Pending Report Regarding Cuppys Coffee Controversy

I have just returned from an ‘Internet free’ few days away following the AAFD Annual Conference and have discovered that the Blue MauMau blogs have been actively ‘on top’ of the Cuppy’s Coffee presence at our conference. I wish to thank all of those who actually attended our conference for their fair and honest reporting. I found all such reports to be well intended and balanced, even those with which I do not completely agree.

The AAFD is apprised of the allegations that Cuppy’s Coffee has violated its franchise agreements and the AAFD’s Accreditation Standards. Within hours of the first disclosure of allegations that Cuppy’s was not honoring contractually promised refunds in the construction agreements of its affiliate, Elite Manufacturing, the AAFD was in communication with Cuppy’s management to assure that contractual commitments would be honored. The AAFD asked for access to investigate all claims, and Cuppy’s readily agreed (a demand was not necessary), as well as agreeing that the AAFD could mediate all disputes that were not readily resolved internally. Cuppy’s and its affiliate, Elite Manufacturing, also agreed to forthwith escrow all deposits subject to refund demands until the conditions triggering refunds had been satisfied.

It should be noted that Cuppy’s Coffee is recognized by the AAFD for having an AAFD Accredited Contract. The Cuppy’s franchise agreement (pdf, 49 pgs) substantially conforms to the AAFD’s Fair Franchising Standards, and provides significant rights to Cuppy’s franchisees. If Cuppy’s is found to be in violation of its contracts, there would be cause to suspend or withdraw AAFD Accredited Contract status. The AAFD has not approved or endorsed the Cuppy’s business model, or its efforts to support its franchisees. Several commentators have suggested that the AAFD needs to do a better job of differentiating what AAFD Accreditation means and doesn’t mean, and our inquiry includes an evaluation of how the AAFD can assure that our recommendations are not confusing in the marketplace.

The AAFD investigation is ongoing, and we expect to make a full report to the AAFD Board of Directors in July. However, this is what my personal investigation has revealed so far:

1. Elite Manufacturing is a related company to Cuppy’s (whether there is common ownership is disputed). Elite was an approved builder of Cuppy’s Coffee units. Although franchisees were free to choose other builders, Cuppy’s recommended Elite and Elite was the only builder that offered 1) to refund deposits if a prospective franchisee was declined for financing, and 2) to pay the prospective franchisee’s franchise fee from the construction proceeds.

2. It appears that Elite did not escrow deposits it received from prospective franchisees. While escrowing deposits would have been a prudent practice, holding onto the funds was not a requirement of the Elite agreement (or the AAFD’s Standards), and such a failure cannot be deemed a violation of the agreement. The AAFD Standards Committee is in the process of determining whether such requirement should be added to our standards.

3. It further appears that during and after August of 2007 several prospective franchisees who met Cuppy’s lending criteria were, in fact, turned down for financing. Elite claims its problems stem from the US mortgage and banking crisis. It further appears that Cuppy’s and Elite’s first reaction was to attempt to preserve these deals, although it appears that both Elite and Cuppy’s readily admitted that it did not have sufficient cash resources to effect immediate cash refunds to all claimants.

4. From the date of the AAFD’s knowledge of refund demands, the AAFD has sought to intercede on behalf of any claimant that sought assistance from the AAFD. Cuppy’s and Elite have both readily acknowledged the promised refunds, stated their intent to honor their commitments, agreed to escrow all deposits in the future, and to allow the AAFD to mediate all claims. The companies further readily agreed that the AAFD could monitor and investigate the companies’ efforts and to report our findings.

5. To date, the AAFD has tracked 11 refund demands that have been reported on various Internet sites, or directly to the AAFD. Of these 5 have been fully settled, 4 have settlement documents approved and out for signature, and 2 are disputed claims. The company has also advised that there are a few additional refund claims that were also resolved without public scrutiny, although we have not yet seen the details of such claims.

6. In late April, Cuppy’s and its related entities were sold to FranSynergy, led by Mr. Dale Nabors. Mr. Nabors has been candid in addressing the issues facing the companies, but has also given his vote of confidence with his pocketbook. Perhaps more important, Mr. Nabors has reaffirmed the commitment of Cuppy’s to honor its contracts.

