Sona MedSpa Guilty of Negligent Misrepresentation

A model exists throught the Securities and Exchange Commission (SEC) for substantially preventing the negligent misrepresentation conducted by Carousel Capital Partners II and Sona MedSpa and other franchisors and their funding partners. All SEC fund raising documentation whether private place, public offerings or other known SEC based fund raising vehicles require primary evidence for all operational or business statements made. The law firms who help create these fund raising documents are required to receive evidence that all statements made in the document are true. For example, in this case the company and their legal counsel would have been required to get outside medical experts (likely dermatologists) to verify the medical claims being made. In a similar fashion the company and their legal counsel would also have been required to show substantial evidence (from franchisee and owner based centers)that the business claims (financial returns, etc.)were true. The SEC has already laid out the map for conducting due diligence correctly. Why doesn't the franchise industry follow this SEC map??? Likely the Sona MedSpas and Carousel Capital Partners II would not exist if these types of requirements were in place3.

He always seems to be able to open the window and escape to fresh air and new beginnings!

If the official arbitrator concluded in the verdict report that executives within Sona MedSpa are guilty of "negligent misrepresentation," what does this mean for former IFA Chairman James H. Amos and his daughter Heather Rose, who own and run the company? It is hard to spin a guilty verdict into something good for the branded system.

What will the franchisees do with this verdict? What will new or prospective investors and franchisees do when they learn about the guilty verdict?

How should a franchisee use this legal decision to their advantage?

What is the company telling their franchisees about the guilty verdict?

"God has blessed the Sona franchise and your franchise will be blessed as well"

Franklin, Tenn. (Blue MauMau) - In previous articles related to the troubles of the Sona Medspa system, many franchisees have told stories of religion being used in selling and operating the business. One franchisee was told by company executives that God had blessed the Sona franchise and his franchise would also be blessed as well. Even during one legal session, one witness stated that Jim Amos was reading his Bible while testimony was being conducted.  

Kemp Coady and his wife Rosita, executives with MBAs from Cornell University, have just received an arbitration award for roughly $400,000 against Sona Medspa, found guilty of negligent misrepresentation. Mr. Coady said he thinks it is unconscionable that all the Sona people used the premise of God and Christianity to try and justify the Sona system when it lacked solid medical and business research to support it.     

Says Mr. Coady, "Those are the things that really disgust me. When they (Sona) mixed religion in with the business it caused us to believe that what they were telling us was somehow true but it wasn't. They negligently misrepresented the medical facts because they did not hire the proper experts to prove what they were telling franchisees was true."

Mr. Coady states emphatically, "We were very much deceived."  

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise industry. She is now a freelance investigative reporter and a columnist for franchising.

It is strange how franchisor's who are allowed to disclose incomplete information about their branded business plan to the public under the law are so often let off easy for their negligent misrepresentations that permits them to constructively lie to prospective franchisees to sell their product.
I'm sure their new UFOC will cover all bases.

Who really won and who really lost. Any of the experts care to comment!

Apparently Mr. Amos has had other run-ins with franchisees. This is from his days as president at ICBY in the mid 90's.

"The jury found that Scott, Amos, Holt, and Horner engaged in a conspiracy to defraud investors commencing in May of 1992. "

This seems to say that the Coady's bought the franchise in 2003, but Jim Amos and Carousel did not buy the Company until 2004. The article also seems to imply that the misrepresentation happened at the time of sale. Wouldn't this seem to indicate that the current ownership didn't have anything to do with the issues but are dealing with something that occured before they bought the Company?

Editor's Note: Investigative reporter, Janet Sparks, contacted Mr. Michael Seid to get his response to the arbitrator's ruling of "negligent misrepresentation" against Sona Medspa. Mr. Seid stated that he did not want his remarks edited. So, with his permission, his entire email to Ms. Sparks is shown below. - Mr. Blue MauMau

Janet

I am going to take a pass on getting into a dialogue with you regarding the Sona MedSpa case. I understand that the arbitrator found that there was no fraud or intentional misrepresentation, found in favor of the defendants on the major issues and awarded what I understand to be less than 5% of what the plaintiffs and their legal counsel were attempting to win.

Given the number of substantial claims that were eliminated by this judgment when coupled with the vagaries of arbitration, such a minor award that really dealt with actions that took place before the current owners acquired the system is not something that merits the headline of your blog on Blue Mau Mau, "Sona MedSpa Guilty of Negligent Misrepresentation".  Were I writing your headline, it likely would have read "Sona plaintiff's unable to substantiate the majority of their claims – arbitrator awards less than the cost of litigation."  A more balanced approach would likely have alerted the reader to the proportionally miniscule award, the elimination of the guts of the plaintiff's case and the failure of plaintiff's council to meet the vast majority of the claims they used you and others to broadcast while the matter was being arbitrated.  I find the use of the press during litigation to be a disgraceful tool and would wish that reporters would avoid supporting this litigator ploy.  Using a baseball analogy, Michael Garner swung for the fence but barely got the ball past the pitchers mound.  Contrary to Michael's opinion, calling this a landmark decision, given his failure to substantiate almost all of his case is akin to calling my last speeding ticket a capital offense.  His was too absurd a claim to warrant any ink – even in a blog. 

