Sona Squares Off Against Franchisees

Sona Laser Centers and Sona MedSpas is locked in an increasingly bitter dispute with some of its original franchisees, involving not only typical franchise issues but also the franchisees' allegations that at least one of the services they offer to customers, a laser treatment for hair removal, does not work. While franchisees have received considerable favorable publicity in the fight to date, Sona executives say that the actions of the franchisees belie some of their complaints, and Sona remains committed to building a national chain of spas.

Among the challenges facing Sona are the following, according to Michael Garner of Dady & Garner, P.A. (Minneapolis), who is representing some of the franchisees:

• In April 2006, the state of Mary-land issued a cease-and-desist order against Sona, directing it to show cause why the company should not be permanently enjoined from selling franchises in Maryland;
• In February 2006, a federal court in Alexandria, VA, denied Sona's request to enforce its post-term non-competes against its breakaway Washington, DC-area developer. In denying the motion, the judge observed that on the record before him, the franchisee's proof of Sona's fraud, which he found 'arresting' and well documented, precluded Sona from showing a likelihood of 'success on the merits'; and
• Arbitration proceedings with three franchisees and court challenges with two other franchisees, in which Sona is seeking to enforce arbitration clauses. The challenges claim fraud and violation of franchise acts and RICO statutes.

The franchisees battling Sona are legacy operators that were in the system when Carousel Capital, a Charlotte, NC, investment firm, acquired it in 2004. 'It's a veiled attempt by some of the legacy franchisees to disenfranchise and not pay royalties,' said Heather Rose, CEO of Sona, in an interview with FBLA. 'We have successfully moved each case to arbitration so far, and we believe we will prevail in court.'

Sona's future looked bright 2 years ago, when Carousel purchased the small operation and announced dual goals of becoming the country's leading hair removal spa and expanding into related 'med spa' services such as laser skin rejuvenation. With Rose joined by her father, franchising veteran Jim Amos, former CEO of Mail Boxes, Etc., in the executive office, hopes were high that Sona could deliver on its commitment to become a 'household word.'

Sona's services reach right into a highly desirable demographic: baby boomers concerned about their appearances as they age. The company claims that its lasers can remove 93% to 97% of a person's unwanted hair in an average of five treatments; the laser treatments work on all kinds of skin and hair; and treatments are cheaper than a dermatologist's services.

However, several franchisees say that the treatment claims are exaggerated, or worse. 'The problem is that none of it was true. It was all a fabrication,' said Kemp Coady, the former Boston franchisee. Coady provided to FBLA an affidavit from Dr. David Goldberg, a dermatologist and professor at Mt. Sinai Hospital in New York, that calls Sona's claims 'unsupported (or contradicted) by medical science, fraudulent, and misleading.'

Yet Rose responds that many experts support the laser treatment technology. 'Look at what the experts say: We have white papers that validate the lasers that we use,' she said. Rose said that experts do not agree on the particulars of treatment protocols ' when in the process certain treatments should be done, and how they should be done. But she said that is different than alleging that the treatments don't work.

While the two parties can produce dueling medical white papers, it's clear that a large measure of the dispute is financial in origin. 'The operation worked like a Ponzi scheme,' said Coady. 'Earnings claims information was given to us outside of the offering circular ' including elaborate financial models ' that showed that we would be making millions of dollars. We now know that those statements were not prepared in accordance with generally accepted accounting principles, and that they concealed the fact that revenues were insufficient to cover costs.'

Rose responded that the system is operated on an accrual accounting method that is appropriate for a company that collects upfront payments from clients but delivers services over time. 'Magazines do it,' she said, citing one example. 'So yes, Coady took in about $450,000 in his first 3 months, but we really made only $80,000 because services still were owed to customers.'

Coady responded that early cash flow dried up, while he was left with obligations to fulfill for customers. 'In simple terms, the Sona system got the customer to pay for a series of treatments upfront, but never provided the cash flow management to pay for the customer's entire series of treatments,' he said. 'The franchisee was left, a year down the road, having to treat customers without cash to cover it. Moreover, even if the cash had been reserved, it would not have been sufficient to cover the expenses.'

The problem was compounded by the customers who demanded refunds for unsuccessful procedures. 'I've lost everything,' Ron Berglund, the former St. Paul franchisee, told FBLA.

Evolving System

However, Rose questioned the validity of franchisees' complaints by noting that several of the legacy franchisees have remained in the same business, while trying to sever ties with MedSpa. 'In one situation, a franchisee partnered with a competitor in his market who had several locations,' she said. 'How can a franchisee claim the system doesn't work when he is still operating a laser hair removal treatment business? [The same franchisee] purchased five lasers from the same manufacturer that supplies Sona shortly after suing us and claiming the treatments don't work.'

From Rose's perspective, complaints arise from the rapid pace of change in an evolving industry, rather than from any inherent weakness in the technology or unfairness in the Sona franchise model. 'This is an emerging segment, and one where the technology changes rapidly,' she said. 'Franchisees should embrace that. They are complaining that the model [treatment protocols] is not static. But why should it be?'

