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Appeals Court strikes IFA's amicus brief on non-compete clause issue
| The IFA had said a lower court's ruling in favor of an Atlanta Bread Company franchisee would wreak havoc on franchising in Georgia. |
After a franchisee scored a victory last June in a $12 million lawsuit against the Atlanta Bread Company for terminating his five stores over a non-compete issue, the International Franchise Association attempted to have the decision reversed. The lower-court judge ruled the non-compete restriction in the franchise agreement didn't align with Georgia law because it was too broad. She also ruled the restriction did not have a territorial limit, so the franchisee
would have been in violation regardless of the location of his competing unit, a PJ's Coffee and Lounge. She added, "Nor did it restrict what the franchisee could do for the competition, so he could not have been so much as a janitor with a competing coffee shop."
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Janet Sparks is the former publisher of Continental Franchise Review, an Janet can be reached at 303-799-7398 or at jsparks@franchisetimes.com |
the business of franchising in the state.
On January 3, 2008, the Georgia Appeals Court ruled to strike IFA's amicus brief on technical issues. The Court ruled IFA's central argument is based on the brief's attached documents which were not part of the record. And secondly, that the remaining arguments rehash existing arguments, and circumvent the court's limitations on the number of pages, burdening the court and parties with a redundant brief.
IFA responded: "This is an extraordinary and unprecedented decision for the Court of Appeals not to hear an amicus, and that has never happened before in Georgia's history." IFA believes its brief did exactly what a true amicus is suppose to do: It provided the Court with "publicly available information relevant to the Court's policy considerations of the effects the trial court
ruling will have on the franchise industry." But IFA feels the order was even more unusual in that it was signed by a clerk and not by one of the judges.
The heart of the issue
The legal action between Sean Lupton-Smith and Atlanta Bread Company concerned Lupton-Smith opening a PJ's Coffee and Lounge outlet, which the bakery/deli franchisor viewed as a violation of his non-compete clause. As a result, in February 2006, Atlanta Bread terminated all five of his franchise restaurants, all of which were moneymakers. According to Lupton-Smith's court filing, the five franchises collectively brought in more than $1 million in revenue per
month.
Lupton-Smith filed a lawsuit through his attorney R. Randy Edwards, Kilpatrick Stockton, claiming he was unjustly terminated. Because 50 percent of PJ's sales were in liquor and sundries, he believed it didn't compete with Atlanta Bread.
His intention was to add diversity to his own business operation due to the turmoil in Atlanta Bread. Because Atlanta Bread's principals, CEO Jerry Couvaras and brother Basil, were settling criminal charges in their native South Africa, Lupton-Smith said it was a nervous time for everyone in the system.
In 2004, Jerry Couvaras was arrested in Johannesburg while visiting family. His brother Basil, COO of Atlanta Bread, was later named a co-defendant, and an interim CEO was put in charge of the company. According to its UFOC, the brothers and their parent company and affiliates paid $310,000 in fines in lieu of Jerry Couvaras, being jailed for allegedly swindling South African investors out of $5.54 million 12 years prior. They pled guilty to negligently violating
the Bank Act and Deposit Taking Institute Act, and the fraud charges were dropped.
In 2006, the Couvaras brothers returned to the U.S. to regain control of their company. When Lupton-Smith told Basil Couvaras about his PJ's restaurant, Basil immediately instructed him to turn over all his Atlanta Bread stores for violating his non-compete agreement. Lupton-Smith filed for a temporary restraining order, and sued the company. But, according to news reports, he had put the stores' revenues in an escrow account, causing a major cash-flow problem. He had to agree to hand the operations back to Atlanta Bread in June 2006. Atlanta Bread paid him $840,000 for the value of the equipment in the stores, although Lupton-Smith said the value was at that time $12 million.
Flipping stores for profit
Former insiders say what happened to Lupton-Smith is a well-known practice of the franchisor. According to one source who does not wish to be named, Atlanta Bread has had a history of "flipping" stores, a well-known term in the company. They have been pulling the pin on franchisees and then getting the bank to take a few cents on the dollar for the equipment in the restaurants. "By taking back profitable stores, those doing around $1.2 million in sales, and then putting them back on the block for round $400,000," he said, "is a hell of a profit."
James P. P. Dirr, vice president and group general counsel for Atlanta Bread, said he doesn't know what they mean by "flipping stores," but because of their contractual rights under various agreements and leases, Atlanta Bread will reacquire franchise locations and then re-franchise the units. Dirr explained, "We do that for the brand. It is to continue the brand and continue the marketing. It is to be sure we end up with the independent operators that can best represent us.
When asked if franchisees just walk away from stores, he said, "There are a number of ways franchises end up in our control."
Dirr said right now the company is in an extensive re-branding and remodeling stage so it is not growing. "Once the new prototype, the new look, comes to be more expansive, we hope to continue to grow our brand as we have been."
Atlanta Bread's Web site shows 160 bakery/deli shops in the system, as they did two years ago. But Dirr said the franchise presently has 125 locations, which includes six or seven company-owned stores. The units are owned by approximately 100 franchisees. As to an explanation for the decrease, he said the company was at a 10-year mark, so they have some that are not renewing and some that have closed.
Dirr wasn't sure if Atlanta Bread was still using the same non-compete clause the litigation with Lupton-Smith focused on. He said, "The lawsuit was initiated slightly before I was here, and I have seen the provisions, but to be honest with you, I haven't done a side-by-side comparison. But our agreement now is generally the same."
IFA answers amicus questions
According to a spokesperson at the IFA, there is no strict timetable for the Court of Appeals to render its decision. However, because no oral argument was allowed, the Court likely will rule sooner rather than later.
"It is clear that the decision will directly impact the nature of in-term covenants in Georgia, but it is difficult to determine how broadly its impact will be felt outside of Georgia," the spokesperson said. Regardless of how the Court of Appeals decides, it is likely that either party will petition the Georgia Supreme Court for review pending the outcome of the Court of Appeals' decision.
IFA is not placing blame on Atlanta Bread for the way it drafted its non-compete clause in the agreement, saying the question before the Appeals Court focused more on the creation of a new law by the trial court than the manner in which a franchise system drafts its agreements.
I asked IFA if both its franchisors and franchisee membership were consulted on this matter. According to an IFA spokesperson, the amicus brief was reviewed by the IFA Executive Committee which includes members of the Franchisee Forum. "Franchisees should be just as concerned as franchisors about the decision. After all, if one franchisee is engaged in a competitive business while a franchisee, it could have a direct, adverse impact on other franchisees," the spokesperson said.
