News Briefs

D'Angelo/Papa Gino's attorney, Steven B. Feirman, Piper Rudnick LLP (Washington, D.C.), told FBLA that the company is surprised by allegations of wrongdoing from franchisees that are benefiting from reduced costs. “It's ironic,” he said. “The franchisees bringing the lawsuit include former owners of D'Angelo, who sold to Papa Gino's. They set up the company-owned restaurants, sold most of the franchises, and developed the purchasing structure.”

Because Papa Gino's is a larger, more efficient operation, it has actually reduced purchasing costs and passed the savings along to the franchisees, said Feirman. “In addition, the former owners prohibited franchisees from buying from other vendors, but D'Angelo doesn't,” he said. “So the current management is lowering costs and making sure that the franchisees are the beneficiaries of that. The franchisees used to pay cost plus 12% to the franchisor; they pay less now.”

Indeed, D'Angelo did reduce the fee structure in 2001, after the franchisees first complained about the rebate program, and it agreed to allow franchisees to use another supplier, Cirelli Foods, at their discretion. Yet, the franchisees argue that in the 1999 to 2001 period, they paid about $887,000 in “unfair” commissions, for which they want redress.

At a hearing in March, D'Angelo filed a motion to dismiss. The franchisor argued that its franchisees do not have a claim that is applicable under the provisions of the Robinson-Patman Act that governs antitrust activities. D'Angelo argued that legal precedent gives it a right to rebates from its suppliers, if they are disclosed, and that D'Angelo disclosed the rebates in regulatory filings. The court has not yet ruled on the motion, nor a second motion to dismiss that was filed by U.S. Foodservice, based on the statute of limitations for claiming injury.

Stadfeld and the franchisees believe that the payments will not meet the legal test. “Whether commissions are allowed or not depends on the facts of each case,” said Stadfeld. “Courts have found that commissions are not legal unless they are payment for a product or service with meaningful value. We believe that in this case nothing of value was exchanged.”

Moreover, because company-owned stores compete directly with its franchises, “it is easier for us to show that the different prices for supplies directly affected the franchises' competitiveness in the marketplace,” Stadfeld added.

But Feirman said that D'Angelo selects its company-owned stores very carefully. “None of the complaints have ever cited store-to-store competition,” he noted.

And Stadfeld admits that D'Angelo franchisees do see a positive aspect to the company-owned operations: “Unlike many chains, the executives of D'Angelo clearly believe that the stores are worth owning,” said Stadfeld.

Subway v. Panera Tussle Plays Out in Massachusetts

National competition between quick-serve franchises Subway and Panera Bread Bakery has become white-hot in Marlborough, MA.

On July 16, John Allen, owner of a Subway franchise in a shopping mall in Marlborough, obtained a temporary injunction from the Middlesex County Superior Court against his landlord, R.K. Associates, after the landlord proposed to allow a Panera Bread Bakery franchise to take a space in the same mall. But on Aug. 2, the Massachusetts Appeals Court voided the injunction. Litigation was continuing as FBLA went to press.

The issue is whether the rental agreement between R.K. Associates and Allen prohibits R.K. from renting to Panera at the R.K. Centre Mall. The lease states that R.K. cannot rent to a restaurant whose primary business is selling deli- or submarine-style sandwiches. It specifically names Blimpies, Miami Sub, Schlotsky's, and several other franchises, but not Panera.

R.K. Associates contends that Panera is not primarily a deli, but is an upscale cafe-style restaurant, and is thus not covered by the restriction. Mitchell Roberts, who owns the Marlborough Panera franchise and several other Panera franchises, says that sandwiches are only about 40% of his sales, and that the sandwiches differ significantly from those at Subway, both in quality and price. “It's like comparing a Lexus to a Hyundai,” he told a local business newspaper.

Indicative of the growing competition between the franchises, Panera has filed a motion to join the case as an interested party, according to Robert Sinsheimer, principal, Sinsheimer & Associates (Boston), who is representing the landlord.

Despite having the injunction lifted, Michael Tremblay, principal, Tremblay & Tremblay (Marlborough, MA), says that his client has a strong case. Subway franchisee Allen paid a private detective to go to two Panera restaurants in the Boston area and count how many people ordered sandwiches. Tremblay plans to introduce evidence in the case that about 60% of lunchtime purchases were sandwiches, which he will argue brings Panera into direct competition with Subway.

