Why Franchise Legislation? The Need for Statutory Duty of Franchisor Competency

posted Sep 14, 2013, 7:47 PM by Cold Stone Facts

[CSF- Cold Stone Creamery could not even get pass the first level competency - SEE CS BUSINESS MODEL]

Posted Sun, 2013-09-08 11:43 by Peter Lagarias

One would think that franchisors should owe a duty of competency to their franchisees. After all, franchises are sold on the very idea that their franchise system excels in its particular business. In Franchising for Dummies, none other than Dave Thomas, the late founder of Wendy's, wrote that a franchise business includes not only "a nationally known brand name" but also "a proven and successful way of doing business." For this reason franchises are often touted to prospective franchisees as no experience needed. Many franchisees acquire their franchise businesses with not only no industry experience but also with having never previously operated a business.

One can search a long and fruitless time for court decisions recognizing a duty of competency from franchisors to franchisees. Yet a duty of competency through due care is deeply engrained in our legal system. Architects, doctors, engineers, and lawyers are uniformly required by courts to exercise due care in their actions with their clients. Thus, for example, doctors must exercise "that reasonable degree of skill, knowledge and care ordinarily possessed and exercised by members of the medical profession . . ." Mann v. Cracchiolo, 38 Cal.3d 18, 36, 210 Cal.Rptr. 762 (1985). When we drive our cars all of us are required under the law to exercise due care.

Why not a duty of due care in franchising?

In other words, the franchise system, its required procedures and regulations, and its mandated products and equipment, should be required by law to be provided competently with due care by the franchisor.  

Most courts in franchise cases currently examine franchisor duties only through the prism of contract law. Namely courts usually ask only what duties are expressly set forth in the franchise agreement. The problem for franchisees with such an emphasis on contract law, however, is that franchisors draft the contracts. And franchisors expressly promise their franchisees little, if anything, in the one-sided agreements the franchisors draft. A franchisee will be reduced to asserting an implied breach of the covenant of good faith, which in many states can be defeated by express contract terms and disclaimers. Thus the emphasis on express contract provisions resulted in one court ruling:

"In its last breach of contract claim, [the franchisee] JRT alleges that [the franchisor] TCBY did not give JRT a reasonable chance to succeed. There is no such express term in the contract documents, nor have we found any precedent for an inherent contract right to a reasonable opportunity to succeed. The district court correctly found as a matter of law that there was no such obligation, either express or inherent, in the contract." – JRT, Inc. v. TCBY Systems, Inc., 52 F.3d 734, 738 (9th Cir. 1995).

The very core of what is being sold in a franchise and provisions of franchise agreements support a franchisor duty of competency. Most franchise agreements expressly trumpet the franchisor's experience and competency in preambles and recitals. Today's franchise agreements also universally require franchisees to follow the franchisor's business procedures and manuals. These provisions while not couched as express franchisor obligations surely imply franchisor competence. Is the franchisee supposed to assume that the franchise system and operations do not work? Is the franchisee required to follow manual provisions and specifications that are harmful, counterproductive or illegal? Is the franchisor responsible for nothing that it requires of its franchisees?

One vivid example of a need for franchisor competency by statute involves franchisor manuals and procedures. Through their manuals franchisors dictate what franchisees must do under threat of breach and termination. But what if the specifications are for incompetent services and products that the franchisee must sell? What if the required actions are illegal? Shouldn't the franchisor be liable to the franchisee for such required actions under a duty of competency?

Read the rest - HERE.

Kahala Acquired in Auction by Serruya Family

posted Aug 24, 2013, 6:48 PM by Cold Stone Facts

[CSF]- Kahala\Cold Stone sold at auction:

""The Markham, Ont.-based Serruya family bought a controlling interest in Cold Stone’s parent company in an auction."

TORONTO – The Serruya family today announced that they have acquired a controlling interest in Kahala Corp., owner of Cold Stone Creamery and many other franchised brands. The transaction was completed on Monday.

The Serruya family brings substantial experience in franchising to Kahala. They are planning for growth of Kahala brands in both international and North American markets.