Sona has collected data on 'hundreds of thousands of treatments' conducted by its company-owned spas, according to Rose, and 'we learn more all the time ' [That's why] the course of treatment we recommend changes.'

However, franchisees point to hundreds of unsatisfied customers and criticize Sona for not standing behind its technology. In Utah, the local franchisee closed without providing refunds, and the State Consumer Affairs Department has commenced an action to try to recover them, according to Garner. The franchise in San Francisco also closed, and franchises in Grand Rapids, MI, Indianapolis, and New Haven, CT 'are struggling,' Garner added.

The franchisees' advocates cite a flawed business model and deceptive business practices for the dilemma that franchisees face. 'While the fraud perpetrated by this franchisor is staggering, other wrongs are equally shocking,' Garner told FBLA. 'For example, Sona is selling a topical product for use in its centers that the FDA has found to be unsafe; Sona's operations manuals, in part, were plagiarized wholesale from copyrighted sources; franchises were sold pursuant to unregistered offering circulars. And they are still selling franchises.'

Indeed, Sona opened five franchises in March 2006 and has 31 operating at present (not including the five involved in lawsuits). In fact, Rose said that the effort of Sona to expand rapidly is one contributor to the lawsuits. Several early franchisees were granted huge territories in return for commitments to open multiple treatment centers. When the expansion was not moving quickly enough for Sona's new owners, they approached the franchisees with offers to buy back some of their territorial rights. The franchisees rejected those offers, but have not increased the pace of expansion, she said.

Moreover, Sona made adjustments to franchise contracts when it bought the system, as it attempted to generate goodwill from the existing franchisees, Rose said. 'We have made multiple moves to do the right thing,' Rose said. 'We changed the royalty structure to put more money in franchisees' pockets.'

Franchisees see it differently. 'The irony is that it was all avoidable,' Garner said. 'We went to Sona and its lawyers last summer, showed them our findings, and offered to work with them to settle. They rebuffed us at every point, cancelled scheduled meetings, and refused to sign agreed documents.'

Resolution of the groups' differences seems far down the road. If anything, the dispute continues to grow. According to Garner, Sona franchisees in Atlanta, Boston, Minneapolis, New Haven, Philadelphia, and St. Paul, MN, have given the franchisor notice that they will no longer be part of the system, citing the franchisor's misrepresentations and their own financial distress.

Kevin Adler is associate editor of this newsletter.

Sona Laser Centers and Sona MedSpas is locked in an increasingly bitter dispute with some of its original franchisees, involving not only typical franchise issues but also the franchisees' allegations that at least one of the services they offer to customers, a laser treatment for hair removal, does not work. While franchisees have received considerable favorable publicity in the fight to date, Sona executives say that the actions of the franchisees belie some of their complaints, and Sona remains committed to building a national chain of spas.

Among the challenges facing Sona are the following, according to Michael Garner of Dady & Garner, P.A. (Minneapolis), who is representing some of the franchisees:

• In April 2006, the state of Mary-land issued a cease-and-desist order against Sona, directing it to show cause why the company should not be permanently enjoined from selling franchises in Maryland;
• In February 2006, a federal court in Alexandria, VA, denied Sona's request to enforce its post-term non-competes against its breakaway Washington, DC-area developer. In denying the motion, the judge observed that on the record before him, the franchisee's proof of Sona's fraud, which he found 'arresting' and well documented, precluded Sona from showing a likelihood of 'success on the merits'; and
• Arbitration proceedings with three franchisees and court challenges with two other franchisees, in which Sona is seeking to enforce arbitration clauses. The challenges claim fraud and violation of franchise acts and RICO statutes.

The franchisees battling Sona are legacy operators that were in the system when Carousel Capital, a Charlotte, NC, investment firm, acquired it in 2004. 'It's a veiled attempt by some of the legacy franchisees to disenfranchise and not pay royalties,' said Heather Rose, CEO of Sona, in an interview with FBLA. 'We have successfully moved each case to arbitration so far, and we believe we will prevail in court.'

Sona's future looked bright 2 years ago, when Carousel purchased the small operation and announced dual goals of becoming the country's leading hair removal spa and expanding into related 'med spa' services such as laser skin rejuvenation. With Rose joined by her father, franchising veteran Jim Amos, former CEO of Mail Boxes, Etc., in the executive office, hopes were high that Sona could deliver on its commitment to become a 'household word.'

Sona's services reach right into a highly desirable demographic: baby boomers concerned about their appearances as they age. The company claims that its lasers can remove 93% to 97% of a person's unwanted hair in an average of five treatments; the laser treatments work on all kinds of skin and hair; and treatments are cheaper than a dermatologist's services.

