Franchisees target Detail Garage, founders in lawsuit
Illustration by Jonathan Hankin
Auto-detailing enthusiasts love their Chemical Guys products, devouring how-to videos posted every Monday, Wednesday and Friday on its YouTube channel with 532,000 subscribers, and arguing the finer points of how to fix paint fast or get a glossy wet shine on the cars they adore.
So when Paul Schneider and David Knotek, the founders of Chemical Guys in 1968, decided to start selling a franchise in 2016 called Detail Garage, a retail store that sells Chemical Guys products and also hosts popular “Rides & Coffee” events to attract hundreds of customers to ogle cars and talk shop, many car buffs signed on. By 2019, Design Garage had 52 franchise units open.
But in January, one franchisee pair cried foul. Owners of three Detail Garage stores in Arizona under the name Cardinal Investments One, they filed a sweeping lawsuit seeking class-action status against Detail Garage. It claims the founders are running a “shell-franchise operation” and “anti-competitive scheme” whose actual purpose is to boost revenue for the founders’ affiliate companies, primarily Smart LLC and ChemicalGuys.com and including 14 entities total.
Detail Garage franchisees are required to buy Chemical Guys and Smart Wax products exclusively from Smart LLC, at prices the lawsuit says are not competitive, and are forbidden from selling them anywhere but in their physical stores. Meanwhile, the lawsuit claims, the founder-controlled entities sell products that undercut what franchisees can charge, sometimes by 50 percent.
At a meeting in Los Angeles in August 2019 to discuss product shortages as high as 60 percent of their orders, the lawsuit alleges, Wendy Jones, one of the plaintiffs, was told Smart would “never allow” franchisees to source goods from elsewhere. “At that point, plaintiffs realized that Detail Garage was a sham and nothing more than a front for Smart products.”
Lynn Gangamella, the other plaintiff, states her case simply. “Lo and behold, if it’s going to be a Chemical Guys product you will find it cheaper online, because our company is selling it cheaper online,” she said. “In reality, our own company is our biggest competitor.”
‘Great, positive things’ at Detail Garage
Knotek, Schneider and franchise development exec Chad Zani are the defendants named in the lawsuit. They and John Mansfield, VP of direct-to-consumer for Chemical Guys and Detail Garage, had corresponded with the plaintiffs before the lawsuit, Gangamella said, sending them a notice last fall that Detail Garage could force them to cease and desist operations as of January 21, 2020, not coincidentally the day the lawsuit was filed.
Last spring, Detail Garage had sent Cardinal Investments a default notice claiming the franchisees had not completed required training. They removed Gangamella from the franchisee advisory council soon after, on the grounds they were in default.
Saying he was commenting for the company and its executives, Mansfield said, “We wouldn’t want to say anything that either betrays the trust, the communication between franchisees or the legal process. We’re prepared and ready to go through the legal process and that’s about it.”
“I’d be glad to tell you about the great, positive things we have going on, though,” he said. “We’re celebrating our largest January ever,” following a strong year in which sales posted in the stores hit $20 million. He called supply shortages last year “a seasonal issue that we face, in the March to May time frame,” but they’ve increased production of the most popular products. In April of this year, they’ll be opening the first East Coast distribution center in Atlanta, to add a second center to its Gardena, California, headquarters. A retail expert who joined the company last July, Mansfield said a new feature on the website allows a customer to see something online, then reserve it to pick up in a Detail Garage store, to “help drive traffic to stores.”
Declining to comment on specific allegations in the lawsuit, he said. “I’m worried that anybody would have this perception of us. We try to work really hard to build relationships with our franchisees,” he said. “To me the most distressing point is, there’s a different perception of what we’re trying to do, I guess.”
Garrett Kubiak, owner of Detail Garage Detroit East, commented on a blog post in Franchise Times first reporting the lawsuit. “This lawsuit is an awful representation of an individual owner’s inability to understand the franchise role in Chemical Guys. We are proud that Chemical Guys has the ability to price accordingly in multiple channels to grab market awareness of the brand. We are one of the top selling franchises in the country and these ‘loss leaders’ have only helped grow the brand and drive results into our stores,” he wrote in part. “Please don’t allow people who don’t represent the very best in a brand to cloud judgment!!!”
Franchisees ‘have a worse deal than anybody’
Leslie Schwaebe Akins, attorney for the plaintiffs, said it’s “not weird” to have the sole approved supplier be the affiliate of the franchisor. But in Detail Garage’s case, “here you have the actual entity that is the supplier that is selling to the franchisees, but it also is using its ultimate sales channel…to sell the product for less money than it allows its captive franchisees,” she said. “You’ve got anti-competitive practices. You’ve got price discrimination for its franchisees.”
Gangamella recalls her days as a super-fan of Chemical Guys. “I love a clean car,” she says. She even cops to a detailing obsession, albeit half-jokingly. “This is the story we tell.
The family had an intervention because every two weeks I was getting a Chemical Guys box and I’d say, I need this, I need this.” When they learned in 2017 Detail Garage was franchising, “Wendy and I jumped on a plane” to check it out. Their three stores had revenue of $1.05 million combined in the past year. “I love the stores,” she said. “The issue is with the back side of it.”
Attorney Akins said her reason for taking the case is simple: “Franchisees sign a 10-year agreement and spend a lot of money, only to find out they have a worse deal than anybody else out there. And that’s wrong.”
Beth Ewen is senior editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to email@example.com.