Entrepreneur's Source arbitrations attorneys continue to duke it out
Court denies TES's request to vacate award in class action arbitration
A Connecticut judge in May denied a request by The Entrepreneur’s Source to overrule an arbitrator’s decision granting class status to a group of franchisees that filed a petition challenging many of the company’s practices more than two years ago. The company had argued that the arbitrator exceeded his powers in allowing for a class arbitration, and that he impermissibly denied the intervention of 13 other franchisees on behalf of the franchisor.
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.
Janet can be reached at 303-799-7398 or at email@example.com
The judge stated, “This court cannot conclude. . . that the arbitrator’s conclusions were clearly erroneous; or that the arbitrator ignored clearly governing legal principles.” She said the legal principles in the case are subject to interpretation, but just because TES and its president, Terry Powell, disagree with his conclusions, it doesn’t establish “manifest disregard” of the law, which must be proven to vacate the award.
The Entrepreneur’s Source coaches clients to purchase franchises, including its own franchise system. Fred Krastel and other franchise operators originally filed their case in February 2005, alleging that TES’s regional developers give earnings information as part of the validation role and that the franchisor withholds the UFOC until the validation is complete, a violation of FTC rules. Franchisees also question the role of being a franchisee and an agent for TES franchise sales.
In an interview, Powell and attorney Scott Kern questioned the judge’s decision and said that the franchisees’ attorney, Mario Herman, doesn’t have the elements he needs to certify the class, notably enough people making similar claims to justify a class. Kern said Herman originally had about 30 franchisees and now has approximately 12 to 15. “The company has settled with about half of the original group that Mr. Herman represented who are not adverse in any way to TES. The parties just decided to part ways and we’ve issued mutual general releases. No money exchanged hands.” Kern said TES is confident that it has a strong argument to prevent the class. He explained that the recent ruling by the judge had to do with the clause construction, so the case will move to the next step. “Not that a class arbitration is permitted by the agreement, but rather whether or not a class arbitration is appropriate under the circumstances,” he said.
Kern said there had been another group of franchisees, outside the 13 franchisees who were actively intervening; who tried to file “friend of the court” brief in TES’s favor, but the judge refused. She based her decision on the fact that the only thing before her was what had gone on in the arbitrator’s hearing and his decision.
TES has also filed a motion to have Terry Powell removed personally from the case, which is still pending. “At some point, Mario will presumably file a motion for class certification, if he still has any clients,” he added.
Herman said absent an appeal to the Connecticut Court of Appeals, the case will now return to the Class Arbitrator to certify the class.
Post arbitration briefs due in Greenspan case
After nearly three weeks of testimony involving approximately 12 witnesses and 3,500 pages of transcript, the record is now closed and the post-arbitration briefs are being submitted to the American Arbitration Association. Attorneys for both sides expressed how complicated and lengthy the case has been since if first started in 2004.
Kern, attorney for The Entrepreneur’s Source, said the company feels that the only reason franchisee Michael Greenspan came back after leaving the TES system was that his attorney, Herman, got a few people together to try and develop some legs under a class action attempt. He said, “They reached out to some former franchisees and they then believed that there was something that had taken place that was not aboveboard. Otherwise, we never would have heard from Mr. Greenspan.”
But Herman sees it differently, stating that the entire Greenspan testimony has been a thorough analysis of the TES business, which may or may not impact the class decision. According to Herman’s brief, the record established proved that TES engaged in deceptive and unfair trade practices under Connecticut Unfair Trade Practices Act (CUTPA) and fraud and negligent misrepresentation, when it sold a franchise to Greenspan. He alleges that franchisor representatives, including regional directors, gave illegal earnings claims by providing actual revenue amounts, as well as the number of leads, the conversion rate of 5 percent leads to placements, and the average fee per placement. He states that the alleged conversion to placement was not 5 percent but one to two percent, and that only 60 percent of the time did the IMAP (I Made A Placement) translate into a paid placement. Herman said, “That’s like being a realtor and claiming that because you listed a house you got the sale.” Greenspan also claims that TES deliberately withheld the UFOC from him until his decision to purchase a franchise was made. And he alleges that he was steered to a “short list” of successful franchisees, with whom he validated the TES opportunity.
Although TES’s attorney had not submitted his post brief at press time, he gave several points that will be addressed when it is filed. TES claims that Greenspan admitted in his testimony that he knew how much he could make as a TES franchisee before he ever spoke with anyone at the company because he had investigated it early. That is in contradiction to Greenspan stating in his brief that he had voiced his goal to many company representatives that he expected to make $100,000 annually as he had done while a franchisee of Fast Signs. Kern also disputes that he was given a “short list” of successful franchisees, that the TES list contained two franchisees who were doing poorly.
In regards to TES’s IMAP program, Kern explains that it only “anchors” the placement, that there is still work to be done before the agreement is signed. He admits some deals do fall through and Greenspan knew that. Another issue disputed by TES is that Greenspan should have known that by only working in his TES business on a part time basis, which is allowed by the franchisor, he could not expect to make as much money. Greenspan claims he worked full time in it.
Herman said since the record is now closed it’s just the briefings that go before the arbitrator so he can have a view of the two positions. In conclusion Herman said, “Powell is very clever in how he does his earning claims. He is essentially planting the seeds and using the area reps to propagate this stuff. He does it through this fictitious idea that you can close 5 percent of the leads that you get. But it isn’t based on any real numbers.” According to Terry Powell, TES does not give earnings claims.
Kern said that the weakness of many of Greenspan’s claims was obvious, that at the close of the hearing Herman announced to the arbitrator that some of their claims were being withdrawn and that they were reducing their claim for damages. Greenspan sought a rescission of the franchise agreement and damages in the amount of $43,900.00, as well as the franchise fee and upfront fees. However Herman also requested punitive damages “to punish TES for its egregious behavior, and asked that TES’s counterclaim be denied and award Greenspan his attorney’s fees to be filed at a future date.”