enough about your reputation to read the facts necessary for you to look like you know what you are talking about , why would anyone trust that you would get the facts they would need to make a good business decision?
Today's CB Postings Moved To Government Regulation Forum
There are now 3 new forums for government advocacy:
I have moved the most recent government regulations posts out of the Coffee Beanery article to the appropriate government regulation forum above. The threads are less organized but moving discussions from places they do not belong is messy business.
Mr. Blue MauMau
The coffee Beanery Joanne Shaw and her claim to fame
In arbitration Joanne tried to impress the arbitrator with the fact that she was the first woman to chair the IFA. She didn't tell the arbitrator how far from Grace she has fallen. From the IFA to selling in K-Mart. Then think about K-Mart they go from Martha stewart to Ma Barker and her boys. K-Mart is next on the list.
OUCH! Richard
It appears that they are right. The comment was "found guilty" Richard read it as "convicted"
We don't have to as who gets killed in this Killer Due Diligence, do we Richard
What is wrong with your Coffee Beanery Cafe?
As you know Starbucks, Caribou, It's a Grind and many independent coffeehouses operate across the country, why are you unable to compete?
Did you select a poor location?
Is your product inferior?
Are marketing your business effectively?
How are your service standards?
Do you tell all your customers how you were taken advantage of by Coffee Beanery and the Shaws?
Do you manage your COGS and labor carefully?
Deborah you lost...
You failed in arbitration, you failed in Judge Duggan's court, you failed to accept the recission offer, you failed to take any responsibility for this mess and now you want to win in the court of public opinion.
The Truth Shall Set You Free!
TIF
Coffee Beanery Injustice condoned by Republicans .
We can see that our "business" Congress and the Republicans will fight the proposed legislation because it is federal government policy to sacrifice franchisees as expendable logs on the fires of development in the economy. The alliance of the FTC and the IFA and the SBA together with the mandated and binding arbitration clauses in franchise agreements permit the franchisors to use and abuse their franchisees in their own interests with immunity and impunity under our laws.
It is Ralph Nader's Public Citizen and others who are trying to save the law for the people with the introduction of this Bill but it may be too late because when a Republican Congressman from Utah has the guts to stand up and attempt to bully and intimidate a witness to justify the injustice of the Coffee Beanery Case as being a matter of lack of due diligence on the part of the victim, this makes me sick. This bullying of Deborah by this Republican indicates that it is government policy protected by the Congress. It would make the public sick if they understood the malicious trap that is set for franchisees by franchisors under the law with the help of the FTC and the SBA and the VA.
This Representative is not a representative of the people, he is an agent of the franchisors and his party who are in bed with the Republican FTC and the Republican SBA, who pull the covers up to obscure what they are doing behind closed doors to protect the franchisors and to give the franchisors immunity for their systemic abuses of franchisees under our laws.
It is obvious that the SBA is in the business of guaranteeing loans for franchise investments at any demonstrated degree of failure of the franchises and that the Republicans and the Democrats now want to use the veterans and the SBA Patriot Express Loan Initiative to stimulate the economy, etc.. and very high risk investments will be sold to VETS and their family members while the risk is obscured by the red herrings of the UFOC's.
The Senate and the House Judicial Committes who are made up of attorneys know what goes on in franchising and they understand how mandated arbitration one on one with the franchisees protects the franchisors from making restitution to those who sign their rights away in unilateral contracts with franchisors because they believe that the UFOC's are NOT negotiable, and that the government wouldn't give franchisors a UFOC if they weren't selling a valuable product to the public.
It is obvious that the Coffee Beanery hid the risk of the Cafe Concept from the franchisees and this is why Maryland negotiated a Rescission with Coffee Beanery through DLA Piper who has promulgated much of franchise law. Dale Cantone of Maryland apparently assumed that Coffee Beanery would settle with the CB franchisees rather than go into arbitration and he gave these franchisees bad advice. The Federal Arbitration results reflect the federal government policy that protects the franchisors from making full restitution to their franchisees when they violate the Rule and the UFOC's. The ABA even had a seminar recently involving retaining the status quo of Rescission with incomplete restitution. The Rule and the UFOC's actually underlay the contracts that protect the franchisors from charges of fraudulent inducement to contract. We understand that the government agreed to produce a disclosure Rule to protect the franchisorts who can disclaim everything except what is contained in the contract for the purpose of preventing franchisees from destroying franchisor networks who are found guilty of fraud under which complete restitution might be available under the law to their franchisees.
