COFFEE BEANERY: Exec’s Cone-viction Leads to Franchisee Victory Part 2
August 25, 2008 by Sean Kelly
Filed under Business
(FranchisePick.Com) Don’t miss: COFFEE BEANERY: Secret Justice Franchisee Interview Part 1, COFFEE BEANERY: Secret Justice Franchisee Interview Part 2
In COFFEE BEANERY: Exec’s Trafficing Conviction Leads to Franchisee Legal Win Part 1, I recounted how Coffee Beanery V.P. Kevin Shaw’s dalliance into the secet underworld of blackmarket traffic cones had come back to bite him right in the crosswalk. As I was accused of “silliness” on this serious subject, I’ll try not to yield to my childish fascination with traffic cone trafficing and get to the serious lesson for you, the prospective franchise buyer.
The Coffee Cone-undrum Begins
In 2003, Deborah Williams and Richard Welshans (who are alternatively described as married, “significant others,” and/or both) were, by their own descriptions, highly successful corporate executives. Deborah was VP of Operations for a large corporation; Richard had 18 years experience in industrial sales not related to traffic cones. They were financially secure, with $600,000 in equity in a million-dollar house on an expertly paved street.
When Richard lost his job due to downsizing, the couple decided to start a business. “We just wanted a little coffee shop… we just wanted a little franchiseable coffee shop, like a little Cheers-type place,” says Deborah in a videotaped interview. “We started looking for different franchisors. Our first choice, of course, was Starbucks.”
Starbucks doesn’t offer franchises, so they became interested in a Coffee Beanery franchise. During the sales process, Coffee Beanery salespeople and Kevin “King Cone” Shaw allegedly detoured the couple toward their Cafe concept. Shaw and his crew advised the couple that they’d be better off opening a Coffee Beanery Cafe, their strip-center concept that included a food menu, rather than the coffee and beverage-based mall concept the franchisees had planned to open.
Franchisees Detoured to Dead End Cafe Concept
Williams and Welshans allege that they were led to believe the Cafe was a proven concept (when it wasn’t), that they were told they’d make $125,000 profit, and that critical details involving vendor rebates and Kevin Shaw’s grand larceny cone-viction were withheld from them. Had they kn
own Kevin Shaw was a card carrying member of the TCPS, and was reputedly tied to the radical Cone Liberation Organization (CLO) there’s no way they would have purchased a Coffee Beanery franchise. Had that required info been disclosed, Richard and Deborah would surely be successful Cuppy’s Coffee franchise owners right now.
They opened their Coffee Beanery Cafe in January, 2004 in Annapolis, MD. In a second video interview posted at UnhappyFranchisee.com, Deborah Williams says “three months into the franchise, we realized something was wrong. Money was running out like it was going through a sieve. We hired an attorney. We also filed a complaint with the Maryland Attorney General’s office here in Maryland…”
Instead of being able to focus on building their coffee business, Williams and Welshans spent the next fours years battling their franchisor. They filed a demand for arbitration. They withdrew their demand for arbitration. They filed a complaint in the District Court of Maryland. They won the right to have their franchise agreement rescinded, but declined it. Coffee Beanery filed a demand for arbitration. The franchisees lost the arbitration. They appealed the judgement that they lost and lost again. They appealed to the District Court of Maryland, and Maryland overturned the arbitration ruling against the franchisees.
Hooray! They won! What did they win?
Hooray! They won! What did they win? After four years, they won the right to sue the Coffee Beanery for the same stuff they claimed in the arbitration. They won the right to plead their case in a real court of law, with a real jury and a real judge with robes and possibly a gavel. Woo-hoo!
And the lesson here is…?
The first lesson is that one should be very, very diligent in researching the franchise organization that one joins because the cards are stacked against the franchisee in the event of a dispute. Here Williams and Welshans are celebrating a win, and after four years all they’ve won is the right to spend more money on more years of bad moods and aggravation. While they clearly have valid complaints, they’ll never get awarded enough money to get back the time they lost and the toll it took.