Tremblay would not comment about whether Subway has sought to intervene in the case.

Shakey's Pizza Chain Sold, Franchisees Drop Lawsuit

Business newspapers in Southern California reported that a class action lawsuit filed by 39 franchisees of Shakey's has been withdrawn, after the remnants of the company were sold to The Jacmar Companies (Alhambra, CA). Jacmar, which was already the single-largest franchisee, with 19 restaurants, reportedly paid $4.5 million for the company in early July. Representatives of Jacmar did not return numerous phone calls to discuss the purchase or the lawsuits.

With the sale, Inno-Pacific Holdings (Singapore) avoids a lawsuit filed by franchisees that alleged fraud, breach of implied covenant of good faith and fair dealing, and negligent misrepresentation. They had sought $20 million in damages from Shakey's and Inno-Pacific CEO Chin-Yong Wong (Ahmed v. Shakey's Inc., No. BC287817, Los Angeles County Superior Court).

Two decades ago, Shakey's was a powerful pizza franchisor. The company had more than 400 restaurants nationwide. But Shakey's stagnated, and a revolving door of CEOs could not find a successful format. Today, 57 of the 61 restaurants are in Southern California, where Jacmar is located, and so it is believed that the company will use that as a base from which to rebuild.

As Shakey's struggled in 2002, it missed a deadline to renew its UFOC with the California Department of Corporations when it failed to post a bond that the Department required in order for Shakey's to demonstrate financial stability. Meanwhile, Shakey's allegedly negotiated renewals with its franchisees without telling them of the difficulty with its UFOC. When franchisees discovered the problems, they sued. Then in May 2003, the California Department of Corporations declared that Shakey's had “abandoned” its UFOC, and the Department issued an order prohibiting the company from offering or selling new franchises.

The plaintiffs' claims for fraud, breach of implied covenant, and negligent representation, as well as their complaint against CEO Wong, were dismissed in April 2004. The breach of contract and accounting charges were reportedly going to be dropped when the sale to Jacmar was consummated.

UPDATE: Ziebart Franchisees Collecting on $1.5 Million Judgment

Ziebart International Corp. franchisees are successfully collecting on their $1.5-million arbitration judgment issued last year, after accusing the company of overcharging them for supplies and products. But it wasn't easy.

After an arbitrator ruled in favor of the franchisees last year (see FBLA, December 2003), Ziebart challenged the ruling in the Wayne County (MI) Circuit Court and the appellate court before a final judgment was issued. Ziebart was unsuccessful, and in fact, the franchisees gained an extra $400,000 in debt relief during the appellate court's review.

But Ziebart dragged its feet on payment, according to Norman Yatooma (Birmingham, MI), the attorney for the franchisees. “We obtained a writ to seize their property … and we went to their headquarters with court officers and a locksmith. That finally got their attention,” he said. Ziebart paid $200,000 the day after the writ was issued, and it is now steadily paying $70,000/month, Yatooma said.

In addition to the monetary award, the arbitrator, Barry L. Howard, former chief judge of the Oakland County (MI) Circuit Court, determined that Ziebart must provide rust-proofing and other products at “competitive” prices to its franchisees. He also ordered Ziebart to reinstate any terminated franchisees that were party to the original complaint. And Howard said that any franchisee that wants to leave the system can do so without financial penalty and can keep their customer and vendor lists.

Many of the original 27 plaintiffs have left the Ziebart system and set up a competing company, which they call Z-Tech. “Some plaintiffs feel that the Ziebart trademark is valuable, and they are remaining with the company, but not paying the 400% markup on products any more,” said Yatooma.

D'Angelo Franchisees Sue over Alleged Kickbacks

D'Angelo Sandwich Shop franchisees have sued their franchisor, Papa Gino's, in U.S. District Court in Boston for allegedly overcharging them for food supplies and janitorial services. According to the lawsuit, the commissions that D'Angelo received from one of its vendors, U.S. Foodservice, violated federal antitrust laws. The franchisees are seeking $4.5 million, which reflects triple damages.

