KnowledgePoints settles with franchisee claimants
Complex issues: Franchisees buy the company, plus there’s shareholder litigation.
Howard Bundy, an attorney with Bundy & Morrill in Seattle, says he feels good about the settlement his firm reached for their franchisee clients of KnowledgePoints Development Centers. Although they had already received an interim award in an arbitration case for franchisees Neal and Jill Kimball, Bundy said, “Sitting here today, it’s like that interim award never happened. Our clients are happy their case is settled.”
In the recent arbitration case, other franchisee-claimants alleged material misrepresentations and omissions, and earnings claims violations by Knowledge Points, a Portland-based company providing tutoring services for students. Named in the arbitration case were two high-profile franchise executives: W. Berry Fowler, founder of A Thousand Points of Knowledge (ATPOK), who previously founded Sylvan Learning Centers and Little Gyms International—which he later sold—and Jeff Elgin, CEO of Capistar Franchise Holding Inc. In 2003, Fowler merged his ATPOK franchise system with Elgin’s company and then, KnowledgePoints Development Corp. became a subsidiary of Capistar. Capistar also operates FranChoice and Bison.com. At the time, Fowler signed an employment contract with Capistar as a director, and also became one of its franchisees.
Fowler had originally set up the franchise company in the state of Washington as a non-profit, after approaching the YMCA in Spokane to become a ATPOK learning center. Disclosure documents state that the YMCA provided the space, hired the employees, and covered all other costs associated with operating the center, in exchange for a percentage of the gross revenues. ATPOK only provided the learning materials and furniture. On the basis of the alleged success of the Spokane YMCA non-profit model, Fowler started selling franchises in the fall of 2000.
When the Kimballs signed a franchise agreement with Fowler for their first location in Florida, they claimed in their arbitration demand that the financial model ATPOK had shown them was based on the non-profit receiving 50 percent of gross revenues, the franchisor receiving 12.5 percent, and the balance of 37.5 percent going to the franchisees. They also alleged that the franchisor omitted facts in presentations, orally and written, and that the Uniform Franchise Offering Circular contained specific earnings claims that had no reasonable basis. After signing their franchise contract, they learned that the YMCA was receiving 65 percent of gross revenue, not 50, and that ATPOK had waived the rent and made other concessions to the YMCA to assure success.
When Elgin purchased the KnowledgePoints franchise in 2003, according to the arbitration, he realized the original non-profit business model was not working for franchisees and introduced a new retail model at his first franchise convention. When the Kimballs attended a company training program in Portland later that year, they accepted the option to convert their 2001 franchise agreement to the new 2004 agreement, based on the information they received on certain projections—number of students they could enroll and earnings they could expect, set out in the UFOC—along with waivers and releases forgiving the franchisor for past grievances under the 2001 agreement. In order to acquire more territory to expand, the Kimballs also signed a promissory note, for $31,250, due and payable at the end of 2004.
But in 2005, when they once again became dissatisfied with their franchise arrangement, they sought a resolution. After the Kimballs unsuccessfully mediated their issues, they initiated a mandatory arbitration with Knowledge Points, as well as with the merger predecessor ATPOK. The Kimballs asserted that the franchisor had fraudulently induced them to sign the new contract and the waivers and releases.
On January 23, 2006, an American Arbitration Association three-judge panel handed down an interim decision, awarding hefty damages with interest and attorney fees to the claimants. The decision stated the company had violated the Washington Franchise Investment Act in connection with the offer and sale of the 2001 franchise agreement under the original franchisor, and violated the Oregon Franchise Act regarding the 2004 agreement with the successor franchisor.
According to this decision, a final award was to be issued after the panel received submissions relating to claims for attorney fees and costs. The promissory note signed by the Kimballs was rescinded and cancelled, as was the franchise agreement. The Kimballs’ claims for punitive damages was denied. And the franchsior’s counterclaims were denied.