However, several franchisees say that the treatment claims are exaggerated, or worse. 'The problem is that none of it was true. It was all a fabrication,' said Kemp Coady, the former Boston franchisee. Coady provided to FBLA an affidavit from Dr. David Goldberg, a dermatologist and professor at Mt. Sinai Hospital in New York, that calls Sona's claims 'unsupported (or contradicted) by medical science, fraudulent, and misleading.'

Yet Rose responds that many experts support the laser treatment technology. 'Look at what the experts say: We have white papers that validate the lasers that we use,' she said. Rose said that experts do not agree on the particulars of treatment protocols ' when in the process certain treatments should be done, and how they should be done. But she said that is different than alleging that the treatments don't work.

While the two parties can produce dueling medical white papers, it's clear that a large measure of the dispute is financial in origin. 'The operation worked like a Ponzi scheme,' said Coady. 'Earnings claims information was given to us outside of the offering circular ' including elaborate financial models ' that showed that we would be making millions of dollars. We now know that those statements were not prepared in accordance with generally accepted accounting principles, and that they concealed the fact that revenues were insufficient to cover costs.'

Rose responded that the system is operated on an accrual accounting method that is appropriate for a company that collects upfront payments from clients but delivers services over time. 'Magazines do it,' she said, citing one example. 'So yes, Coady took in about $450,000 in his first 3 months, but we really made only $80,000 because services still were owed to customers.'

Coady responded that early cash flow dried up, while he was left with obligations to fulfill for customers. 'In simple terms, the Sona system got the customer to pay for a series of treatments upfront, but never provided the cash flow management to pay for the customer's entire series of treatments,' he said. 'The franchisee was left, a year down the road, having to treat customers without cash to cover it. Moreover, even if the cash had been reserved, it would not have been sufficient to cover the expenses.'

The problem was compounded by the customers who demanded refunds for unsuccessful procedures. 'I've lost everything,' Ron Berglund, the former St. Paul franchisee, told FBLA.

Evolving System

However, Rose questioned the validity of franchisees' complaints by noting that several of the legacy franchisees have remained in the same business, while trying to sever ties with MedSpa. 'In one situation, a franchisee partnered with a competitor in his market who had several locations,' she said. 'How can a franchisee claim the system doesn't work when he is still operating a laser hair removal treatment business? [The same franchisee] purchased five lasers from the same manufacturer that supplies Sona shortly after suing us and claiming the treatments don't work.'

From Rose's perspective, complaints arise from the rapid pace of change in an evolving industry, rather than from any inherent weakness in the technology or unfairness in the Sona franchise model. 'This is an emerging segment, and one where the technology changes rapidly,' she said. 'Franchisees should embrace that. They are complaining that the model [treatment protocols] is not static. But why should it be?'

Sona has collected data on 'hundreds of thousands of treatments' conducted by its company-owned spas, according to Rose, and 'we learn more all the time ' [That's why] the course of treatment we recommend changes.'

However, franchisees point to hundreds of unsatisfied customers and criticize Sona for not standing behind its technology. In Utah, the local franchisee closed without providing refunds, and the State Consumer Affairs Department has commenced an action to try to recover them, according to Garner. The franchise in San Francisco also closed, and franchises in Grand Rapids, MI, Indianapolis, and New Haven, CT 'are struggling,' Garner added.

The franchisees' advocates cite a flawed business model and deceptive business practices for the dilemma that franchisees face. 'While the fraud perpetrated by this franchisor is staggering, other wrongs are equally shocking,' Garner told FBLA. 'For example, Sona is selling a topical product for use in its centers that the FDA has found to be unsafe; Sona's operations manuals, in part, were plagiarized wholesale from copyrighted sources; franchises were sold pursuant to unregistered offering circulars. And they are still selling franchises.'

Indeed, Sona opened five franchises in March 2006 and has 31 operating at present (not including the five involved in lawsuits). In fact, Rose said that the effort of Sona to expand rapidly is one contributor to the lawsuits. Several early franchisees were granted huge territories in return for commitments to open multiple treatment centers. When the expansion was not moving quickly enough for Sona's new owners, they approached the franchisees with offers to buy back some of their territorial rights. The franchisees rejected those offers, but have not increased the pace of expansion, she said.

Moreover, Sona made adjustments to franchise contracts when it bought the system, as it attempted to generate goodwill from the existing franchisees, Rose said. 'We have made multiple moves to do the right thing,' Rose said. 'We changed the royalty structure to put more money in franchisees' pockets.'

Franchisees see it differently. 'The irony is that it was all avoidable,' Garner said. 'We went to Sona and its lawyers last summer, showed them our findings, and offered to work with them to settle. They rebuffed us at every point, cancelled scheduled meetings, and refused to sign agreed documents.'

Resolution of the groups' differences seems far down the road. If anything, the dispute continues to grow. According to Garner, Sona franchisees in Atlanta, Boston, Minneapolis, New Haven, Philadelphia, and St. Paul, MN, have given the franchisor notice that they will no longer be part of the system, citing the franchisor's misrepresentations and their own financial distress.

Kevin Adler is associate editor of this newsletter.