If we read the history of the Coffee Beanery case and the Maryland Rescission, available on Blue Mau Mau, we can see that there is a fight going on here between federal and state policy concerning violations of the Rule and the UFOC's, and the purpose of Rescission when the State UFOC's are violated. The unfortunate Coffee Beanery Franchises were caught up in this policy struggle and only if they can get Dale Cantone into court under oath will they have any satisfactory answers.
I really hope the Senate Judiciary Committee is sincere in their desire to protect the law for the people and this isn't just one of those show case events where it looks like Congress is trying to protect the Bill of Rights for the people while, under the table, they are protecting the Bill of Rights for Big Business.
While we hope the Senate Judiciary Committee doesn't have a price, Americans are beginning to understand that our elected Representatives and Senators can be bought by the special interests. There is hope, however, because we see that the two veterans of the Senate Judiciary Committee, a Democrat and a Republican, often stand together to protect the law for the people. These are two courageous and good men who have dedicated their lives to protecting the law for the American people.
If this bill passes, it will make it more difficult for franchisors to indulge in systemic abuses of their franchisees. However, only when franchising is regulated at least as well as securities are regulated by the SEC will these great injustices
that destroy innocent consumers ( who have bought franchises in good faith) because they thought the FTC was regulating franchisors to protect then) be prevented.
I congratulate D&R of Coffee Beanery on their courageous stand that may lead to a new age in franchising in which the value of the franchise, as determined by its value to the first generation franchisee, will determine which franchisors will stand and which franchisors will fall in our economy. This competition among franchisors to produce highly successful franchised business plans that are sold to the public will provide a safer climate for franchisees who will be given the information in disclosure in Item 19 and Item 20 on which to do their due diligence and assess the true risk of the success or failure of the investment.
No way of knowing the facts...
If you have some facts by all means share them.
Call it what it is!
It is NOT a "contract of adhesion". It is an Agreement the terms and conditions of which can usually be negotiated and addendums written to adjust the language to satisfy both parties.
The more you yell "contract of adhesion" the more you cause people to belive the Franchise Agreement is a 'Take it or Leave it" scenario, and that is NOT USUALLY the case.
In my opinion your cause would would be much better represented if you would reference the Agreement for what it is, an Agreement which too few franchise candidates negotiate to create a more favorable outcome.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
www.fransynergy.com
Serious Judges
Serious judges are bound to recognize substantive law and the law of the case and franchise agreements are interpreted under the body of strict contract law even though the contracts are not bargained and the terms of the contract favor the franchisors in arbitration and in the courts.
The AAFD is trying to get fairer contracts and fairer terms and this is a start.
But, it is the FTC's weak regulation of franchising that enables and encourages franchise fraud.
YOU GOT THAT RIGHT
The franchisees couldn't overcome their attitude, and their lawyer didn't have the foggiest notion of the consequences and that he had no case in the arbitration for any relief beyond the rescission offer. This could be called Delusions of Adequacy.
Richard Solomon
www.FranchiseRemedies.com
consent order
The recision is not what we all think of as a normal recision. DLA Piper represented the Coffee Beanery in the case Maryland filed. There was only one other cafe owner in Maryland and he had no choice but to accept because his statutes of limitations had run out for filing a private suit. The recision that was offered was restricted. We would get our $25,000. franchise fee and a refund on any equipment we purchsaed through CB. That totaled close to $110,000. In the mean time we are still accountable for 7 years on our lease which is guaranteed by us personally. We would still be responsible for our business loan of $325,000. which is guaranteed by a lein on our home. Recision as most of us think of would be to put us back where we were prior to buying the franchise. We understand that damages occur after you open your doors so please don't think we are confused about that . Putting us back to where we were would have given us close to $500,000. This amount would hold true for the other cafe woner as well. Which just so you know he has encountered legal problems due to his early termination including but limited to a law suit filed against him by his landlord. CB would have to pay close to a million dollars if the recision had been "conventional" So in looking at our options we would have ended up in this same position. We had only one option and who would have ever guessed an arbitrator would find CONTRARY to a state regulator
Not typical, but OK
It is not the 'typical' sales/buying procedure. However, in and of itself that would be okay, provided the franchisor had complied with the requird time frames between Disclosure, Agreements etc...