According to court documents, U.S. Foodservice charged franchisees a $28/week fee for deliveries, but it paid Papa Gino's $157 per store, per week for each franchised restaurant that used it as the supplier. Papa Gino's views this arrangement as a “commission,” but the franchisees see it as a “kickback,” said L. Seth Stadfeld, Weston, Patrick, Willard, & Redding, P.A., one of the plaintiffs' attorneys. “Not only have the charges and the commissions raised franchisees' costs, but they also had the effect of putting the franchisees at a competitive disadvantage with company-owned stores in the same market area,” he said.

D'Angelo/Papa Gino's attorney, Steven B. Feirman, Piper Rudnick LLP (Washington, D.C.), told FBLA that the company is surprised by allegations of wrongdoing from franchisees that are benefiting from reduced costs. “It's ironic,” he said. “The franchisees bringing the lawsuit include former owners of D'Angelo, who sold to Papa Gino's. They set up the company-owned restaurants, sold most of the franchises, and developed the purchasing structure.”

Because Papa Gino's is a larger, more efficient operation, it has actually reduced purchasing costs and passed the savings along to the franchisees, said Feirman. “In addition, the former owners prohibited franchisees from buying from other vendors, but D'Angelo doesn't,” he said. “So the current management is lowering costs and making sure that the franchisees are the beneficiaries of that. The franchisees used to pay cost plus 12% to the franchisor; they pay less now.”

Indeed, D'Angelo did reduce the fee structure in 2001, after the franchisees first complained about the rebate program, and it agreed to allow franchisees to use another supplier, Cirelli Foods, at their discretion. Yet, the franchisees argue that in the 1999 to 2001 period, they paid about $887,000 in “unfair” commissions, for which they want redress.

At a hearing in March, D'Angelo filed a motion to dismiss. The franchisor argued that its franchisees do not have a claim that is applicable under the provisions of the Robinson-Patman Act that governs antitrust activities. D'Angelo argued that legal precedent gives it a right to rebates from its suppliers, if they are disclosed, and that D'Angelo disclosed the rebates in regulatory filings. The court has not yet ruled on the motion, nor a second motion to dismiss that was filed by U.S. Foodservice, based on the statute of limitations for claiming injury.

Stadfeld and the franchisees believe that the payments will not meet the legal test. “Whether commissions are allowed or not depends on the facts of each case,” said Stadfeld. “Courts have found that commissions are not legal unless they are payment for a product or service with meaningful value. We believe that in this case nothing of value was exchanged.”

Moreover, because company-owned stores compete directly with its franchises, “it is easier for us to show that the different prices for supplies directly affected the franchises' competitiveness in the marketplace,” Stadfeld added.

But Feirman said that D'Angelo selects its company-owned stores very carefully. “None of the complaints have ever cited store-to-store competition,” he noted.

And Stadfeld admits that D'Angelo franchisees do see a positive aspect to the company-owned operations: “Unlike many chains, the executives of D'Angelo clearly believe that the stores are worth owning,” said Stadfeld.

Subway v. Panera Tussle Plays Out in Massachusetts

National competition between quick-serve franchises Subway and Panera Bread Bakery has become white-hot in Marlborough, MA.

On July 16, John Allen, owner of a Subway franchise in a shopping mall in Marlborough, obtained a temporary injunction from the Middlesex County Superior Court against his landlord, R.K. Associates, after the landlord proposed to allow a Panera Bread Bakery franchise to take a space in the same mall. But on Aug. 2, the Massachusetts Appeals Court voided the injunction. Litigation was continuing as FBLA went to press.

The issue is whether the rental agreement between R.K. Associates and Allen prohibits R.K. from renting to Panera at the R.K. Centre Mall. The lease states that R.K. cannot rent to a restaurant whose primary business is selling deli- or submarine-style sandwiches. It specifically names Blimpies, Miami Sub, Schlotsky's, and several other franchises, but not Panera.

R.K. Associates contends that Panera is not primarily a deli, but is an upscale cafe-style restaurant, and is thus not covered by the restriction. Mitchell Roberts, who owns the Marlborough Panera franchise and several other Panera franchises, says that sandwiches are only about 40% of his sales, and that the sandwiches differ significantly from those at Subway, both in quality and price. “It's like comparing a Lexus to a Hyundai,” he told a local business newspaper.