They wanted a little coffee shop. Annapolis, apparently, didn’t.
But there’s a more fundamental question that sticks out like an orange thumb:
Didn’t the franchisees make their most critical mistake before they ever came in contact with the Coffee Beanery?
Wasn’t the franchisee’s first and most critical mistake being motivated by the romantic notion of themselves as proprietors of an upscale Cheers-Meets-Starbucks coffee shop, and failing to begin their planning process with a strategic business and market strategy?
Doesn’t the real problem start with Deborah’s statement ““We just wanted a little coffee shop…”
Shouldn’t they have first asked Annapolis if it needed – or wanted – a little coffee shop?
WHAT DO YOU THINK? SHARE A COMMENT BELOW.
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Sean, this was a piece of crap franchise which any decent attorney could have pointed out.
Just pointing out the obvious franchise litigator line: you can pay me now, or you pay me a lot more later.
Yeh! Michael!
Is the problem that there aren’t enough decent attorneys out there?
Why do we have so many “crap” franchisors out there inducing people into long-term relationships and contracts that can kill franchisees financially and emotionally?
Why are franchisors licensed by government to lie, cheat, and steal? How can a few Internet Sites counter all of the hype and PR and selling of franchises that are wrapped up in a voluminous government disclosure package together with the self-serving killer franchise agreement?
Carol
I think we’ve got to be careful not to replace one franchising myth (”If you buy a franchise, you’ll be successful”) with another (”If you buy a good franchise with a fair agreement and an ethical franchisor, you’ll be successful”).
Years ago, I had a client who wanted to open multiple franchises in a tertiary market in the South. I shared my experience with two in particular. One was a business to business franchise that had a lot of dissatisfied franchisees. I advised against it. The other was a rising food concept with happy franchisees. I advised for it. He bought both. The first one thrived and he opened two more, and the second one failed. Why? The town needed the first one desperately. He had no competition. He got impatient and took a bad location for the second one, and took a bad location. It was one of the chains few closures.
Fraudulent inducement, non-disclosure of material facts, and a predatory agreement are terrible things and not to be dismissed. If these things happened and continue to happen, they should be stopped, the offenders penalized and the victims compensated accordingly. No doubt about it. But these factors didn’t cause these cafes to fail on the retail, consumer level. The fact is, Williams and Welshans had already made their most serious blunder before they met the CB, did they not?
Starbucks – the franchisee’s first choice – is closing 600 of their stores nationwide. Auntie Anne’s Soft Pretzels – one of the best franchise organizations in the industry – launched a cafe concept locally and closed their half dozen or so test stores. Neither of these were franchised – but it they were, Williams and Welshans most likely would have failed with them, too.
Williams and Welshans were willing to spend hundreds of thousands of dollars and four years (so far) analyzing, dissecting and criticizing everything that CB should have done pre-sale, but didn’t. How much time did they spend researching their basic assumption to open a coffee shop – and then a cafe – in Annapolis, MD? From the sounds of it, they just pulled it out of the air one day. They thought it would be cool to own a coffee shop.
If their specific trade area in Annapolis, MD simply had no need of another coffee or sandwich shop, they probably would have failed with anyone’s concept.
It’s an important lesson: Don’t just open the business you think would be fun (or good for your image) to run or because it fits with your country club image – open the business that there’s a consumer demand and a specific market for. That way, if you’ve determined that this market needs a coffee shop and someone suggests a full cafe instead, you probably won’t just say “OK. We’ll do a cafe.”
Sean: All that you say is true! But! it doesn’t excuse the fact that the FDD (UFOC) is really a red herring that gives very little information about the franchise, itself. The FTC Rule and the FDD protects franchisors from common law fraud actions in the states, and this, of course, invites a lot of fraud, as demonstrated by the CB case, and the many other franchisors who are being sued in the courts.
