Class-action lawsuits poised to make franchisors eat humble pie

Ontario justices are sending a strong message to franchisors to play nice when sharing profits.

Pet Valu, Midas, Shoppers Drug Mart, Quiznos, Tim Hortons, Bulk Barn, Sunoco…just the first.

The cases often revolve around how the franchisor uses its power to set the prices – both the prices that franchisees must pay for the products they sell, and how much they can sell them for.

“It’s about dividing up the profit pie. And the person who has the pie cutter is the franchisor. And so, they cut themselves the biggest piece,” Mr. Sterns said. “But on the other hand, the franchisees are the ones who put a lot of investment into making the pie.”

Mr. Shaw is absolutely right and absolutely wrong:

1. The technology for organizing pre-trial franchisee groups is improving (daily) but
2. This is just the tip of the iceberg.

I guarantee that.

[see Revolt of the Franchisee: Behind some of the biggest brands - Midas, Quiznos, Tim Hortons - the messy class-action battles or The Globe and Mail]

Do franchisee attorneys cheat at settlement time?

Attorneys provide services that economists classify as credence goods which are quite susceptible to fraud.

Franchisee attorneys sometimes act on their own self-interest because only the elites know the game and they mostly keep their mouths shut. After the confidentiality agreements are signed, there is very little danger of client complaints.

Here is one perspective on the U.S. Quiznos class action lawsuit settlement process that resonates.

If you were a conspiracy theorist, might you suspect something like…..

The lawyers for both sides colluded to end the case in a manner that got the franchisees nothing; cost the franchisor nothing other than its legal fees (because the debt written off was worthless anyway); the “benefits” to the franchisees are illusory and valuless; the judge would sign off on anything just to clear the case from his docket so long as he had some/any piece of paper in the record saying that the franchisees were getting real value; and they found a valuation “expert” with a degree in alchemy.

NAH! THEY WOULDN’T DO THAT.WOULD THEY?

Richard Solomon has over 40 years of franchise law experience in the United States and his Franchise Remedies site is an important resource.

Food truck encroachment: Why sunk cost investments and change kills mom/pop franchise life savings

A legal civil war will mask franchising’s unavoidable investment flaw: opportunism arising from inevitable change.

The #1 business risk is franchisor opportunism: the self-interested exercise of contractual discretion via deceit. This one risk comes cloaked in hundreds of types.

Systemic Factors: At one time, franchisees were granted a geographic monopoly but that ‘s history, mostly. Franchisees own the majority of the assets but franchisors control the use/exit of this capital. Franchisors take $ from the top; franchisees only from the bottom. Pre-sale due diligence is irrelevant because the franchisor reserves the right to unilaterally change the model. Sunk cost chains draw off-balance sheet capital in from all s0urces of “love money”.

High-end, branded roach coaches will be franchisors’ new crack cocaine:

1. lower capital barrier to sales (easier financing),
2. boost total market retail sales (royalties/ad fund %),
3. product sales margin increases (tied buying provisions),
4. same control via central commissary innovation and tied buying to outfitters,
5. 100% flexibility (scaled territories),
6. streamlines process when an intentional insolvency is chosen,
7. centralized social media promotion, and
8. margins by contracting with a secondary space rental company (more than make up for franchisors giving up hefty lease margins).

Benefits for traditional mom-and-pop investors?

At best, a generous offer from your franchisor for you to buy 3 new trucks to replace your outdated bricks-and-mortar store.

I would suggest that billions of $  existing franchisee-owned assets just shrunk. Permanently. Never to return.

Think: Dunkin’ Donuts, Tim Hortons,  Quiznos on wheels.

• Food trucks are rolling into the mainstream: Restaurant chains such as Sizzler and Subway are joining the parade of roving gourmet kitchens that started with Kogi two years ago., Sharon Bernstein, LA Times
• Streetza Pizza Social media, event planning.

Thanks for the tip, Michael.

It is a great shock to find that in a world of Gary Coopers you are the Indian.

Who the hell ever thought they signed up to a faceless nobody loser cowpoke in a cheesy spaghetti western franchise system?

I know I sure didn’t.

Franchisees enter into a type of shock when they realize they entered into relationships that put them as 2nd class citizen.

• franchisee :: franchisor,
• buyer :: supplier,
• customer :: banker,
• client :: solicitor, and
• citizen :: politician.

Some never make it out; such as Bob Baber (2.5 years now). Janet Sparks

People who treat other people as less than human must not be surprised when the bread they have cast on the waters comes floating back to them, poisoned.

To act is to be committed, and to be committed is to be in danger.

Be careful what you set your heart upon – for it will surely be yours.

I want to be an honest man and a good writer.

– James A. Baldwin

Blitzkrieg 2.0: Death to franchise law trench Warfare

Another interesting article from Blue MauMau.

Rich Piotrowksi in Quiznos Battle starts off his own story by saying:

One ounce.

One ounce cost Rich Piotrowski and Ellen Blickman their Quiznos franchise and more than $200,000 in legal fees during a two-year battle with the sandwich company.