We have discussed in the past my perception of where I believe you naturally land on issues involving the IFA, its leadership and franchising in general.  I have never understood what I perceive to be your consistently negative reporting on an organization I am proud to be associated with.  Given what I can anticipate will be the leaning of your column in Franchise Times I really do not see the need for me to provide you with any verbal input.   I can only imagine the selective sentences you may likely pull out of this hurried response but would hope that if you print some of it, you print all of it.

Perhaps, if you wish, we can discuss my perception of your reporting the next time we meet.  For me, I am sadden by the personal verdict involving Jim and Heather but am pleased that this is over for them and the rest of the Sona MedSpa system.  I trust they can finally get back to work on more productive issues and hope, although I don't expect it, that your column will be balanced in dealing with the facts in this case.  I would also pray that you would at least highlight the fact of the failure of plaintiff's legal council to meet his burden of proof in almost every instance and how little his client benefited from this "victory".

Maybe you could consider writing a future column on the plaintiff bar and whether they are benefiting or hurting franchisees or are really the only winners in many of these cases.  Maybe you can write a column on whether reporting on allegations in a case, in a way that makes the claims seem like facts while the case is being tried is fair.  Now, those would be columns I would be pleased to discuss with you.

Michael Seid
Managing Director
Michael H. Seid & Associates (MSA)

As counsel for the Claimants in the arbitration reported here as well as for other former Sona franchisees, I welcome the opportunity to address some of the comments that have been made and to clarify some of the history of this case. 

At the outset, the significance of the Arbitrator’s ruling cannot be trivialized.  For clarification, the Complaint originally sought $4.5 million dollars in damages, total.  This was a guesstimate that we prepared at the outset of the case and without expert input.  It is typical for attorneys to claim as much as they can in a pleading at this preliminary stage of the case.  By the time we got to trial, we knew that the total damages were $1.3 million, and that’s what we asked for in arbitration.  We recovered roughly a quarter of those damages.  The Arbitrator denied the remainder, which represented the value of the business itself.  Apparently the arbitrator concluded that the value of the business, which the Claimant had kept, was worth something.  Second, it is misleading to evaluate the success of the case by saying that we prevailed upon only one of a number of counts.  Look at it in perspective:  We prevailed on negligent misrepresentation and recovered money.  Sona, which had counterclaims against the Coadys originally in the range of $7 million dollars, (later trimmed down to somewhere between $1 and $2 million dollars) recovered nothing.  On my scorecard, that’s a win for my team and a goose egg for the other side.  You don’t say that the team that wins the game by one run was the losing team.  It was the winner, and win we did.

Now to the meat of the holding:  The Claimants were originally induced to buy a Sona franchise in September 2003 on the basis of representations by the then-owner, Dennis Jones, that the Sona hair removal system was far superior to other systems; that it would remove 93 to 98 percent of a person’s unwanted hair in five treatments; that the removal was permanent; that the reason it worked was because of a unique, patent-pending “Sona Concept” that timed the laser treatments to hair growth cycles; and that it had a proprietary chemical, Meladine, that enabled the laser to work on all types of hair when, in fact, lasers typically cannot remove white, blonde, or gray hair.  The problem?  None of this was true or supported by any credible medical studies.  Jones, however, told prospects that he had a database of 50,000 clients verifying the claims.

Coady purchased his franchise on the basis of these representations in September 2003 and proceeded to build out his facility through the ensuing year.  In the interim, Carousel, Amos and Rose purchased Sona.  One might think that an investment capital firm buying a company engaged in laser hair removal might have retained a dermatologist to evaluate the efficacy of its procedures or that it might have taken note of the mountains of data that said, in substance, that laser hair removal was a hit or miss proposition, that any sort of guarantees were suspect and that overreaching in selling to the public was not unusual.  But Carousel, Amos and Rose did none of this.  A couple of months after they purchased the company, and while the Coadys were still building out their center, other franchisees, who had been in business for a few months or up to a year, came to Rose with the news that indeed the “Sona Concept” didn’t work:  Five treatments were insufficient to remove anywhere near 93 percent of the hair; it wasn’t permanent; and Meladine didn’t work to enable laser treatment of light-colored hair.  As a result, customers were complaining they had been misled and were demanding free treatments or refunds.  Rose, Amos and Carousel sat on this information through the Summer of 2004 without notifying existing franchisees that they were operating on the basis of bad information, telling their clients falsehoods, or correcting the bad information.  When the Coadys went to training at Sona headquarters, in September, they were trained to tell prospective clients all of the same “faulty” information.  The Coadys opened their center and repeated those statements to their customers.  It was only a year later, when franchisees discovered the full impact of Sona’s falsehoods, and the Coadys learned from a dermatologist that there was no substance to the “Sona Concept,” that they took steps to leave the system.