I strongly encourage franchise candidates NOT to write a check or sign ANYTHING (other than receipt of UFOC if applicable) on discovery/orientation day. It is WAY too easy to get caught up in the emotion and excitement of the day. NOTE: Leave your pen and checkbook at home.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
www.fransynergy.com
Mandated Arbitration
You are right. If the mandated arbitration isn't enough, try reading Maryland Franchise Law. You can only imagine our shock when we beleived that "If a franchisor forces a franchise to litigate out of state, that franchisee retains the right to file a civil suit in any court in this state." I don't have to tell you if this was a law we could enforce.
The reason is clear from the
The reason is clear from the language of the consent order and from communications with the Securities Commissioner. The rescission offer stated:
WW, LLC was not prepared to release The Coffee Beanery since the rescission was limited and would not have compensated it for its lost investment in the business, that is it did not put it back where it was before the franchise was signed. It was also not a party to the state administrative proceeding. However, before deciding what to do, WW, LLC contacted Melanie Lubin, the Securities Commissioner to determine what effect it would have on its private claims. As Ms. Lubin eventually wrote: "The Consent Order does not affect any private cause of action... under Section 14-227 of the Maryland Franchise Law or other applicable law. The form of rescission offer that is attached to the Consent Order states that the offer of rescission is made in settlement of the administrative proceeding that the Division has brought under the Maryland Franchise Law and further provides that if a franchisee does not accept the offer of rescission, that franchisee does not waive any rights the franchisee has under the Maryland Franchise Law." This letter was Exhibit 1 in the Arbitration Hearing.
Those rights referenced in the Commissioner's letter include rescission and restitution. In the arbitration, The Coffee Beanery admitted all the facts underlying the consent decree. The violations of the law included such black letter violations as not disclosing required contracts, which were indisputably required. The undisputed testimony was that WW, LLC acted in reliance on the disclosures made and would not have entered into the franchise agreement if it knew about the various required contracts and about the failure rate of cafes. Indeed, the arbitration went on for 11 days, 9 and 1/2 of which were Claimants' case, including testimony by former Coffee Beanery management level personnel that The Coffee Beanery knew for years that the Cafe concept was a failed concept but that it kept selling them because the traditional mall store concept was becoming unsaleable and The Coffee Beanery needed new franchises to stay afloat due to the high failure rate in its system.
The arbitrator went so far as to ignore the blatant violations of law, which were not disputable, flat out ignore other violations, reject all of Claimants' many witnesses as not credible and reject entirely as not credible the testimony of Claimants' respected accountant expert finding instead in favor of Respondents' expert, who happened to also be the arbitrator's personal accountant. The arbitrator also disregarded as not relevant that Kevin Shaw, one of the disclosed persons had been convicted of grand larceny and the conviction was not disclosed as required. The decision appeared to be written in a way to try to prevent any avenue to vacate the award, but the fight is still going on in court.
Several other states are presently investigating The Coffee Beanery for violation of State Franchise Laws, although Michigan, its home state has rejected numerous complaints by former franchisees.
I will leave to the readers to figure out why the arbitrator did what she did. Interestingly, the arbitrator was chosen before present counsel got involved in the case and Claimants' request that she recuse herself due to the conflict involving her accounting firm, was rejected by the AAA even though it had not been disclosed until after she was appointed. She had no franchise experience.
Harry
hmr@cohanwest.com
Discovery Day is for closing
Of course! Always send out the UFOC 10 days before DD. Best yet, send it on a CD. Or a 5.5" floppy. MAC formatted.
RQ
Reasonable on Its Face? Protecting the License to Steal
Some very ignorant and unkind pro-Zor morons with no manners post on this site. That's what makes it so interesting and they demonstrate their arrogance and selfishness for all to see.
Please forgive them or ignore them. Realize that they like things the way they are and they don't want you to warn anyone about franchising and scare any
prospects away.
But, take heart! in that government probably monitors these sites and they always rush to cover their a...es ---and, at least, maybe they will learn something. There are probably a lot of people working at the FTC who didn't even realize that Item 20 was a Deal.
