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| Continental Franchise Review.. |
Arbitrator rules
Franchisor/franchisees view win differently
(Previous article: Franchise Times, CFR, August 2007)
Arbitrator finds The Entrepreneur's Source violated Connecticut Unfair Trade Practices Act.
On December 14, an arbitrator awarded franchisee Michael Greenspan $71,413, in addition to rescinding his franchise agreement with The Entrepreneur's Source (TES). TES is a franchise brokerage firm which not only matches franchise buyers with franchisors, but also franchises its business, turning brokers into franchisees. The arbitrator upheld Greenspan's claim that TES violated the Connecticut Unfair Trade Practices Act (CUTPA) during his term as a
franchisee/broker. He was awarded actual damages of $43,900, along with $14,633 for attorney fees and another $12,880 for TES's portion of fees and expenses for the arbitration process. TES's counterclaim for future royalties was also denied in its entirety.
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Janet Sparks is the former publisher of Continental Franchise Review, an industry newsletter that covered the franchise community for more than 30 years before being acquired by Franchise Times Corporation. |
CUTPA first and foremost to franchisee
Herman emphatically states that is not true, that CUTPA was first and foremost in their case. They felt the combination of TES's regional directors giving earnings claims and the company withholding disclosure documents until later in the process of the sale was deceptive trade practice under CUTPA. The way TES conducts its business practices with its regional directors wearing two hats complicates things, he said, especially when they are providing earnings claims on their own performance.
They also alleged misrepresentation based on several company practices. One included Powell's own experience, which wasn't in cooperation with the TES network, that five out of 100 leads—cold calls—close. Based on an average of $10,000 per placement, and knowing how the calculations are done through various phases, franchisees figure you will get approximately 15 placements a year. Herman said, "You do the math. TES doesn't give you the earnings claims but they give you the methodology calculus to figure it out. He said under the FTC that
is considered an earnings claim.
Herman said they feel the whole mechanism by which TES solicits franchisees is what they consider deceptive and unfair trade practices, and that was all distilled in the final briefs very clearly in front of the arbitrator. "Powell stating that we had 12 or 20, some God-forsaken amount of claims we presented, is not true. The only ones we presented were, first and foremost CUTPA and secondly, common law fraud and negligent misrepresentation." He said by the time they hit the second brief, they decided to just go with CUTPA because they felt
they could get everything they needed in the decision and restitution.
Herman also clarified that they were only asking for the money Greenspan paid to corporate up front and back, which is why those damages were limited to the $43,900. He said, "We got everything we asked for, and then some. I didn't even present attorney fees application but the arbitrator said you get a third of the award."
TES moving forward with motion to vacate
TES attorney Scott C. Kern said their intention now is to file a motion to vacate the arbitration award. He emphasized that all Greenspan was asking for was restitution, just his franchise fee and other fees, and that he admitted he was making money on placements of franchisees under the TES system. Since the arbitrator decided to give him damages, under Connecticut law, that amount will have to be reduced according to Kern. He said, "We believe that there is no liability to TES under CUTPA, but if there is liability we are going to show in our motion that it was calculated improperly."
But another issue Powell plans to address in his motion to vacate is the arbitrator's inability to attend to the details of the case in keeping it organized and moving in a timely fashion. He said, "This arbitration took an exceptionally long time to complete and there were some factors going on for Mr. Farr, the arbitrator, which we really feel disadvantaged us tremendously." He said at the time he was working on his case, Farr was running for public office and had to reschedule things that were already on the calendar. He was also
involved in a Governor's Task Force concerning pardons and parole review as well as other committees. "He is a dedicated public servant," according to Powell, and he feels that was an enormous demand on his time—time he should have been spending on the Greenspan arbitration. He said it took two-and-a-half years for the case to be completed. He feels that at the last Mr. Farr just decided he should give Greenspan something and that he decided to draft the award vaguely.
Greenspan's next step and response to TES's motion
Herman said they will now notify the American Arbitration Association that they have received a positive ruling from the arbitrator. The next step is class certification which means they will brief the issue of the common causes of action in the case. He said, "You have to have the common facts prevail over the individual facts."
Herman feels TES doesn't have much chance in having the arbitration decision vacated. In addressing Powell's objection to the arbitrator's "vague" decision, Herman said he has no idea why Kern didn't ask for a "reason for opinion" as he and his client had done. Considering there was no written basis to the decision—which arbitrators are not required to provide—Herman said Kern had plenty of opportunity to ask for it. "We requested it because we thought it would be easier to help us with the class allegations to determine the bases of which the arbitrator decided the way he decided." Herman also felt the arbitrator's reason for opinion would help curtail further litigation.
Herman also takes exception to TES's opinion of the arbitrator. "I found this arbitrator to be a man of incredible integrity, and not just because we won." He felt the questions that Farr asked were very penetrating. "He never betrayed what side he was going to come down on. I never knew if we were going to win or not." Herman said he does arbitrations all the time and he was one of the best he had ever been up against. "This has been a huge effort, over approximately three years. Moving this thing forward was thousands of pages of transcripts,
hundreds of pages of briefings, twelve witnesses and three weeks of hearings." He said the arbitrator had everything he needed to make his decision, that he could reread and research everything as he had time. "That was the beauty of the case. I don't see how the delay could have injured anybody."