What is important about the Arbitrator’s ruling is that it found the buyers—Carousel, Amos, Rose and partners of Carousel Capital—guilty of negligent misrepresentation.  In short, they knew franchisees had been given bad information, and they sat on their hands and did nothing and allowed it to be repeated to the franchisees’ clients. 

An important point that everyone seems to have missed, or misinterpreted, is that it is the very finding of guilt on negligent misrepresentation that makes this an important case.  Negligent misrepresentation is a low threshold:  It is easy to breach if you are not careful.  Hence, the decision casts a very wide net:  Purchasers of and investors in franchisors have a duty not to be negligent; they owe a duty of reasonable care to the existing franchisees that they acquire.  I repeat:  This is a broad standard of care that can be met by reasonable due diligence but also can be very easily breached by a failure to use reasonable due diligence.

There are a number of other chapters of the Sona saga that are worth mentioning here, if only briefly.

In January 2006, the Washington franchisee, also disillusioned with the falsehoods he had been told, de-identified and went independent.  Sona sued him in Federal Court seeking a preliminary injunction against violation of his covenant not to compete.  Following a two-day hearing, the federal judge in Virginia denied Sona’s request for a preliminary injunction, finding, among other things, that the evidence that Sona’s methods were misleading was sufficient to show a likelihood that the franchisee would be entitled to rescind on the basis of fraud.  In the wake of that franchisee’s departure from the system, several others also left.

There was also collateral damage.  Sona franchisees did not discover the faulty nature of the system until they had been in business for a year or more and clients had run through the five treatment cycle and found that their hair was still there.  At that point, customers began to demand refunds.  Also, because of Sona’s quirky cash-based accounting system, franchisees began running out of money about that time.  One store, in Salt Lake City, closed its doors, and the franchisee was the subject of action by the Consumer Affairs Department requiring a payment of tens of thousands of dollars in restitution to clients who had not had all their hair removed.  A similar case happened in St. Louis.  Stories abound of franchisees who lost not only their personal fortunes but also their mental health, their family relations, and their homes.  Sona, itself, got off lightly.  The point, however, has been made:  Those who buy franchised organizations cannot ignore the history that went before.  They have a duty to franchisees to make sure they are telling the truth and acting fairly.

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W. Michael Garner, attorney for the Sona franchisees, is a partner in Dady & Garner, P.A., Minneapolis and New York. The firm represents franchisees, dealers and distributors in their disputes with franchisors and suppliers.   Mr. Garner is the author of a three-volume treatise on franchise law, the editor of the Franchise Desk Book, and former editor of the American Bar Association's Franchise Law Journal.  He has been practicing franchise and distribution law for over 30 years.

Sona does indeed view the outcome as favorable, for a number of reasons -- first and foremost, while the claimants in the Coady case as well as all the others have predicated their claims upon fraud (the Coady claimants in fact went so far as to liken Sona and its founder to "snake oil salesmen")

"the arbitrator ruled unequivocally that no fraud or intentional misrepresentation of any kind occurred, and also ruled that none of the franchise or other state regulatory or consumer protection statutes the claimants relied upon were violated."

This goes more to show how inadequate the state regulatory and consumer protection statutes are in imho.

Amazing... but not unexpected. Some of the Sona franchisees have been writing about this for some time - read here.

I used to believe that Jim Amos and Heather Rose were victims not unlike the franchisees who had believed the shameless puffery and false claims of Sona's founder Dennis R. Jones. Amos and Rose had even earned my respect for their desperate efforts to restructure the company's failed business model in order to forestall the bankruptcy of their newly acquired franchise system. However, their efforts were much too little and much too late for me. Sona's Founder, Dennis Jones, and CFO, Tom Noon, had already sunk me financially! Franchise buyers beware! Not much has changed at Sona Medspa. Listen carefully to everything you're told. Hitler once said, “Make the lie big, make it simple, keep saying it, and eventually they will believe it.” This is precisely what Heather Rose is trying to do with this outrageous press release. Amos and Rose even have the audacity to continue to claim that Sona Medspa is “one of the world's fastest-growing medical spa franchises” when they have seen nothing but decline in their unit numbers.

For the life of me, I cannot find any franchised spa system with any history of franchisee profitability.

Am I just losing it to whiskey and syphillis? Is  it old age and deterioration of brain cells?

How can I ever help anyone to an affirmative investment answer in any due diligence assignment if I can't find corroboration of any franchised spa (medspa or otherwise) ever making profits over any reasonable period of time?  DUH!!!--

Richard Solomon, FranchiseRemedies.com,  has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School