One ounce — the amount of meat a “mystery shopper” determined was lacking in a sandwich bought at the couple’s restaurant in 2006 — is also what led a judge to order Quiznos to pay the couple $350,000 and to pay their attorney’s fees.

In a statement, Quiznos said it didn’t agree with the judge’s Dec. 31 decision. It hasn’t announced whether it would appeal.

It’s a good article and I’d like to focus on one element:

Piotrowksi said he left repeated messages for Daigle, and at one point, threatened to call a press conference because he was angry he hadn’t received any return calls. That’s when, the couple says, the argument turned nasty. A few days later, Quiznos sued them for damages.

I talked to a friend in the U.S. yesterday and he wondered: Would the threat of exposing wrongdoing in the media help his friend get his money back?

• In a word: No.

I wish Rich and Ellen all the best but fighting a trench war (WWI) against an infinitely better armed opponent, is why franchisees are often called cannon fodder: expendable military personnel.

Technology is defined broadly as any methods that extends mans’ abilities: physical, mental, social, information, etc. In WWII, faster logistics, Lend Lease, panzers, V2, Little Boy, teletype, encryption, air force, coordination, communications, radar were all technologies that helped break the back of tyranny. It can do the same for franchisees who are willing to trust once again.

• Don’t retreat in fear to the past, to the gore and futilityof Passchendaele (civil law).
• Look to the skies.
  

In franchise tactical defense, you never threaten: You just do. Threatening is for sissies and those who think that being reasonable will elicit a reasonable response. In the history of warfare, it won’t and never has. Technology, however, can lead to

1. Identify and share an experienced commercial lawyer (not franchise Uncle Tom).
2. Collect emails into a database. Download volunteer electrician’s code.
3. Blitzkrieg (or lightning war) the system via the internet. Reverse the electrical and power polarity. Create a cluster of Web 2.0 community members using email invites and links to existing and new weblogs. Go DC to AC, and then back. Be the next citizen journalist: already 10 million losers typing in their home offices, anyway; where’s the crime in 1 more?
4. The money’s gone anyway.
5. Regain your freedom, dignity and self-respect.

I get paid (sometimes) for thinking this stuff up. And it works:

Big time.

A prediction: Quiznos will spend their last dollar suing anyone and everyone before even considering paying anyone a remedy. Their corporate dissolution papers just need to be dated.

Bhupinder “Bob” Baber

It was two years ago today that Bob Baber, a franchisee entangled in what seemed like an impossible legal mess, went into a bathroom and shot himself.

Janet Sparks of Blue MauMau reminds us and discharges her duties in her usual dignified and professional manner.

Where I’m from, we say je me souviens (I remember) and we mean it.

My thoughts and prayers are with Rattie and her and Bob’s family and friends.

Litigation Merry go Round

Another class action lawsuit was filed this week as reported by Richard Gazarik at the Pittsburgh Tribune-Review: Quiznos franchise owners sue sandwich company.

I took the article into the Information Sharing Project as Record# 1,575. Here is what the Word file looks like before I split it out into the Access database. The present keywords that I extract from the article are here:

• Bankruptcy
• Churning (serial reselling)
• Coupon programs (forced) destroy franchisee margins
• Discount programs destroy retail margins but boost wholesale profits
• Encroachment (too many outlets put in territory),
• Fear of poverty
• Fear mongering
• Forced ordering
• Franchisor overcharges for required products
• Gouging on supplies
• Lawsuits just a cost of doing business
• Lawsuits, class action
• Must buy entirely useless goods and services
• Must buy only through franchisor (tied buying)
• Must pay future royalties, even when the franchise fails (liquidated damages)
• Racketeering
• System designed to fail for franchisees
• Threats of lawsuits
• Will work even when Variable Costs > than Selling price

The Future? These are the keywords that will likely fit this situation as it grinds onto the inevitable useless conclusion [if the trajectory does not change]:

1. Bootstrapping the assets of a corporation
2. Class-action dead end
3. Credence good fraudulent expert
4. Don’t owe your lawyer money
5. Fee surprises at settlement time
6. Federal insolvency laws used to shirk legal claims
7. Franchise agreements create a License to Lie, Cheat & Steal
8. Financial failure of first franchisee a material fact to the second
9. Franchisor bankruptcy
10. Franchisor corporation created to fail
11. Franchisor insolvency, intentional
12. Futility of taking legal action
13. Health consequences
14. Loan pushing
15. Piling on: franchisor can afford a few awards but not hundreds
16. Settlement just covers fees
17. Sue lender for not doing their lender’s due diligence
18. Sue the sales agent
19. System under scrutiny withdraws membership from franchisor association
20. Trading in false hope
21. Within the four corners of the contract

I honestly feel for the operators but fighting this [or any other] franchisor in the Courts is just for fools and their paid cheerleaders.

Numbers 8, 14, 17 & 18: They hold some real promise as a group action.

• I wonder why the franchise bar never argues along these lines?