Some moron just asked "How specifically would the FTC regulate like the SEC? They think our government is so stupid that they couldn't figure out how to make the franchisors disclose the actual failure rate of their first generation franchisees to help new prospective franchisees to determine the risk of the investment.
What is wrong with the Cafe coffeehouse concept?
SBUX and Caribou seem to be doing just fine? What is wrong with Coffee Beanery's cafe concept outside of malls?
Coffee Beanery ---Deborah and Richard
Thank you, Deborah and Richard. I am Z of The UPS Store fiasco, and I know where you are coming from because I, too, want to warn and prevent others from being hurt by bad franchisors snd ineffective regulation. I, too, understand that there are some good franchisors out there who treat their franchises fairly, but the fact remains that public policy has been designed to allow franchisors to absolutely control their franchisees in both success and failure in the franchisors' interests always while obscuring the actual failure rate of the business plans they are selling to the public. The fact remains that the franchisors can cheat, abuse and mistreat their franchisees with immunity and impunity under present public policy and the status quo and the UFOC's are an enabling factor.
While the State of Maryland did find CB guilty of breaking their laws, it appears that the public policy and the mandated arbitration under federal guidelines trumped the state findings and a biased arbitrator supported the status quo.
I started to research franchising after we had our terrible experience with The UPS Store. We bought this store in good faith and it was shocking for us to learn that MBE-UPS premeditated some of the bad faith practices we were exposed to when our business started to fail. We never had a chance ----we never made a dime ---but we were always very busy. UPS competed with us. It is hard to work long hours and be tied to a business that is failing and that you cannot save because the business plan you bought was fatally flawed and misrepresented as an unprecedented opportunity to be part of a famous brand name.
The story of the Coffee Beanery confirmed my views that the UFOC permits predatory and unethical franchisors to hide the failure rate of their business plan while still being able to offer the plan for sale to the public with the UFOC. It appears that states are trying to give the franchisees some relief with relationship laws but there will be no real relief until government regulators, the FTC, requires franchisors to disclose the failure rate of their franchised plan under disclosure laws.
Franchising needs to be regulated at least as well as securities are regulated by the SEC so that franchisees can know the real and actual risk of the investment they are making. Predatory churning will not be stopped until this is done.
If franchisees are going to put their savings at risk and middle-class Americans and veterans and corporate refugees are going to be targeted for the equity in their houses and for their retirement savings, the very least they deserve is full disclosure of the KNOWN risks of the failure or success of the franchised business plans. The franchisors KNOW the failure rate of their first-generation franchisees and this known statistic should be disclosed to new prospective franchisees to permit them to assess the risk of the investment.
I thank you again for sharing your story with us.
and I thank Janet Sparks for bringing it to Blue Mau Mau. If you have read some of my posts, you know that I am particularly concerned that veterans who have already sacrificed so much as instruments of public policy and who do this is good faith to protect the ideals of our nation will not be WARNED and will be sacrificed to public policy that supports obscuring the risk of bad business opportunities that can destroy the lives of those who purchase a "pig in a poke."
AAA
If this award seems reasonable to you then you need help. In reading this award did you read and understand what you were reading? To begin with this arbitrator mentions third party contracts. Franchisors are required to disclose what the franchisee is to purchase and if the Zor receives revenue from these required purchases. The award also discloses that "It is not known if the Pepsi Contract was in place when we signed the FA." This would be a perfect example of DISREGARD FOR THE LAW,as well as her bias. She has a copy of the Pepsi contract. It went into effect in 10/1999 and was not to expire until 2006. Our FA was signed in 2003. Then this Pepsi contract is a piece of work it self. Long time franchisees tell us that the reason we are paying so much for Pepsi products is because CB defrauded Pepsi as well.So to avoid yet another suit CB agreed to require Pepsi products to be sold in all of the locations at regular price until money that Pepsi paid up front to CB was refunded. To date no one, including Joanne Shaw and the rest of the corporate officers and CB attorneys have ever said the Gift Card program was voluntary. Everyone who testified said the Gift Card was required. The arbitrator also found that Contrary to Maryland she finds that CB DID COMPLY with the law. The financial assistance was a program developed for CAFE owners. If you sign this contract the franchisee would get Royalty relief for one year. What a joke. For a year you continue to have the royalities taken from your account every month for and exchange you get a warehouse credit. Lets think about that for a minute. Remember the GAAP violation? They seperated the Warehouse from the corporate financials. The royality program now allows them to not claim the roylaities that are still being deducted and at the same time the warehouse credit is not being claimed in the corporate financials. Back to this Financial Assistance the award discloses, in consideration for all of this the franchisee only has to sign the contract which in turn waives any and all legal actions the franchisee may have against CB. This release is for anything past, present and future. This is one of the reasons there are so few suits filed. In desperation thse cafe owners signed this release. They took it one step further. A new franchisee after signing the FA was presented this program. You can only imagine how that person must have felt. What a jump on the first year in business.