There are only two items that deal with the actual franchise, itself; i.e. Item 19 and Item 20. Item 19 is MATERIAL but OPTIONAL and only a small number of franchisors disclose earnings in order to protect their “safe harbor” in the courts –and/or to obscure the unprofitability of the franchise. Item 20 is an Artifice upon which prospects are supposed to perform due diligence, and which protects franchisors from making any representations, themselves, about the value of the franchise to the new buyer.
The FDD diverts the attention of the buyer away from the known risk of the franchise, itself, as would be demonstrated by “earnings claims” and historical performance statistics of the system. While present and past performance statistics can’t promise future performance, this is all the prospective buyer has to to predict the possibiulity of profits and survivability in the marketplace.
The “legitimate” franchisor is enabled by regulation to sell franchises to the public at any degree of risk of failure to first-generation franchisees, and the SBA will guarantee loans on franchises with high failure rates. Why is CB on the SBA Franchise Registry?
The public has been brainwashed by media and hype to believe that franchising is generally successful. The typical franchisee prospect would have no idea that government would require a voluminous disclosure document and that franchisors would be allowed to hype and sell their “valuable” franchises to the public if they weren’t “valuable.” The typical target of the franchisors is law abiding and would have no idea that franchisors would “steal” on such a large scale because they CAN.
This, obviously, is the intent of the FTC Rule and the FDD. It is a subsidy of the industry that is rationalized as serving the “greater good” because it stimulates the economy and provides revenue and job numbers for government.
Was the FTC thinking about fixing the FLAW in the FTC Rule for those ten years that they did nothing for prospective franchisees? Did they, again, decide that they couldn’t fix the flaw without inhibiting franchising and couldn’t take the chance?
Sure! In retrospect, DW was too trusting and didn’t do the research she could have done, but the CB took advantage of her trust and she was deceived by appearances and fraudulently induced to contract by material omissions in the FDD.
If franchisees knew the actual risk up front, as demonstrated by the unit performance statistics, they wouldn’t be as shocked and surprised when their businesses fail and they lose everything. They would have THOUGHT about the risk and about the consequences of failure, and they would have known the “odds” and accepted the odds and the risk. They would do more careful research before signing the contract if they had any idea of the risk involved.
CB knew these Cafe’s had no record of success and yet they put these people at risk of losing over a million dollars and hid this material fact in the UFOC. There were material omissions in the UFOC.
If this isn’t fraudulent inducement to contract, what is the purpose of regulation at all in terms of its protection of prospective buyers of franchises?
If government wants to play the game; i.e. that if, for instance, 40% of the franchisees fail, the 60% who survive must not be destroyed by the 40% who fail, because the 60% are considered vital and necessary to the economy, the least the government can do is to mandate “earnings claims/unit performance statistics” be disclosed to new buyers.
Can you justrify, Sean, that the “end justifies the means?”
I’m not justifying the current system whatsoever. I think it’s pretty screwed up.
Whether there’s a grand plan with logical and insidious reasons for it to be the way it is, or whether it’s just the result of neglect, bureucracy and lack of sufficient motivation to fix it… you got me. I lean toward the latter.
Where we differ is that you look toward the same institutions that created this system to provide the solutions. I’m a little more cynical. I think the guys who are circumventing the current system will do the same even if unit stats are required. Look at this situation – the penalty for breaking Maryland disclosure laws was what? They had to promise to stop breaking Maryland disclosure laws? And let franchisees out of their contract (which would have released them from exposure)? Big deal. If you think the big lumbering institutions in charge of this current farcical system, you’re more of an optimist than I.
The problem is that due diligence must have a comprehensive scope, not simply a legal or unit economic focus. Here’s a great example from two of my favorite organizations, Cuppy’s coffee and the AAFD.
Earlier this year, a prospective Zee was researching Cuppy’s Coffee. He hired a lawyer as part of his due diligence. The lawyer carefully reviewed the sparkling clean AAFD-award winning contract and gave it two thumbs up. The guy had seen the negative stories on the blog but had his lawyer’s OK and the AAFD’s approval so he thought it was a good deal.