Indicative of the growing competition between the franchises, Panera has filed a motion to join the case as an interested party, according to Robert Sinsheimer, principal, Sinsheimer & Associates (Boston), who is representing the landlord.

Despite having the injunction lifted, Michael Tremblay, principal, Tremblay & Tremblay (Marlborough, MA), says that his client has a strong case. Subway franchisee Allen paid a private detective to go to two Panera restaurants in the Boston area and count how many people ordered sandwiches. Tremblay plans to introduce evidence in the case that about 60% of lunchtime purchases were sandwiches, which he will argue brings Panera into direct competition with Subway.

Tremblay would not comment about whether Subway has sought to intervene in the case.

Shakey's Pizza Chain Sold, Franchisees Drop Lawsuit

Business newspapers in Southern California reported that a class action lawsuit filed by 39 franchisees of Shakey's has been withdrawn, after the remnants of the company were sold to The Jacmar Companies (Alhambra, CA). Jacmar, which was already the single-largest franchisee, with 19 restaurants, reportedly paid $4.5 million for the company in early July. Representatives of Jacmar did not return numerous phone calls to discuss the purchase or the lawsuits.

With the sale, Inno-Pacific Holdings (Singapore) avoids a lawsuit filed by franchisees that alleged fraud, breach of implied covenant of good faith and fair dealing, and negligent misrepresentation. They had sought $20 million in damages from Shakey's and Inno-Pacific CEO Chin-Yong Wong (Ahmed v. Shakey's Inc., No. BC287817, Los Angeles County Superior Court).

Two decades ago, Shakey's was a powerful pizza franchisor. The company had more than 400 restaurants nationwide. But Shakey's stagnated, and a revolving door of CEOs could not find a successful format. Today, 57 of the 61 restaurants are in Southern California, where Jacmar is located, and so it is believed that the company will use that as a base from which to rebuild.

As Shakey's struggled in 2002, it missed a deadline to renew its UFOC with the California Department of Corporations when it failed to post a bond that the Department required in order for Shakey's to demonstrate financial stability. Meanwhile, Shakey's allegedly negotiated renewals with its franchisees without telling them of the difficulty with its UFOC. When franchisees discovered the problems, they sued. Then in May 2003, the California Department of Corporations declared that Shakey's had “abandoned” its UFOC, and the Department issued an order prohibiting the company from offering or selling new franchises.

The plaintiffs' claims for fraud, breach of implied covenant, and negligent representation, as well as their complaint against CEO Wong, were dismissed in April 2004. The breach of contract and accounting charges were reportedly going to be dropped when the sale to Jacmar was consummated.

UPDATE: Ziebart Franchisees Collecting on $1.5 Million Judgment

Ziebart International Corp. franchisees are successfully collecting on their $1.5-million arbitration judgment issued last year, after accusing the company of overcharging them for supplies and products. But it wasn't easy.

After an arbitrator ruled in favor of the franchisees last year (see FBLA, December 2003), Ziebart challenged the ruling in the Wayne County (MI) Circuit Court and the appellate court before a final judgment was issued. Ziebart was unsuccessful, and in fact, the franchisees gained an extra $400,000 in debt relief during the appellate court's review.

But Ziebart dragged its feet on payment, according to Norman Yatooma (Birmingham, MI), the attorney for the franchisees. “We obtained a writ to seize their property … and we went to their headquarters with court officers and a locksmith. That finally got their attention,” he said. Ziebart paid $200,000 the day after the writ was issued, and it is now steadily paying $70,000/month, Yatooma said.

In addition to the monetary award, the arbitrator, Barry L. Howard, former chief judge of the Oakland County (MI) Circuit Court, determined that Ziebart must provide rust-proofing and other products at “competitive” prices to its franchisees. He also ordered Ziebart to reinstate any terminated franchisees that were party to the original complaint. And Howard said that any franchisee that wants to leave the system can do so without financial penalty and can keep their customer and vendor lists.

Many of the original 27 plaintiffs have left the Ziebart system and set up a competing company, which they call Z-Tech. “Some plaintiffs feel that the Ziebart trademark is valuable, and they are remaining with the company, but not paying the 400% markup on products any more,” said Yatooma.