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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