What’s the story of the blindmen and the elephant?
The truth is that franchisees have to take a total, comprehensive approach on deciding the right business to start, etc. And they can’t rely on any document, award or even government approval to do their thinking for them.
If FRs aren’t compelled to follow the regulations now in place, they won’t follow additional ones, even if they make sense.
few months back
One small improvement in the FDD would be the reasons for the terminations and the transfer of units in Item 20.
While it may be obvious that terminations are failures to most —but not all prospective franchisees, the subsidy of the Transfer Columns that the big franchisors take advantage of to hide their failure rate and therir churning could be remedied by a reason for the transfer.
It is obvious to me that the FTC regulated franchising to enable the franchisors to do just exactly what they are doing. Franchisors don’t have to disclose anything really helpful in the FDD and can’t disclose anything outside of the FDD —and franchisors are protected from common law fraud actions in the State Courts, as was the intent of the FTC Rule.
The Snake Oil salesmen are licensed to lie, cheat, and steal under the present status quo of regulation and the law, as needed. The Franchise Model for the one-unit franchise owner has very great risks and government helps the franchisors to hide this risk.
The special interests have always had their way with the Congress and the franchising “bubble” was part of the mortgage “bubble” these past twenty years. Failed franchisees are invisible for the most part. Only a few get out on the Internet to air their complaints and this, eventually, will bring change.
At least, there will be more contraint of franchisors by the banks and lenders who will return, perhaps, to traditional risk assessment procedures. Maybe, some who are more fiscally responsible will ask the SBA for an explanation of why they are guaranteeing loans for franchises whose owners have high failure rates.
At least, the CB incident exposed the ugliness of the current public policy and the Internet will make it harder for the franchisors to withhold material information from franchisees in the future.
Maybe, all franchisee prospects should send a registered letter to their prospective franchisor asking them for any material information in their possession that might influence the franchisee’s decision to purchase the franchise. The franchisors would respond that they were not permitted under law to provide any earnings or statistics that weren’t part of the FDD, and then the franchisees could bring the response to court and show it to the judge.
I thought I read in my history book that there was always resistance to any change to an ugly status quo that meant that some would lose their advantage under the law, but somehow, we, as a country, did change a lot of these ugly status quo’s,
You are right! The CB and Cuppy’s case illustrates that nobody has any more disrespect for the law than those who make these “special” laws, and those who are charged with enforcing these special laws for the special interests.
Franchising today is in no way following ethical business practices. There are thousands who have been robbed of their homes, life style and having to start over. All because they went into business with a crappy zor. Follow your gut because it is usually right. Study the world of franchising. I wish sites like this was available for us. There is still not enough people aware of the sites they can ask questions. The reason people get destroyed with bad zors is lack of knowlege of what they can do to protect themselves. Sites like Franchise Pick should try to get the word out that they exist. I assure you I have talked with existing zees and former zees who have no knowledge of site’s like this to ask guestions about the franchise world. Don’t you think it is time to let the world know there are valuble sites out there that people can ask guestions? Hopefully they will be saved from financial hell.
Yes! Barb is right. How can we spread the word. LET THE BUYER BEWARE OF THE FDD AND THE FRANCHISE AGREEMENT — which so often is the “package” from hell!
Franchisors are free to make misrepresentations outside of the franchise agreement and the FDD, as long as they disclaim all of their representations in the FDD and the actual boilerplate contract that protects franchisors in arbitration and the courts.
The franchise industry is regulated to protect the franchiSORS from their franchisees who fail and to permit franchisors to hide material risk factors from new buyers who are “tricked” into buying franchises that only “look” successful but may have no record at all of success and profits. The name of the game is to protect and hold up the franchisor and the franchisees who survive and the failures, under public policy, cannot be made “WHOLE” because this could bring entire franchise systems down.
