Tuesday, March 30, 2010

The Great Franchising Robbery

So, after months of agonizing about the decision you must make, the inevitable happens. With the advice of former franchisees, your attorney, your accountant, your spouse, and close friends, you end your relationship with Cold Stone. Hopefully, you have protected yourself, both from a legal and a financial standpoint. Remember, Cold Stone will come after you. Now, comes the process of rebuilding your life. It will seem like a daunting task. Looking for a job may be at the top of your list of priorities. Your financial condition may be a real concern. You may have relationship issues to deal with. Begin the work immediately! During this life changing process, you will undoubtedly have questions about why this has happened to you. We have all faced those questions. The answers to your questions can be found in blogs like mine, or by contacting people like Cecil Rolle, or talking to other ex-franchisees.
     So where do we all go from here? Can we take steps together to help each other to cope with what has happened to us? Are there legal steps that we could take either individually, or as a group that might force Cold Stone to pay for their actions? Your first step should be to contact Cecil Rolle, so that he can add your name to our database. I believe that only as a group do we have strength. Your second step is to gather information (e-mails, conversations with area developers or corporate employees, notes from Co-Op meetings, any written correspondence you may have had with Cold Stone, copies of your franchise agreement). This information will be invaluable in the future. Step three would be to educate yourself. Know what is out there.....read blogs (like this one), look for forums online, and talk to other franchisees, and ex-franchisees.

I found a very interesting blog by Carol Cross that many of you might find interesting, called The Great Franchising Robbery. This may give you some insight as to the problems with franchising, and how the deck is stacked against the franchisee. Enjoy!

     With the specter of the global economy and multi-national corporations, who would operate within the global economy, it became necessary for American multi-national corporations to outsource many good American jobs to remain competitive in the global economy. Our manufacturing base has diminished over the years as well, and this has produced a problem for government as to "Where are Americans going to work to realize their American Dream." Where are the jobs of the future?" Franchising has given the government job numbers to report to the American People and franchising has grown disproportionately in our economy because of all of the recessions we have had in the past thirty years.

     Thirty years ago the franchisors and the special interests who surround franchising, to include the federal and state governments, determined that franchising could grow jobs and financial activity in the economy, especially during recessions, when those with the financial resources to invest in themselves, and who had lost their jobs and income, would invest in franchises to restore their income and security. These investments and the redistribution of the savings/assets of franchisees would provide the cheap "venture" capital and the cheap labor to encourage those with successful businesses to franchise these businesses and grow jobs within the slowing economy.
     McDonald's, the great American success story, was, and is, the inspiration for franchisors to franchise their businesses to grow a chain that will make them millionaires within a few years if their "concept" catches on and the American people fall in love with THEIR concept.
     It is the Franchisors who are the ENTREPRENEURS and the franchisees are merely the resources of the franchisors used to grow the franchisors' chain operations. Of course, all franchisors are delighted if ALL of their "founding" franchisees are successful and make it, at least, to a "breakeven" status. But, realistically, there are always a certain percentage of "founding" franchisees that will fail and lose their entire investments. The only reliable research available from academics indicate that all startup small businesses, whether independent or franchised, fail at a rate of 50% at sometime within the first five years and only 29% are still standing at ten years.
     Apparently, in spite of and because of this grim reality, the Federal Government regulated franchising and took the business model out from under the purview of the States in the late 70's because they wanted to grow franchising and in order to grow franchising, they had to protect the franchisors from the certain percentage of franchisees who would fail and who would believe that they were fraudulently induced to contract because of misrepresentations made in the sales process as to the success and profits they would enjoy when they bought the franchise in good faith.
     The failure of "founding" franchisees, however, is not failure for the franchisors if the tangible and intangible assets of the failed founding franchisees can be retained within the system to continue to serve the franchisor. The franchisor has no capital investment in the hard assets of the franchisee's business operation and doesn't fail if these failed units can be CHURNED in fire sales to second-generation franchisees that, perhaps, can bring the business to breakeven status because they buy the business for just pennies on the dollar of the original investor, the founding franchisee.
     Unfortunately, "Churning" has become a management tool for some exploitive and dishonest franchisors whose franchises DO NOT produce profits for the majority of the franchisees and whose founding franchisees fail at a rate that, if known and disclosed, would prevent them from selling their franchises to new prospects.
     Unfortunately, The FTC Rule of the Federal Trade Commission that regulates franchisors appears to, in practive, permit franchisors to obscure the failure rate of their founding franchisees in the sales process and to sell their franchises to the public without making any representations at all concerning success or profits in the written disclosure document, the FDD, or the written franchise agreement. Franchisees are tricked by the appearance of government regulation to believe that there is some oversight of franchisors by the government and that government wouldn't permit the franchisors to sell franchises with high failure rates of founding franchisees and low profitability experience to innocent prospects who invest their life savings in these "pigs" and "dogs" that are eligible, often, for 90% guaranteed loans through the Small Business Administration (SBA).
     Many franchise experts have indicated that there is a fatal flaw in the FTC Franchise Rule that misleads that portion of the “American Public” who invests in franchises. The fatal flaw being that franchisors, themselves, are not mandated to disclose the unit historical financial performance statistics of their systems to new buyers or to investors in the franchisors' commercial paper.
     Apparently, the fatal flaw in the FTC Rule continues to be ignored by the regulators and by the Congress because they feel they can't change the law to make the franchisors disclose unit performance statistics because if the REAL RISK were disclosed to prospective buyers of franchises, this in itself would slow the economy. The Artifice of Item 20 of the Franchise Disclosure Document, whereon prospective franchisees are supposed to do their due diligence with current and ex-franchisees, actually acts to immunize the franchisors from fraudulent inducement/fraudulent concealment in the forming of the contract, and all of their inducements outside of the franchise disclosure document and the written franchise agreement are now moot and not actionable.
       So we have a Catch 22 that has resulted in great pain and suffering for thousands and thousands of Americans who have been unknowingly sucked into buying unprofitable franchises that often fail or that premeditatedly indenture them in long-term one-sided contracts from which there is no reasonable exit.
     The Great Franchising Robbery of franchisees continues and franchising continues to grow in our economy. Because the franchisors know that they are protected from claims of fraud and because they can sell their franchises without making any claims of success or profit in the written documents, franchisors have been encouraged to commit intentional torts and frauds against franchisees to themselves survive --that are NOW going to come to the attention of the courts in great numbers by way of class and mass actions. The government subsidy of the old and the mature franchisors and the startup franchisors will be exposed and there will be some kind of change.
     The Robbery will not stop until there is TRUTH in DISCLOSURE OF THE RISK in buying a New Franchise from a new franchisor or from an established and mature franchisor.


