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GNC, Franchisees Continue Court Battles
More than 350 franchisees of vitamin-store chain General Nutrition Centers, Inc. (GNC) have banded together as the GNC Franchisee Association, Inc., in order to sue the company for misuse of advertising and reset fees and predatory pricing. The lawsuit, filed in May 2003, indicates that the settlement of three class action lawsuits against GNC in 2001 did little to end the bad blood between the company and its franchisees. GNC and its corporate parent, the Dutch firm Royal Numico NV, are named as defendants.
The latest lawsuit was filed in Superior Court in New Brunswick, NJ, and was transferred to the U.S. District Court for the Western District of Pennsylvania in August. At a case management conference in September, the judge asked both parties to submit briefs about a possible change in venue back to New Jersey or elsewhere.
The GNC Franchisee Association was started by four New Jersey GNC franchisees (Richard Sullivan, Scott Tull, Ronald Miller, and Leslie Quadrell), according to its lawyer, Gerald Marks, Gerald A. Marks & Associates, Red Bank, NJ. “We began this lawsuit over a question about how advertising funds were used,” he said. “We say that our clients' money was being used for normal corporate expenses, not for advertising.”
In a statement released to FLBA, GNC responded that “these allegations are without merit on both a legal and a factual basis … GNC's 2002 investment in national advertising has been audited by an independent auditing firm, and the expenditures were appropriate.”
Marks contends that the audit “is totally defective and a sham. We are seeking new audits of both advertising and reset fee expenditures.”
Reset fees are paid by retail franchisees to franchisors for minor store redesigns tied to specific in-store promotions. A GNC franchisee would typically pay a reset fee of $500 to $1,000, said Marks, but the franchisees were assessed $4,500 for a reset last year. “The company that came in did little work,” said Marks. “Also, I've been told by the company that was contracted to do the work that it has not been paid a significant amount of the money that GNC received. I think that contractor might file a lawsuit.”
GNC responded that its reset fees covered “updating the franchisee's store fixtures, graphics and product presentation,” as part of a $20-million image makeover. “Work carried out is billed at our cost, with no mark-up, and reflects the same level of work done at company-owned stores,” GNC added.
Predatory pricing allegations, which are the third issue, echo the three class action lawsuits that were settled in 2001 for $4.2 million. GNC franchisees contend that they are paying higher prices for purchasing products from GNC than the company is selling those same products at its company-owned, branded stores. “Imagine if you get a flier that has a popular product, like TrimSpa, advertised at a certain price,” said Marks. “Then you go into a franchise store, and that retail price is lower than the store owner paid for it. He's got a choice of losing $2 to $3 on each sale, or losing a customer. That's what is happening on a bunch of products.”
The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.
GNC, Franchisees Continue Court Battles
More than 350 franchisees of vitamin-store chain
The latest lawsuit was filed in Superior Court in New Brunswick, NJ, and was transferred to the U.S. District Court for the Western District of Pennsylvania in August. At a case management conference in September, the judge asked both parties to submit briefs about a possible change in venue back to New Jersey or elsewhere.
The GNC Franchisee Association was started by four New Jersey GNC franchisees (Richard Sullivan, Scott Tull, Ronald Miller, and Leslie Quadrell), according to its lawyer, Gerald Marks, Gerald A. Marks & Associates, Red Bank, NJ. “We began this lawsuit over a question about how advertising funds were used,” he said. “We say that our clients' money was being used for normal corporate expenses, not for advertising.”
In a statement released to FLBA, GNC responded that “these allegations are without merit on both a legal and a factual basis … GNC's 2002 investment in national advertising has been audited by an independent auditing firm, and the expenditures were appropriate.”
Marks contends that the audit “is totally defective and a sham. We are seeking new audits of both advertising and reset fee expenditures.”
Reset fees are paid by retail franchisees to franchisors for minor store redesigns tied to specific in-store promotions. A GNC franchisee would typically pay a reset fee of $500 to $1,000, said Marks, but the franchisees were assessed $4,500 for a reset last year. “The company that came in did little work,” said Marks. “Also, I've been told by the company that was contracted to do the work that it has not been paid a significant amount of the money that GNC received. I think that contractor might file a lawsuit.”
GNC responded that its reset fees covered “updating the franchisee's store fixtures, graphics and product presentation,” as part of a $20-million image makeover. “Work carried out is billed at our cost, with no mark-up, and reflects the same level of work done at company-owned stores,” GNC added.
Predatory pricing allegations, which are the third issue, echo the three class action lawsuits that were settled in 2001 for $4.2 million. GNC franchisees contend that they are paying higher prices for purchasing products from GNC than the company is selling those same products at its company-owned, branded stores. “Imagine if you get a flier that has a popular product, like TrimSpa, advertised at a certain price,” said Marks. “Then you go into a franchise store, and that retail price is lower than the store owner paid for it. He's got a choice of losing $2 to $3 on each sale, or losing a customer. That's what is happening on a bunch of products.”
The publisher of this newsletter is not engaged in rendering legal, accounting, financial, investment advisory or other professional services, and this publication is not meant to constitute legal, accounting, financial, investment advisory or other professional advice. If legal, financial, investment advisory or other professional assistance is required, the services of a competent professional person should be sought.
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