The Coffee Beanery Case is a good example of the intent of the FTC Rule and public policy concerning the regulation of franchising in our economy.
How can franchisees access the State little FTC statutes if public policy dictates that state negotiations for rescissions END the right of the franchisee to address the courts under the little FTC Statute? If there is an actual violation of the FDD, don’t the regulators have to step in to protect the public! Catch 22.
This was the message of the Coffee Beanery Arbitrator who felt very comfortable in her decision because she knew this was state and federal regulatory policy?
What does the Appeals Court Decision really mean in terms of relief to franchisees? DW was in the Maryland District Court to begin with and Michael Webster of BizOp pointed out that the federal judge should have known that the evidence before the court indicated fraudulent inducement to contract and and couldn’t be arbitrated, and this judge, in the beginning, could have saved everyone a lot of time and money!
Did the District Court Judge in Maryland know that federal regulatory policy would kick in after the rescission was negotiated by the State of Maryland, and that DW would not be back in his court?
What is the purpose of the little FTC Statutes?
Sean said-”Whether there’s a grand plan with logical and insidious reasons for it to be the way it is, or whether it’s just the result of neglect, bureucracy and lack of sufficient motivation to fix it… you got me. I lean toward the latter.”
I too think it’s the latter- I firmly believe that the government is not the mechanism by which things get ‘fixed”. I think by and large their intrusive intervention is what acerbates most free market problems.
I don’t think the FTC is the place we need to look to fix the problem, unfortunately it requires what I like t call “moral capitalism” the example Sean gives about Aunt Annies closing shops that didn’t work was a great example.
For instance when Meal Assembly/Prep Kitchen Franchisors saw revenues drop off dramtically in 2006/2007 what did they do? Did they cut back on their efforts to sell more franchises? I will begrudingly give them the benefit of the doubt at the beginning of the blood bath that followed. But their continued response up until very recently was to point the finger at the store owners/franchisees for everything that has gone wrong.
They could have slowed or voluntarily stopped selling franchises when they saw the downturn start. Did they?
No, article after article and franchise after franchise website states what a hot and fast growing industry this is. The Meal Assembly/Prep experts stepped up press releases and bogus numbers to reporters to prop up the failing industry.
Even now the “experts” are perplexed about what is happening in the industry.
Had the franchisors only practiced moral capatalism and been morally responsible they would have done the “right” thing and stopped selling franchises and looked at ways to correct the problems networks were having. But the didn’t do that, they acted like the King in the Emperors New Clothes. They refused to acknowledge that there was a problem and just compounded it by selling more franchises(when they could) It got to the point that they threw their own vetting process out the window in 2007/2008 and would sell to anyone who had a check for the franchise fee-See the Super Suckers post here that talks about a store in small town Greene, Ohio that was opened for 6 MONTHS…a franchise that should have NEVER been sold for that location.
Until we have responsible people in the driver seats of these start-up franchises OR have some REAL guidelines imposed on individuals before they can even franchise a concept then we will continue to have horror stories like the UPS store, Meal Assembly/Prep business, Curves, Butterflies the list goes on….
We need enforcement of guidelines and some real serious self policing of AAFFD or another non-profit/profit organization that looks out for the Franchisee via liasons with governmental agency.
We have an estimated 800-1000 families adversely affected by the mass failure of the Meal Assembly industry.
If you just took 85% of those 800-1000 at an average SBA loan of $250,000 in loans you come up with TENS of MILLIONS of dollars in loans that have gone into default.
THAT is outrageous, and it continues because not ONE Meal Assembly Franchisor has stopped selling franchises-in fact it seems like they have kicked up their effort to sell more franchises before the money is shut off to them.
They churn stores that have already failed once.
It’s outrageous
Just my two cents for what it’s worth.
Kelly!
All that you say is correct. But, it is the SURVIVAL of the franchiSOR that motivates the franchisor to sell NEW franchises to NEW buyers even as the franchised concept is getting into trouble and first owners are failing out of the system in large numbers. They sell and churn as possible to maintain visibility and gross sales of their systems.