CLOSE, BUT NO CIGAR
Recission is a bit more complicated that that, at least as it works in franchise law. Depending upon the nature of the dispute and the identity of the parties to the dispute (e.g., franchisee or enforcement agency), being placed in the position one was in prior to the transaction may or may not be limited to just the transactions between the franchisor and the franchisee. What occurred between them may not account for what also occurred between the franchisee and third parties not related to the franchisor, like landlords.
How recission is actually conducted has its hoops that must be jumped through. One's opportunity to obtain rescission may quickly be lost by failing to observe certain formalities associated with it. When the hoops are not properly jumped through you can lose the right to rescission. An example of this may be seen in the CB matter that has recently been discussed. If the franchisee continues to use the name of the franchisor, that causes ratification of the accused agreements and waiver of the claims. That was what the arbitrator was referring to in the language of the award. The arbitrator correctly applied the law of rescission, waiver and ratification in that matter. There is no possibility that a court would ever find that the arbitrator wrongly applied the law. That happens to be how rescission works in the law of all 50 states. Sadly, the franchisee was not aware of that, and also not aware that the excuse of "I can't afford to take the signs down and change from using the frnachisor's identity" won't wash. The arbitrator was also aware that the franchisee didn't go broke overnight. There was obvious "knowledge" that things weren't right quite a while ago, and the franchisee didn't take prompt action to get the rescission process under way when there was money still in the till to stop using the franchisor's identity. You can't just sit there and let the damages pile up and then try to blame someone else for the delay. The remedies of equity are such that they must be availed of or lost. Excuses for lassitude in standing up and defending your position are rarely tolerated.
The law works the way the law is supposed to work. But if one party is aware of what is required and the opposing party isn't, sometimes it may seem as though the law has worked perversely.
Sympathy verdicts make bad law. The law has to be reliable for everyone, franchisors and franchisees alike. If franchisees ill advisedly sign bad agreements, the law considers them as adults who made a mistake and who, like all of us, must pay for those mistakes. It is taught in every law school that one should not try to twist the law to get a popular result. If the franchisor is a bad company, one should take steps to learn that before signing up. If that isn't done competently, as was the case here, you take the consequences of your own incompetent vetting of the proposal.
The law isn't magic, and it also isn't fairy tales. Contracts have to be reliably enforceable or they are worthless. As contracts are the paving stones of commerce, public policy strongly favors enforcing them according to the terms to which the parties put their signatures. When you read what potential franchisee say about themselves in their applications to be approved to buy a franchise, you would never get the impression that you were dealing with an ignorant child. If you claim to be a competent adult in the application, you wil be treated as a competent adult in the disputes.
There is much more to dispute resolution that simple legalistic explanations. The ultimate facts as decided by the judge, jury or arbitrator will depend upon the evidence, not on the excuses given for why the evidence may not favor your side of the case.
Richard Solomon
www.FranchiseRemedies.com
Kevin Shaw's Larceny Conviction
I can tell you what he testified to. At the time, Kevin was in his mid-twenties. He and some friends went out on a pick- up truck and stole a truck full of traffic cones from a highway construction project. They were stopped. He was charged and convicted in Michigan with the proviso that if he satisfactorily completed his probation, it would be expunged. He didn't like his probation officer and never cooperated. The conviction stands to this day. He tried to blame this on a college prank, but then acknowledged that he was already out of college and working for The Coffee Beanery when this occurred. While a nearly 20 year old conviction does not necessarily mean he is still dishonest, it does have to be disclosed and the conviction should have gone to his credibility. We had numerous franchisees testify that Kevin made earnings claims to them, but the arbitrator found Kevin to be credible, his conviction irrelevant and our witnesses all lacking credibility even though we had the written pro forma, Kevin gave everyone.