Commenting on the transaction, Michael Serruya, the new chairman and Co-CEO of Kahala, stated, “We are extremely pleased to become major shareholders of this outstanding company. We look forward to using the experience and skillsets that we’ve obtained over the last 26 years in this industry, as owners and management of numerous quick service restaurant brands, to work closely with the entire Kahala team to enhance and strengthen the franchise business model.”

Kevin Blackwell, the founder and now Co-CEO of Kahala shared that he has known Michael Serruya for over 20 years and holds him to the highest regard not only professionally but personally. “It is without doubt that Michael’s expertise and experience in the franchising world will have a positive impact on Kahala and its future, and I know that Michael will be a tremendous asset to Kahala. The financial strength of the company has been significantly enhanced as a result of this transaction. It positions Kahala as an industry leader and will allow us to grow our portfolio by acquiring or partnering with other world class brands.”

Canada's Globe and Mail reported a few hours ago: "The Markham, Ont.-based Serruya family bought a controlling interest in Cold Stone’s parent company in an auction. The deal includes a number of fast-food chains, but Cold Stone is the company’s most lucrative asset, owing to its highly visible partnership with the coffee and doughnut chain, with which it shares space at more than 250 stores across Canada and the United States."

Former Cold Stone franchisee Cecil Rolle, who has been engaged in litigation with the franchisor said, “I’m hoping the acquisition of Kahala Corp by the Serruya Family is a watershed moment for Cold Stone Creamery franchisee profitability and the harmonization of the franchisor to franchisee relationship, which has been as contentious as they come. The Serruya Family will have to prove to me they are serious about the concerns of the franchisees and their families. Rolle has been an advocate for current franchisees, assisting them in profitability and other issues.

Franchise attorney Robert Zarco of Zarco Einhorn Salkowski & Brito said, “I hope and expect this will be a much needed and refreshing change that will serve as a catalyst to improve the existing strained relationship between the Kahala franchisees and the franchisor.”  Zarco and his firm in Miami have been involved in litigation over the years in separate cases against Kahala, including Cold Stone, Blimpie and other brands.

Arizona based Kahala Corp. is one of North America’s leading franchisors. It is the owner and franchisor of 13 quick service restaurant brands including; Cold Stone Creamery; Blimpie; Taco Time; Samurai Sam’s Teriyaki Grill; The Great Steak & Potato Company; NrGize Lifestyle Café; Surf City Squeeze; Johnnie’s New York Pizzeria; Frullati Café & Bakery; Rollerz; Ranch One; and America’s Taco Shop.

Save for Cold Stone Creamery, ... all of the chains saw growth in 2012

posted Aug 11, 2013, 5:46 PM by Cold Stone Facts   [ updated Aug 11, 2013, 5:48 PM ]

Save for Cold Stone Creamery, all of the chains in the Beverage-Snack segment of the Second 100 report registered domestic sales and new unit growth for 2012,
with many crediting popular food platforms for driving further expansion. Caribou Coffee led all Second 100 Beverage-Snack chains in store-count growth in the Latest Year, as its system size increased 8.4 percent, nearly doubling its 4.3-percent growth rate in the Preceding Year. However, that number does not account for the ...

[CSF-  pathetic!]

Cold Stone Franchisees File Lawsuit Against Company

posted Aug 3, 2013, 7:37 AM by Cold Stone Facts

A group of Cold Stone Creamery franchisees filed a lawsuit against the company this week over a dispute relating to the company’s Flexible Marketing Plan (FMP) and gift-card breakage policy.

The law firm of Zarco Einhorn Salkowski & Brito, P.A. filed the lawsuit in Miami-Dade County, Florida, on behalf of the National Association of Cold Stone Creamery Franchisees (NIACCF).

The suit was filed against Cold Stone for Declaratory Action claiming that the two sides were in dispute over several issues. At the center of the dispute is whether or not Cold Stone is obligated to disclose certain FMP information.