  1. Churning and turning of units by way of third party straws appears to be a practice that is not looked at by either the regulators or the courts. Read the article "Buying a Franchise. Look out for the Franchisors Use of Third Party Straws" in a Google Search under "Franchise Fraud and Third Party Churning."

    Much of the third-party churning is not discernible to new buyers of franchises because failed franchisees continue to pay on their startup debt to avoid personal bankruptcy.

    The business model of franchising, when unfairly regulated in the sales process, appears to permit franchisors to lie, cheat, and steal with impunity under the law!

  2. The thing that folks like Ed and Cecil never even talk about, having blown out early on in the Coldstone arena, is the fact that not only is the business garbage, but the equipment all fails and breaks long before the business is out of debt. It's a whole piece of the picture that nobody even talks about and I know it's not just our store, because every other franchisee I talk to has the same problem. By the way, nice job on the summer 2010 promotion corp!!! Way to stick us with another loser ad campaign. Anybody for leftover peach ice cream pie??? It's shamefull how pathetic corp is on every level. Churn this!!!!!

  3. I agree that I have not talked much about the shoddy equipment the franchisees were forced to buy (with a kickback to Cold Stone Creamery, Inc., of course!). All of the equipment we were forced to buy was not high use restaurant quality! Often our refrigeration compressors failed, or evaporator coils froze over, causing any water build up in the freezer to blow onto the ice cream, resulting in a huge loss of product. Or the register system failed during the Friday night rush. Of course, you could not reach anyone to help you in a timely manner, even though you were paying a premium price for technical support! The ghia was a nightmare waiting to happen!

  4. Obviously, the business model of franchising and the unilateral contract invites exploitation of the franchisees who are considered "expendable" because their assets, when possible, continue to serve the franchisor.

    Remember! Because of the FTC Rule that governs the sale of franchises to the public, there has been no case law made that implies that franchisors have any duty to be competent. The qualifications to be a franchisor were set very LOW by the government in order to encourage startup small businesses. Churning, apparently, has been what has made franchising so durable in our economy.

    But it is hard to understand how a franchisor could justify forcing "shoddy equipment" on their franchisees because their primary interest is the gross sales of the franchisee's business from which they realize their profits. Greed or incompetence?