The very nature of franchising, in which the franchisor earns his profits from the GROSS SALES of the sytem, dictates that the franchisor must always continue to sell more franchises out the front door to TRY to stay alive and well. Remember! all of the time the franchisee is working to TRY to get to break even, the franchisor is profiting from the gross sales produced by the franchisee.
Understand that franchisors will not practice moral capitalism if immoral regulation protects them from fraudulent practices in arbitration and the courts. As long as the franchisors are free to sell their franchises without disclosing TIMELY information to new buyers concerning the viability of the units in the system, they will continue to do this to protect themselves and to try to remain standing. Franchisees will continue to be sacrificed because MATERIAL information concerning the risk of the investment can be withheld from new buyers under the provisions of the FTC Rule and the State FDD’s.
As Robert Purvin of the AAFD told the FTC ten years ago, the FTC Rule was promulgated to protect franchisors from common law fraud charges in the state courts. The mess we see today in franchising is what happens when the definition of “fraud” is changed by government regulation, and the weaker party, the franchisee, is left hanging in the wind.
Carol
The very nature of franchising, in which the franchisor earns his profits from the GROSS SALES of the sytem, dictates that the franchisor must always continue to sell more franchises out the front door to TRY to stay alive and well.
Having to continually sell more franchises in order to keep the franchisor alive is not the very nature of franchising. It is the nature of either a franchisor in trouble or a ponzi scheme masquerading as a franchise organization.
I have worked on consulting teams developing and launching hundreds of franchise programs. In the two major consulting organizations I worked with, both structured the franchise programs so that the up-front franchise fees were primarily for cost-recovery of both their training and up-front costs as well as recovery of their sales and marketing costs for procuring that particular franchisee. Neither one of these companies structured or positioned the upfront franchise fees to be profit centers.
The franchise development strategic planners I worked with structured the programs and taught the franchisors they consulted with that their ongoing revenue and profit was dependent on building a growing chain of profitable, healthy franchises whose owners would expand the chain with additional units as well as provide enthusiastic referrals for other quality franchisees to expand the system.
I’m not talking about a few do-gooder planners – I’m talking about the guys who put together a good percentage of the franchise programs in the country.
When following the more controversial companies and situations, it’s easy – but wrong – to condemn all of franchising and all franchisors as being out to profit at the franchisee’s expense. That’s not the case.
I’d argue that the nature of franchising is a win-win-win relationship in which franchisor-franchisee-vendor work together toward mutual success – And that the contentious examples of franchisors trying to sell themselves out of hot water are the aberrations.
Yes, Sean! But the “aberrations’ are protected by federal regulatory policy and continue their abusive and exploitive practices, with apparent immunity under the law. Dale of Cuppy’s could probably get an injunction today to close a franchisee down for not paying royalties but who out there is going to be able to close Cuppy’s down for selling high risk franchises? I don’t think you can argue that this is not true.
If, as you say, franchisors on the whole offer franchises that are successful for their franchisees, why do 85% exercise their option under the FTC Rule NOT disclose any “earnings” or unit performance statistics to new buyers after 30 years of regulation. The failure to disclose information that is MATERIAL to new buyers of franchises IS the FATAL FLAW of the FTC Rule.
We realize that franchisors want their franchisors to be successful, but even the best of franchisors will have failures, and it is obvious that regulation was promulgated to protect franchisors against their failed franchisees —-who wouldn’t be given the odds of failure/success in terms of the failure/success of other first owners of the franchise before the sale was finalized. Franchisors would be allowed to bring franchisee prospects to signature of the contract by not talking about risk or rewards in the FDD or the contract. The apprearance that “earnings claims” made outside of the contract are prosecuted by the regulators is false, of course. The FTC prosecutes only 6% of the complaints it gets on franchising.