The information the NIACCF wishes for Cold Stone to disclose includes: what percentage or amount of vendor rebates are earmarked for or used by the FMP and what those funds are used for; what percentage of the aggregate purchase price of the vendor’s products are retained for use by the FMP and what those funds are used for; what percentage or amount of the vendor rebates that are earmarked for FMP use are utilized for marketing purposes; and whether prices of the products purchased from the vendors by the franchisees are increased in order for the vendor to offset its rebate payment to Cold Stone.

The NIACCF also wishes to know whether Cold Stone is required to provide a detailed accounting of the amount of gift-card breakage that exists, whether any revenue generated from the sale of gift cards that remains unredeemed has been retained or utilized by Cold Stone for any purpose, and whether the interest earned from gift-card breakage is required to be used by Cold Stone to offset the costs of the third-party program incurred by the franchisees.

Rudy Puig, Cold Stone franchisee and board member and former president for the NIACCF, says the association felt the lawsuit was necessary because the company has not provided the information after two years of discussions.

“Our plan is to find the truth and to better the system, better our stores, and therefore our profitability,” Puig says.

Puig says there are about 200 members in the NIACCF, which was founded in 2010. “All of the franchisees know what’s happened, and the ones who aren’t a part of the association have been notified,” he says. “And for a lot of them, it’s drummed up interest in joining.”

Because the issue is pertaining to a legal matter, Cold Stone, which is owned by Scottsdale, Arizona–based Kahala Corporation, declined to comment for this story.

By Sam Oches

The ABCs of FDDs: Item 16. Restrictions on What Franchisees May Sell

posted May 2, 2013, 4:52 PM by Cold Stone Facts

This is the eighth in a series of articles for prospective franchisees that discuss the components of a franchise disclosure document. Unlike almost all other articles about what you will learn in a franchise disclosure document, however, this series will focus on what you may not learn. This focus is intended to help you both refine and expand your due diligence efforts.

Item 16 is pretty simple and direct: a franchisor must disclose any franchisor-imposed restrictions or conditions on the goods or services that the franchisee may sell or that limit access to customers. Apparently, all participants in the rulemaking process for the new Franchise Rule back in the mid-2000s agreed that Item 16 is uncomplicated as none raised any concerns or submitted any comments. There's a pretty short list of franchise disclosure document (FDD) items that received such a collective yawn: the only other item getting the "no comment" treatment was Item 14 (Patents, copyrights and proprietary information).

A prospective franchisee would be making a huge mistake, however, by letting its ho-hum history and veneer mask the importance of Item 16 disclosures.

Cold Stone Set to Expand into the Philippines and Bangladesh

posted Apr 29, 2013, 9:39 AM by Cold Stone Facts

[CSF:  After fleecing the enough from the US franchisees Cold Stone now moves to the international markets]

SCOTTSDALE, Ariz., April 11, 2013 /PRNewswire/ -- The Cold Stone Creamery(R) brand continues to develop an expanding international footprint with upcoming locations in the Philippines and Bangladesh. The brand is teaming up with a Master Partner in each market to expand America's most innovative ice cream concept throughout Asia. Kahala(TM), the parent company of Cold Stone Creamery, has signed 10-year Master Franchise Agreements with Olive Tree Foods Ltd. in Bangladesh, and with Arizona Ice Cream Corporation in the Philippines; both of which look to bring the Ultimate Ice Cream Experience(TM)into their respective markets.

Cold Stone Unveils Saudi Arabia, Pakistan Expansion Plans

posted Apr 29, 2013, 9:35 AM by Cold Stone Facts   [ updated Apr 29, 2013, 9:40 AM ]

[CSF:  After fleecing the enough from the US franchisees Cold Stone now moves to the international markets]

Scottsdale, AZ – The Cold Stone Creamery brand continues to pave its way internationally with its newest locations in Saudi Arabia and Pakistan.

Kahala, the parent company of Cold Stone Creamery, has signed 10-year Master Franchise Agreements with Venus Pakistan Private Ltd. and has expanded their existing partnership with The Apparel Group with a goal of opening upwards of 15 more stores in each market over the next 5 years.