    No. 08-15335
    Non-Argument Calendar
    D. C. Docket No. 07-00303-CV-3-RH/WCS
    an Arizona corporation,
    a Florida limited liability company,
    a Florida limited liability company,
    a Florida limited liability company,
    CECIL D. ROLLE, individually,
    JACQUETTE ROLLE, individually,
    Appeal from the United States District Court
    for the Northern District of Florida
    (June 3, 2009)
    Before CARNES, MARCUS and ANDERSON, Circuit Judges.
    Cecil Rolle and Jacquatte Rolle, doing business as Lenora Foods LLC,1 are
    former franchisees of Cold Stone Creamery. The Rolles took out a promissory
    note to fund the cost of their franchise. Cold Stone holds the rights to collect on
    that promissory note. After the Rolles failed to make the payments due on the
    note, Cold Stone sued to collect the amount owed. The Rolles filed several
    counterclaims. The district court granted Cold Stone summary judgment on the
    liability on the note and also granted summary judgment against all of the Rolles’
    counterclaims. A jury trial was held to determine damages, and the jury returned a
    verdict for $800,000. The Rolles contend that the district court erred in: (1)
    granting summary judgment to Cold Stone on the Rolles’ counterclaims based on
    the Florida Franchise Act and the Florida Deceptive and Unfair Trade Practices
    Act (FDUTPA); (2) denying their motion to amend their counterclaim; (3)
    1 We will refer to the defendants collectively as “the Rolles” unless context requires
    submitting an improper jury instruction; and (4) denying their motion for a directed
    The Rolles first contend that the district court erred in granting summary
    judgment to Cold Stone on two of the Rolles’ counterclaims. We review de novo
    the district court’s grant of summary judgment on those counterclaims. Houston v.
    Williams, 547 F.3d 1357, 1361 (11th Cir. 2008).

  6. A.
    The first counterclaim alleges that Cold Stone violated the Florida Francise
    Act. The Rolles contend that Cold Stone violated the FFA by misrepresenting the
    franchise’s “prospects or chances for success.” Fla. Stat. § 817.416(2)(a). That
    contention fails because the Rolles did not submit evidence creating a genuine
    issue of material fact that they relied on any alleged misrepresentations made by
    Cold Stone. Although the Rolles argue that they do not need to show reliance, that
    argument is contrary to Florida law. See Travelodge Int’l Inc. v. E. Inns, Inc., 382
    So. 2d 789, 791 (Fla. 1st DCA 1980) (holding that recovery under the FFA
    requires proof of intentional misrepresentations by the franchisor that “were relied
    on by the franchisee to his determinant”). On the record in this case, we agree with
    the district court that the Rolles cannot establish the requisite detrimental reliance
    necessary to recover under the FFA. Cold Stone’s franchise agreement included a
    detailed disclaimer and explanation regarding the risks of owning and operating a
    franchise and encouraged franchisees to conduct an independent investigation of
    their prospects for success. The franchise agreement did not promise that the
    Rolles would profit. The evidence shows beyond dispute that the Rolles
    understood the agreement and that they also conducted an independent
    investigation of their prospect for success. The district court properly granted
    summary judgment to Cold Stone on this counterclaim.
    The district court also granted summary judgment for Cold Stone on the
    Rolles’ counterclaim under the FDUTPA. The FDUTPA provides that “unfair
    methods of competition, unconscionable acts or practices, and unfair or deceptive
    acts or practices in the conduct of any trade or commerce are hereby declared
    unlawful.” Fla. Stat. § 501.204(1). This claim is somewhat different from the
    Franchise Act claim because the FDUTPA does not require a plaintiff to prove
    actual reliance on the alleged conduct. See State, Office of the Att’y Gen. v.
    Commerce Comm. Leasing, LLC, 946 So. 2d 1253, 1258 (Fla. 1st DCA 2007).
    But the plaintiff must prove that “the alleged practice was likely to deceive a
    consumer acting reasonably in the same circumstances.” Id. The alleged conduct
    at issue does not meet that standard.
    Viewing the evidence in the light most favorable to the Rolles, two other
    franchisees that appeared to be acting as agents of Cold Stone made statements to
    the Rolles about their prospects for success in operating a Cold Stone Creamery
    store. Those statements must be viewed in light of the circumstances as a whole,
    however. Some time after the alleged misrepresentations were made, the Rolles
    were given and reviewed Cold Stone’s franchise agreement. That agreement
    clearly states that the Cold Stone franchisees did not have the authority to make
    representations on Cold Stone’s behalf about profit margins. The agreement also
    provides a detailed discussion of financial information, including the average gross
    revenues from Cold Stone franchises, but notes that “[a]ctual results vary from unit
    to unit, and we cannot estimate the results of any particular Franchise.” It further
    warns that “[i]f you rely upon the [provided] figures, you must accept the risk of
    not doing as well.” As we have noted, the agreement also encourages potential
    franchisees to “conduct an independent investigation of the cost and expenses you
    will incur in operating a Cold Stone Creamery,” which the Rolles did. Under these
    circumstances, it is not likely that a consumer acting reasonably would have been
    deceived by the alleged statements made by the two Cold Stone franchisees.

