Experts weigh in on franchisees' lawsuit against Peaberry Coffee
A Denver case’s witness list is a franchising who’s who on both sides. The case will help decide whether law firms should act as franchise consultants.
Expert witnesses play an important role in litigation by helping courts determine what aspects of a lawsuit should be assessed prior to making decisions. With their expertise in franchising, these seasoned professionals offer their opinions to defending or prosecuting attorneys based on their well-researched reports.
Case in point: Colorado Coffee Bean, et al. v. Peaberry Coffee, et al. filed in 2006 in the district court of Denver. In this case, the experts are weighing in on age-old issues, what most executives would consider the basics of franchising: When is a company ready to be franchised? And, what disclosure should be made to properly assist prospects in buying a franchise? But it also includes another issue that has recently been highlighted in franchising: Should law firms act as franchise consultants by providing services outside their expertise?
The parties are awaiting the June 30 trial date at this writing, but the lawsuit could prove to be an interesting study.
The crux of the litigation
In 2002, William I. Tointon, founder of Peaberry Coffee Inc., began to investigate franchising after being in business for 12 years. At that time, he had approximately 18 units. Tointon retained attorney Kim McCullough of Perkins Coie as his franchise attorney. Perkins Coie advertised itself as a firm that "counsels businesses just embarking on a franchise program or exploring alternatives to franchising as a method of expanding." The brochure quotes McCullough as saying, "The value we bring is a mastery of the franchise regulatory system, combined with business sense and experience to help clients make good business decisions."
Executives of Perkins Coie and Peaberry held at least 10 meetings to discuss the required financial disclosures, the viability of franchising the business concept and the formation of a new franchising company in order to comply with the financial disclosure requirements of the Uniform Franchise Offering Circular.
Four years later, 10 franchisees filed a lawsuit against Peaberry Coffee and Perkins Coie, through their attorney Richard B. Podoll, Podoll & Podoll, alleging they have lost millions of dollars due to a faulty system. Their allegations are that Peaberry had not been profitable since 1998, and had lost considerable money in each of the last five years. Many of its retail stores failed to operate at a break-even level, they claim, and in addition, the company was not viable for franchising and failed to meet even minimal franchising benchmarks.
Podoll claims Peabody's financials were not disclosed in the UFOC, but it did include a chart of gross sales information for its retail stores, breaking them into three ranges: "high," "mid" and "low." But he states the law firm omitted cost of goods and operating expenses, which fails to provide the profitability of its stores. The complaint alleges those categories were intentionally designed to be misleading.
When Peabody entered into negotiations to sell most of its stores to Starbucks, documents say, management intentionally withheld the information from the franchisees until the afternoon prior to making the sale public. Peabody is now claiming to have been separately impacted by that sale. When Peaberry made the decision to change its business model to drastically reduce the number of retail stores it planned to open, once again it did not advise franchisees, documents state.
Franchisees are asking for relief on claims of negligent misrepresentation, breach of contract, implied covenant of good faith and fair dealing, violation of the Colorado Consumer Protection Act, civil conspiracy and fraudulent concealment, among other claims.
Perkins Coie and Peaberry are "aggressively defending their actions in court." Fred Baumann, Rothbeger Johnson & Lyons, in Denver, attorneys for Perkins Coie, said they will not comment on the pending litigation.
Experts offer opinions
The Peaberry Coffee case has been stacked with expert witnesses on both sides. Robert Purvin, chairman of the American Association of Franchisees and Dealers; Ed Kushell, of The Franchise Consulting Group; attorney David Holmes, Holmes & Lofstrom; and attorney Peter Largarias will testify for the franchisee plaintiffs. On the other side are Michael Seid, managing partner of Michael H. Seid & Associates; attorney John Tifford of Plave Koch; Tom Miner, principal with Technomic Inc., a foodservice research group; Michael Zeeb of Zeeb and Company, which has expertise in accounting and litigation support; and attorney David Kaufmann, Kaufmann Feiner Yamin Gildin & Robbins.
Of the group, two well-known franchise consultants give opposing views regarding whether Peaberry was negligent in franchising its business at a time when it was unprofitable, and whether it provided the necessary disclosure for prospective franchisees.
In disclosure to the court, Ed Kushell submits he will testify that the manner in which Peaberry ran its company was dysfunctional, and that there was no accountability for the extreme loss sustained at its corporate level. His report says: "Decisions were made based upon unsupported beliefs such as, 'we have a good product,' and 'we can grow to 500 units,' rather than upon qualified comprehensive analysis."
He's also expected to testify that Peaberry's business concept was not viable for franchising at the time it initiated its franchise system. "A company contemplating franchising has the obligation to first prove that their units have been profitably operated. And they are equally obligated not to misrepresent their offering to people who are about to commit their life savings in order to buy the franchise," he said in a phone interview.
In contrast to Kushell's expected testimony and that of AAFD's Purvin, consultant Michael Seid states in his documents that he knows of "no legal or industry requirement that a franchise opportunity must be tested in any particular manner, or that a franchisor cannot sell a franchise opportunity until it has been proven by prior franchisees." He writes that the Federal Trade Commission and state regulators have not established a franchisor "Duty of Competence." Instead, he states, they require franchisors to disclose accurately their experience and history, whatever that may be.
In refuting testimony that Peaberry set up a separate franchise company for the purpose of concealing its financials, Seid states that is "incorrect and irrelevant." He writes, "There is no regulatory or other franchise authority that suggests that the formation of a separate franchising entity is improper," so long as it is disclosed in the UFOC. He also disagrees that financial disclosure relating to Peaberry Coffee stores in Item 19 (earnings claims) of the UFOC is misleading. According to Seid, the suggestion that Peaberry was obligated to disclose the net profits of each store is contrary to the FTC Rule and state regulatory guidelines. "Moreover the disclosure in Item 19 states that there were no pre-existing franchises, and it provides a clear summary of the gross revenue of each of the company's retail stores," he explained.
Kushell will testify that the management team at Peaberry did not seek advice from a franchise consultant experienced in franchise start-ups, but instead hired the Perkins Coie law firm, which he views as unqualified in giving that type of business advice. He is expected to show Peaberry and its executives had no real commitment to franchising and used its initial group of franchisees as guinea pigs.
Rich Podoll said in an interview, "Our lawsuit seeks justice for our clients who were the victims of serious fraud and consumer fraud." He believes this could be a ground-breaking case that pulls a lot of pieces into perspective.
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 firstname.lastname@example.org