The Apparel Group (TAG), well familiar with Cold Stone Creamery, successfully has opened and is operating 38 Cold Stone Creamery locations in the GCC (Gulf Cooperation Council).

Known for its strong foothold as a global fashion and lifestyle retail conglomerate, Tag has been working with Cold Stone to establish a presence in Saudi Arabia.

The first store there opened in the Hyatt Mall in Riyadh City in the latter part of 2012 with continued development plans for 2013 and beyond.

In Pakistan, Venus Pakistan Private Ltd. will look to open their first Cold Stone Creamery store by the third quarter of this year.

Venus Pakistan Private Ltd. was established in 1986 by Mr. Asad Jan Hameed and has vast experience developing a variety of products and services in the food industry.

Both Cold Stone Creamery and Venus Pakistan Private Ltd. look forward to working together to bring super premium ice cream to locations throughout Pakistan.

Cold Stone: Small businesses run up big debt

posted Apr 29, 2013, 9:27 AM by Cold Stone Facts

Do you like the food at Quiznos and Cold Stone Creamery? Your taxes have been subsidizing franchises of those companies whether you eat there or not.

A recent study found that operators of those restaurants received millions of dollars in loans through the federal Small Business Administration program, but were among those most likely to leave taxpayers holding the bag by defaulting. Overall, bad SBA loans have cost taxpayers $1.3 billion since 2000, demonstrating the dangers of government picking winners and losers.

The SBA has been around for 60 years, and was launched with a noble intent: helping people to start a business. But as with many government programs, it can have the effect of encouraging riskier behavior by guaranteeing that the feds will step in if needed. Just as banks were encouraged by government mandates and guarantees to loosen standards for mortgages in the early 2000s, leading to the 2008 economic meltdown, observers say lenders were sometimes too quick to grant SBA-backed business loans.

“There were an awful lot of people who got small-business loans during this period 2004 to 2007 that shouldn’t have gotten them,” Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneur Center in Dayton, told the Dayton Daily News, which did the study. “They were a bad loan when they were made. They just got worse.”

Read the rest - here.

Puig: My Cold Stone Stores Are Profitable

posted Apr 17, 2013, 9:36 AM by Cold Stone Facts

Puig: My Cold Stone Stores Are Profitable

Posted Tue, 2012-08-21 18:15 by Janet Sparks

MIAMI – Attorney Robert Zarco and his client Rodolfo F. Puig, franchisee of Cold Stone Creamery, have now declared that Puig’s three stores are profitable, despite having numerous tax liens, judgments and litigation from creditors against him.In a CNBC documentary, Puig defended Cold Stone from distraught former franchisees, who accused the franchisor of having a flawed business model that was the source of their failed businesses.

Rudy Puig was selected by Robert Zarco and approved by Cold Stone Creamery to represent profitable and happy franchisees when being interviewed by CNBC. Puig was chosen because he was president of the independent franchisee association.

On Sunday, Robert Zarco responded to Blue MauMau after several failed attempts had been made prior to the article being posted last Thursday. “After speaking with my client Rudy Puig, I can tell you all three of his Cold Stone stores are profitable, cash flowing positively. He is not making large profits, only small, and those profits are decreasing,” the attorney stated. 

Zarco also demanded a correction by Blue MauMau in the article it posted last week, stating it does not pertain to his client Rudy Puig. He said that the person of Bank of America v Rodolfo Puig is another Miamian that has the same name as his client. “That should be printed as a correction. It shows a foreclosure on a home and that is not my client,” Zarco stated. He said he had requested from Puig a written explanation of the court and county documents filed against him, but his client had not yet responded.

Late last night Blue MauMau received an email from Puig, through attorney Zarco, clarifying a few items in our report. Puig stated, “At the time of the CNBC taping, all my stores were profitable. At this time, my stores are still profitable; but by a very small margin. Sales are down the past few years, and Cold Stone continues to raise our prices on products we have to purchase from them.”