The AAFD investigation will attempt to determine if Cuppy’s has acted in a commercially reasonable manner. The AAFD also has a Standard on confidentiality agreements which may well be relevant to our review. If anyone is aware of information that may be useful to the AAFD’s investigation, please submit it to the AAFD. The AAFD will not hesitate to take action if it finds that Cuppy’s has failed to honor its agreements. By the same token, I hope observers will recognize that having an AAFD Approved franchise agreement and AAFD due process has protected Cuppy’s investors, and if we find that Cuppy’s has honored its contractual commitments in an appropriate fashion, I will recommend that the AAFD take steps to recognize such efforts.

The AAFD offers two forms of accreditation. Our Fair Franchising Seal is available to mature franchise companies whose contracts and practices honor the AAFD’s Fair Franchising Standards. The AAFD has set the bar very high to earn our Fair Franchising Seal, and we have faced stiff competition from lesser ‘accreditations’ based solely on ‘franchisee satisfaction surveys’ that do nothing to promote franchisee rights.

In order to jump start the AAFD’s fairness initiatives, we also offer ‘Accredited Contract’ status for a franchise company that (for a variety of reasons) cannot yet qualify for the Fair Franchising Seal, but that is willing to offer a franchise agreement that substantially conforms to the AAFD Standards. This latter accreditation gives a ‘start-up’ franchisor a significant incentive to embrace fair franchising in the face a marketplace that sadly ignores the importance of a ‘buyer friendly’ franchise agreement. A company that earns Accredited Contract Status must qualify for the full Fair Franchising Seal within three years of Accreditation.

I believe that Accredited Contracts are the tool by which we will effectively reform the franchising community. Fair agreements will mean that franchisees actually have rights under the franchise agreement, as did the Cuppy’s franchisees who had a right of refund that is unprecedented in franchising!

The AAFD will soon publish the Cuppy’s franchise agreement so the world will know without question the kind of impact the AAFD’s negotiating leverage can have on a franchise system that is looking for an opportunity to compete in a crowded marketplace.

If a company earns AAFD Accreditation, it will be held accountable to honor its contractual commitments. This is happening with Cuppy’s. It is our system working as we intended.

As has been reported, the AAFD is a transparent organization that is dedicated to fairness in franchising – and if anyone takes the time to read the AAFD Fair Franchising Standards, you will understand that ‘fairness’ is a two-way street. The US Bill of Rights provides several powerful personal liberties. The rights to freedom of speech and freedom of the press are prized by Internet bloggers and journalists, although I fear these rights are being challenged by the reckless disregard by bloggers of other crucial rights – especially the right to a presumption of innocence until proven guilty, the right to ‘due process’ of an accused, the right to face one’s accusers, and the right to a fair and impartial trial by jury of one’s peers. It is unfortunate that we cannot offer “instant gratification” to those who demand it, but conclusions cannot be drawn until all of the facts have been investigated and resolutions pursued.

For those who question Cuppy’s right to be present at the AAFD’s Conference, I would remind them that ours is a free society. You have the right to judge, but the AAFD has the right to honor the principles of our Constitution, including Cuppy’s rights to face its accusers, to be accorded due process, to be tried by a jury of its peers and to be presumed innocent until proven guilty. That said, I should admit and disclose that both Mr. Nabors and Mr. Hibbing (who had signed on as part of our ‘cast’ months ago) offered to stay away from our conference so as not to cause me or the AAFD embarrassment. Based upon what I have learned so far, I see a young company with new management trying to do the right thing and to survive in a competitive world. Cuppy’s presence at the AAFD conference was solely at my urging.

I urge the readers of Blue MauMau, and similar communities where citizens enjoy the right of unabridged discourse, to always ‘consider the source.’ Be wary of those who hide behind anonymity, because we cannot discern or challenge motives, or hold such bloggers accountable for their version of truth and reality. But more importantly, please be wary of vigilante justice and ‘lynch mobs’ who are quick to blame without all the facts.