Apparently, the “powers that be” did not want to find out at what success rate or failure rate, prospective franchisees would be turned off and not buy franchises. I would imagine the FTC hoped that the failure rate would stay under the radar, at 10% or less, and we wouldn’t have the mess in franchising that we have today.
You know, also, since franchisors are protected from fraudulent inducement under the FTC Rule that they have become very bold and they even have established case law in the courts that it is okay to “encroach” on your franchisees as long as you told them you were going to do this some place in the FDD and the contract.
I know that you want to believe that franchising ia a win-win-win relationship in which franchisor-franchisee-vendor work together toward mutual success —-but the nature of franchising in which the franchisor can survive with profits, even as a percentage of his franchisees don’t survive, invites opportunism. Always, the franchisor gets his profits as long as the franchisee is standing, even if the franchisee never makes a dime in profits and eventually fails and loses everything.
Eventually! the truth will out and it would be to franchising’s advantage to try to clean up the mess themselves but self-regulation hardly ever works, does it? When push comes to shove and you can “shove” failing franchisees out the back door into obscurity and silence and make a few bucks for yourself, this is what happens.
You are a good man, Sean, and you have worked on the bright side of franchising but the dark side is intruding into the bright side of franchising and it conflicts you, I know.
Thanks again! for not blocking my computer and allowing me to comment.
Carol
Dale of Cuppy’s could probably get an injunction today to close a franchisee down for not paying royalties but who out there is going to be able to close Cuppy’s down for selling high risk franchises? I don’t think you can argue that this is not true.
I don’t disagree with that one bit. The fact that Cuppy’s Coffee has been allowed to get away with what certainly appears to me to be a classic ponzi scheme is mind boggling. No gov’t agency has stepped forward, still, and the so-called non-profit advocates show up with their hands out. To me, these are scams within outright scams and the taxpayers will end up footing the bill through the SBA.
The way that The UPS Store changed the rules of the game seems like a clearcut case of injustice for the MBE franchisees that converted. Quiznos horrific actions against the franchisees that stood up for their rights was pretty clearcut also.
The validity of these franchisees’ complaints against the Coffee Beanery is not so cut & dried, in my opinion. They wanted a coffee shop and they got one. They had the names and numbers of every cafe owner and could have learned a lot more if they had spent the necessary time with them, including the dates they opened, prior failures, etc. They seemingly made the major business decision of their lives – to open a coffee shop in Annapolis, MD – on an emotion and a whim. Speaking from what I see – and the questions I asked that have gone unanswered – it seems to me that they put ten times more effort into placing the blame elsewhere than they ever put into making their cafe work. THEY – and no one else – decided to open a cafe in Annapolis and no one put a gun to their head to switch to the cafe from the coffee shop. Their problem was that they didn’t put much thought into their initial decision, so it wasn’t hard to get them to change their minds.
Carol, I don’t disagree with what you say about the regulatory side of franchising being completely out of whack. I just disagree that this, in particular, is a clearcut case of injustice against a hapless franchise investor. At best, the blame here is shared: slick, even underhanded, franchise sales machine meets franchisees who want franchise success handed to them on a silver platter – or they’re gonna make sure there’ll be hell to pay.
One of the most surprising lessons I learned in the role of franchisor was the extraordinary lengths some people will go to to blame others for their own bad decisions. They will even make things worse for themselves as long as they don’t have to accept responsibility.
The Maryland AG Regulatory Office found substantive violations of the FTC Rule and the UFOC that were by nature misleading. There were other MATERIAL ommissions in the UFOC other than Kevin’s cone caper. If this case doesn’t indicate “fraudulent inducement to contract” or “fraudulent concealment of material facts” what is the purpose of regulation?
When Deborah acted on appearances and oral representations and the defective disclosure document, she was falsely induced to contract.
You fault her because she seemed to know almost immediately that things were not working out as promised. Deborah knew that CB had been in business for years and she thought that CB was selling a viable business opportunity. How could she have known that the Cafe Concept wasn’t EVER a success when her Item 20 painted an untrue picture of the CB? Deborah thought, like others who failed with the CB Cafe Concept, that she was buying a turn key operation and a proven plan.