Puig’s second point was to correct the three documents posted in the article that were not related to him. “The Monterey Masters Association, VIS  Holdings and the Bank of America judgments have nothing to do with me.  I have never been associated with any of those properties or transactions,” Puig declared.  He then asked, “How can Blue MauMau post these as me?”

Puig said the Green Tree judgment was never a foreclosure and has been resolved. And lastly he stated, “The situation with the landlord [South Kendall] was years of me requesting a reduced rent. The center was of 30% empty for many years and I felt they were not doing enough to fill it. Since the lease is with Cold Stone, it made it difficult to come to any sort of agreement.  Although I did not receive what I wanted, the situation did improve.”

Puig said the small tax liens against his company Nutty Buddies have been resolved and explained that there were several accounting errors in the allocation of funds between his different businesses.

Blue MauMau had conducted a search through Miami-Dade County Clerk and the above mentioned documents were listed for Rodolfo Puig, along with Rudy Puig’s tax liens, judgments and his landlord litigation. All documents listed on the article were sent to Robert Zarco on Tuesday prior to publishing the article. In speaking with Zarco on Sunday, he said he had forwarded the documents to Puig, and Puig had not responded. 

Blue MauMau also attempted to verify the Bank of America issue through attorneys representing the creditors. They explained that they were not allowed to make any verifications pertaining to legal documents. Based on our research, Blue MauMau is now satisfied that the person listed in the Bank of America foreclosure is not Rudy Puig, owner of Cold Stone stores.

Puig also explained in last night’s email to Robert Zarco, “I am not here to defend Cold Stone or Kahala. My name is still on the Demand Letter that was entered to the courts against Cold Stone.  We, the franchisees, are simply asking for transparency on all issues, but especially on the products we purchase for our stores. We believe that the prices we are paying are too high and a seven to ten percent reduction in cost would really help ALL the stores.”

Clarification of other matters

Robert Zarco said he wants to again make it clear that he formed the National Independent Association of Cold Stone Creamery Franchisees, completely unconnected with and unrelated to Kahala Corp., the holding company of Cold Stone. “It was done independently. The only thing that Kahala ever did was pay the $50,000 legal fee to my law firm, which was the responsibility of NIACCF. But Kahala was reimbursed those fees*,” he asserted.

Zarco explained the reason they went on stage to be interviewed by CNBC was to protect the brand because the franchisees were getting hurt from customers who did not want to visit the stores after the original broadcast. “Cold Stone may have benefited from it, but our objective was for the benefit of the franchisees,” he again explained.

Blue MauMau also received an email late last Friday night from former franchisee Frank Caperino, one of the franchisee association leaders sued by Cold Stone to compel arbitration. In a return phone call on Saturday morning he clarified that he, not Rudy Puig, was president of the National Independent Franchisee Association as of January 1, 2012. When he sold his stores in July, Ken Mogle took over the presidency. He said, “I was a fifteen-year franchisee with eight Cold Stone Creamery stores and was on Cold Stone’s National Advisory Board for nine years. Rudy and I were on the NAB for four years together.”

In a posted comment to the article Caperino wrote: “I only signed a release of liability because Kahala forces you to sign a release every time you renew a franchise agreement or try to transfer a franchise agreement. If I wanted to sell my Cold Stone franchise, I was forced to sign this release of liability.” Caperino also clarified that Ed Reesman, one of the cited association leaders, is still in the Cold Stone system and owns one franchise in South Dakota.

*Editor’s clarification: With attorney Robert Zarco’s approval, reporter Janet Sparks recorded a telephone interview with Mr. Zarco and incorporated his statement into her article, which was: “Kahala was reimbursed those fees [$50,000].” However, Zarco again contacted Blue MauMau to ask for further clarification in the article. He emailed that he meant to say: “Kahala NEVER got reimbursed the $50,000. Kahala paid the $50,000 on behalf of The NIACCF for what the NIACCF would have had to pay Zarco for representing the NIACCF's interests against CNBC.” Robert Zarco also stresses that he never represented Kahala. He explains: “Rudy Puig was suggested by me to appear on CNBC because he was president and frequent spokesperson of the NIACCF. The NIACCF Board agreed and approved for Rudy to be the spokesperson for the NIACCF and NOT for Kahala. Only Dan Beem was speaking on behalf of Kahala!”