Harry
hmr@cohanwest.com
Recision must be Used Carefully -----When Fraud is Fraud
You can see that Recision must be used carefully by the States to prevent destroying franchise networks who contribute to state and national economies ---even if they don't contribute to profits for some franchisees and destroy these franchisees financially.
The States are in the position of balancing the "public good" and justice and restitution for the individual franchisees injured under their laws, and they apparently prefer to ignore the "churning" of networks to present visibility if not viability of the business plan until it is brought to their attention by the citizens of their states. The States know, of course, that the franchise agreements mandate arbitration under federal law.
But, when fraud under their laws is brought to their attention, they have to do something! You can see why the IFA is out there lobbying against State Relationship laws.
States, therefore, negotiate deals with Private Law Firms (like DLA Piper) that permit the franchisor to still stand tall and do business in the State, evem if the negotiated decision, in which the franchisees have no representation, does great injury to the individual franchisees who were injured by fraud under Maryland law. Whether or not they know that the arbitrators will not deal with the fraud under State Law, I don't know. Whether or not they know that franchisees will not be able to address the State Courts after an Arbitration is ruled final, I don't know.
But, it appears that federal policy as determined by the FTC doesn't recognize that there are "flawed business plans" (only violations of the Rule or the UFOC's) that are licensed under the UFOC's and will not allow this issue to be brought into arbitration, even when the franchisor has been found guilty of fraud and the hiding of the failure rate of the busines concept under the law of the state.
Then they get into the business of "reliance" and this is where I, who am not an attorney, get lost. It would appear to me that if CB fraudulently produced a UFOC that obscured the failure rate of the business concept, etc.. that the arbitrators would have to recognize this as fraud and that it would have to be arbitrated.
But, apparently, under the Deal and public policy wherein the federal government in case law, etc.. has never indicated that there is such a cause as the fraudulent sale of a "flawed business plan" the arbitrator could just ignore the state fraud and stick it to the CB franchisees under the terms of the franchise agreement and federal policy.
This award also acts as a WARNING to any other CB franchisees that there is really no relief anywhere for your loss so just suck it up and get lost. The 75 Coffee Beanery Franchisees who have already been destroyed are silenced as is the intention of the CB when they demand 10 year leases with personal guarantees, etc...
The ball is now in the judge's court but he is faced with a status quo where almost all arbitration awards are upheld by the courts. Will the Judge work for the government, the people, the franchisees, or the franchisors in the interests of justice, or in the interests of the economy that requires a higher standard of proof for franchisees.
The hiding or obscuring of the flawed business plans is upheld at the highest levels of government and may even be the will of Congress! The Judge is in a tough position.....but he can use the technicalities of the law to duck and hide. We can see that honorable CEO's who are part of the ISoldIt concept stopped selling new franchises when they got into trouble. However, the predators, who can churn because of their ability to hide their failure rate, can keep on selling franchises to prop up their networks while trying to solve their problems. This, of course, is malicious injury of new franchisees and should be stopped by government.
Remember, most all of our judges were attorneys before they became judges and even the ABA, who doesn't read the Gospel of Luke, have endorsed this public policy.
Maybe, Harry will have to hire a bodyguard. Will Harry and the CB Franchisees, Debby and Richard, who have been so injured by CB Shaw, have exhausted all of their recourse for recovery or could they take their case to the Supreme Court.
The Supreme Court, of course, only agrees to hear those cases that either confirm or change public policy as developed under law, and they don't have to agree to hear cases if they like the law that has already been established.
It is an academic thing for me and it will be interesting to see what happens.
Gift Card
The Gift Card contract with The Coffe Beanery, as I pointed out, had a clause that released them any liability that could arise from the use of the Gift Card. We are still in business and do not and have never sold that card. As far as the business accounts, the franchisees that go out of business can not close thier business account. As a matter of fact these franchisees are still being charged $7.00 a month. We brought this to the attention of the EXPERT GIFT CARD WITNESS. He did not what to say when he was asked about the two cants and the $7.00 a month charge.
K Mart I don't get it?
What does K Mart have to do with CB?
GUILTY
In American practice, the term Guilty is always criminal. The term used in civil cases is liable.
Richard Solomon
www.FranchiseRemedies.com
What is wrong with the Coffee Beanery Cafe