But Sonia Miller Van Oort, an attorney with Flynn, Gaskin & Bennett, representing the franchisor, said in a statement to this writer that the AAA panel “agreed to reconsider its interim award based on challenges they made to the accuracy of factual findings, application of law, and overall validity of the interim award.” Van Oort stated that while motions to reconsider and to vacate the interim award were pending, both sides recognized the possibility of incurring additional legal fees to re-arbitrate the case, and agreed to resolve the matter outside of the arbitration forum. As a result, Van Oortr stated, “the Kimball interim award has no factual or legal significance.”
Bundy, representing the franchisees, said that the franchisor settled not only the Kimballs’ claims, but the other four clients’ as well. The settlement involved an immediate payment and a stream of payments in the future. The franchisees also gained the right to continue with the tutoring business using any of the materials and methodology they wanted, so long as they don’t use the Knowledge Points trademark. And, all outstanding litigation and arbitration were dismissed between the parties with a specific order that vacated that interim award. Bundy said, “We felt very good about the outcome.”
Franchisees buy the company
As the arbitration cases were being settled, there has been a new development. A group of 40 franchisees were in talks with Jeff Elgin and KnowledgePoints Development, Inc. to acquire the franchise system. According to Craig Tractenberg, an attorney with Nixon Peabody who represents the franchisee-group, the company has been sold to a newly formed KPI Acquisition Corp., and is operating as KnowledgePoints. Details of the acquisition were not available. As to the details, Tractenberg said, “Under the agreement, I cannot make a public statement.”
In the statement from Van Oort, she says that the franchisor was acquired by franchisees who “believed in the potential of KnowledgePoints Development Corp.’s business model and wanted the opportunity to run that business themselves.” Van Oort also stated that “KnowledgePoints Development Corp. has no ownership interest or control over KPI and that “none of the KPI owners were parties to the Kimball matter or any other pending litigation against KnowledgePoints Development Corp. or Capistar Franchise Holdings, Inc. at the time of the sale.”
There were other Knowledge Points franchisees who were not part of the acquisition, and it is unclear as to what their future will be with the company. In a telephone interview with one owner of two centers, he said that he had not received any correspondence from the company stating a change in ownership, and he was not asked to be a part of the acquisition. Although Elgin said he did not know how many other franchisees there were, one attorney close to the case thought there were twenty-plus franchisees outside of KPI Acquisition Corp. Elgin said the remainder of the operators had been notified of the acquisition.
Capistar files litigation against Fowler, et al
The settlements of the arbitration cases and the acquisition of KnowledgePoints Development Corp. by the franchisees do not complete this saga. According to Van Oort’s statement, “In March 2006, Capistar Franchise Holdings, Inc. initiated legal proceedings in Minnesota federal court that involved W. Berry Fowler. “In conjunction with the Kimball matter, Capistar resolved those issues relating to Mr. Fowler. This federal action is stayed pending filing of final settlement documents,” said Van Oort.
According to the Complaint, Fowler and his sister Barb Garber, as well as additional officers and shareholders of ATPOK, committed wrongdoing that caused injury to Capistar, a Minnesota corporation, and as a result, Fowler and Garber are currently in wrongful possession of stock belonging to Capistar.
Capistar alleges that Fowler, Garber and other defendants falsely, fraudulently, and with the intent to deceive Capistar, represented in the merger agreement that “no misrepresentations, illegal earnings claims, or misleading statements were used in the sale of any franchise.” Elgin alleges he relied on those representations in deciding to purchase the ATPOK franchise from Fowler.
The Complaint also states that in the recent Kimball AAA arbitration interim award, Fowler and ATPOK had, in fact, made misrepresentations and omissions, illegal earnings claims, and misleading statements to the Kimballs to induce them to become franchisees of ATPOK.
The parties have submitted a Stipulation to Stay Proceedings and the court has issued an order to stay the matter until October 13, 2006.
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