Cold Stone Goes after Franchisee Assn Leaders

posted Apr 17, 2013, 9:30 AM by Cold Stone Facts

Cold Stone Goes after Franchisee Assn Leaders

Posted Wed, 2012-08-08 21:38 by Janet Sparks

Cold Stone Creamery

PHOENIX – After Cold Stone Creamery recognized a new independent franchisee association, the franchisor turned its back on those very franchisees who dared ask for too much—more transparency.*  As a result, the association filed a lawsuit against the franchise company. That’s when Cold Stone went after the association heads rather than bother with the association.

A Florida district court ruled that a lawsuit brought against Cold Stone by the independent franchisee association should be put on hold until the disputes were individually arbitrated.

Cold Stone had argued that the franchisees represented by the National Independent Association of Cold Stone Creamery Franchisees had all signed franchise contracts agreeing that any and all disputes must be resolved through individual arbitration in Arizona, not Florida. The court also agreed in its May 21 ruling that the NIACCF did not have “association” standing in the Florida lawsuit.

First on Cold Stone’s list of franchisees to arbitrate were three leaders of the independent group, Rudy Puig, president, Ed Reesman, chair of purchasing committee, and Frank Caperino, treasurer. 

Prior to NIACCF filing its complaint, association directors had been vocal in the press about their frustrations with Cold Stone and holding company Kahala, in trying to establish a dialogue to improve franchisee profitability. They pushed hard to get the franchisor to be more transparent. Association leaders asked why their main product, sweet cream, was so expensive, how their advertising dollars were being spent, and how much money Cold Stone was collecting on unredeemed gift cards. 

The franchisor refused to cooperate and instead went straight for the franchisee association leaders. Although rare, this heavy-handed approach has been tried before. It happened some years ago in Cohn v Taco Bell and more recently when Quiznos unsuccessfully pursued the leaders of a Quiznos independent franchisee association.

Robert Zarco of Zarco Einhorn Salkowski & Brito filed the NIACCF complaint for declaratory relief on January 23, 2012. Although the independent group did not identify the franchisees or state specifically how many store owners they represented, the association asserted it had standing to file the legal action. Zarco stated in the complaint, “At least one of its members (indeed, all of its members) will suffer injury in fact by the real and immediate threatened harm from Cold Stone’s actions in failing to provide information pertaining to . . . certain  monies that Cold Stone Creamery, Inc. has received from third parties. . . designated to be utilized for the benefit of Cold Stone franchisees.”

A good-bye sign hung by a Cold Stone franchisee as store closes for good.

The complaint did not ask for any monetary compensation for the association members.

One month after the lawsuit was filed, Cold Stone filed its motion to compel arbitration in Arizona against NIACCF’s president Rudy Puig and purchasing committee chair Ed Reesman. On May 15, 2012 the franchisor filed another against Frank Caperino, NIACCF’s treasurer. Court dockets show the latter was dismissed on July 20 for lack of proper jurisdiction. The case is now closed.

Boston attorney Arthur Pressman of Nixon Peabody, representing Cold Stone with law firm Snell & Wilmer, verified that Caperino sold his stores and is no longer in the franchise system. “He gave Cold Stone a full release prior to leaving,” he explained.

Since he was out of his office, Pressman could not confirm or deny that Reesman had also left the chain. He said Puig’s company Nutty Buddies’ arbitration is pending. After oral argument the court will rule.

Attorney Zarco stated that Reesman settled another dispute with Cold Stone and left the system. He said Puig is still in arbitration in Arizona. Zarco said the judge had not yet decided on the case.

“The fact that Cold Stone is putting pressure on and attacking the leadership of the association, in our view is inappropriate, especially if that is the only motive,” he stated. In closing Zarco declared, “We are going to pursue our claims against Cold Stone and aggressively defend their claims against us.”

1-10 of 54