I believe, of course, that it is public policy under the FTC Rule to never arbitrate fraudulent inducement to contract. Fraudulent inducement to contract is only produced when the FTC Rule or the UFOC/FDD is violated —-and then ONLY the State has the standing to sue or to negotiate a rescission, and there is no right of action under the state statutes for the injured franchisees, whether they accept or reject the rescission.
This is why it will be interesting to see whether or not the 6th Circuit Court of Appeals reversal will do anything good for Deborah if they again try to approach the Court with their original claims —if there is no settlement, that is!
Carol
When Deborah acted on appearances and oral representations and the defective disclosure document, she was falsely induced to contract.
Like I said, the blame is shared.
The Coffee Beanery didn’t talk her into starting a business. They didn’t fraudulently induce her into opening a retail coffee shop in MD. She had made that decision before she initiated contact with the Coffee Beanery. She wanted a little Cheers-meets-Starbucks place.
To me, that was 90% of the business failure right there – before she ever had the chance to be cone-winked.
This is a woman who ran a larger operation than all of Coffee Beanery – and claims she was well-versed in franchise law prior to buying – yet she accepted an obviously illegal earnings claim without question?
MD gave them the right to get out of their contract, which was fraudulently induced. The rest of their poor decisions were their own. I don’t doubt CB is liable for some fees and damages, but if they think they are going to get the whole enchilada they are kidding themselves.
Prospective franchisees need to realize that starting a business – any business – has risks. With a franchise you get established procedures, a cool logo, a staff of people who are paid to be nice to you and a neato decoder ring, but you are still starting a business. There’s no franchise success fairy, and the buck stops with your own self.
Sean: I accept your points. Franchisees, of course, CONTRIBUTE because they are LOOKING for solutions and SEEKING out opportunities and thus, they are THERE to be HAD. All prospective franchisees should get expert advice and counsel before they invest in a franchise, but the government and the franchisors know that they don’t do this — because of the appearance of government oversight and security presented by the voluminous red herring of the FDD. The FDD legitimizes the franchisor and gives the franchisor credibility and helps the franchisor to obscure the risk of the investment from the view of the new buyer.
Also, this contribution of the prospective franchisee — being there — doesn’t excuse the cooperation of the status quo to produce regulatory policy that helps the franchisors to obscure and hide the actual risk of the investment, in terms of possible survivability and profits, from the new buyers of the franchise.
I think Susan Kezios likened this to buying an automobile without being assured by the seller that it had a running motor and a mileage guarantee, or something like this. This kind of disclosure is not in keeping with the standards of the Commercial Code that governs business transactions in this country.
Franchisees get special treatment under the law and are premeditated sacrifices to provide resources for the franchisors to stimulate the economy. This policy is rationalized as serving the “greater good” and those who apologize or protect this ugly and immoral public policy use the crock of “due diligence” to preserve their innocence and deny their complicity with the scheme.
There is no franchise success fairy, as you say, but there is the bad witch of FTC regulation who helps to trick prospective franchise buyers into buying high risk franchises from franchisors who are legitimized and provided with credibility because of the FTC Rule and the FDD –that then protects the franchisors from fraud charges in arbitration and the courts.
Obviously, since starting a small business, franchised or otherwise, is extremely risky as evidenced by startup failure rate statistics, those franchiSORS, who are themselves small businesses in the startup phase, do have a better chance of longer survival because they don’t share in the failure of the physical units operated by their franchisees and do have somewhat better odds of startup survival as franchised chain operations, especially if they can churn and turn and pump and dump. I’m sure this fact doesn’t escape the regulators.
Again, could franchising survive if the unit performance statistics of the system were mandated by government to be disclosed by the sellers of franchises to the buyers of franchises before closing the sale?
If your answer is NO, what does this mean?
Carol