  7. 5
    Next, the Rolles contend that the district court erred in denying their motion
    for leave to amend their pleadings to add a antitrust counterclaim. We review the
    district court’s denial of that motion for abuse of discretion. See Green Leaf
    Nursery v. E.I. DuPont De Nemours and Co., 341 F.3d 1292, 1300 (11th Cir. 2003).
    Because the Rolles filed their motion six weeks after the scheduling order’s
    deadline for amending pleadings, they were required to show “good cause” for their
    delay. See Fed. R. Civ. P 16(b); Oravec v. Sunny Isles Luxury Ventures, L.C., 527
    F.3d 1218, 1231–32 (11th Cir. 2008). Although the Rolles argue that their delay
    was caused by Cold Stone’s alleged misconduct during discovery, they admit that
    they had a basis to allege their antitrust claim before the discovery squabbles began.
    We are therefore convinced that the district court did not abuse its discretion in
    finding that the Rolle’s excuse did not amount to good cause for their delay. We
    affirm the district court’s denial of the Rolles’ motion to amend their pleadings.
    The Rolles also contend that the district court erred in its jury instruction
    regarding the offset due on the promissory note based on the collateral recovered
    from the Rolles’ franchises. The district court has “wide discretion as to the style
    and wording employed in its [jury] instruction.” McCormick v. Aderholt, 293 F.3d
    1254, 1260 (11th Cir. 200) (citation omitted). “We will only reverse the lower
    court because of an erroneous instruction if we are left with a substantial and
    ineradicable doubt as to whether the jury was properly guided in its deliberations.”
    Id. (internal quotation marks and citation omitted). Here the district court instructed
    the jury to reduce the amount due on the promissory note based on the reasonable
    market value of the collateral that Cold Stone recovered. The Rolles argue that
    because Cold Stone did not provide them with notice of the sale of the collateral at
    issue, there is a rebuttable presumption that the collateral seized satisfies the full
    value of the debt owed, and that the district court should have instructed the jury
    about that presumption. We disagree.
    The presumption is rebuttable, and the district court properly found that it
    was rebutted by proof that the note covered more than just the collateral at issue;
    that the Rolles had removed a significant amount of equipment from one of the
    stores before it could be recovered by Cold Stone; and that the equipment had
    depreciated in value over time. The district court was not required to leave the
    determination regarding the presumption up to the jury when the evidence in this
    case was so overwhelming. The district court instructed the jury to determine the
    reasonable value of the collateral that was recovered by Cold Stone and to offset the
    amount due on the promissory note by that amount. That instruction was correct.
    We are not “left with a substantial and ineradicable doubt” that the jury was
    misguided. Id.
    The Rolles’ motion for a directed verdict fails for a similar reason. They
    contend that Cold Stone disposed of the collateral in a commerically unreasonable
    manner, and for that reason the collateral should be presumed equal to the total
    amount of the debt owed. That presumption, however, is also rebuttable. See
    Weiner v. Am. Petrofina Mktg. Inc. 482 So. 2d 1362, 1365 (Fla. 1986). Because
    Cold Stone proved that the “fair market value of the collateral was less than the
    debt,” it was entitled “to recover a deficiency judgment in an amount equal to the
    total debt minus the fair market value of the collateral as ultimately determined.”
    Id. The district court properly denied the Rolles’ motion for a directed verdict.

  8. I know that the court ruled on behalf of Cold Stone.....Cecil has not made a secret of the rulings against him. But you failed to mention the complete text of what the judge said in his ruling, which was basically that had Cecil had a basis for bringing suit against Cold Stone, just not under the motions of the current counter suit. Also, the ruling against Cecil just confirms my contention that the franchise laws do nothing to protect the franchisee from unfair practises of the franchisor and its agents! And due diligence is impossible, when the information needed to comply with due diligence is lacking, or the information given by the franchisor is highly suspect as being accurate!

  9. Yes! Ed! There is no doubt that franchise law is stacked in favor of the franchise systems. Thirty years of case law that supports the goal of the FTC Franchise Rule to support the franchise systems and those "lucky" franchisees who survive in the systems can't be overcome. Those who fail must be discredited and silenced to protect the systems.

    Unfortunately, the qualifications to be a franchisor and to sell franchises under the FTC Franchise Rule and the State FDD's have been set very low and franchisors need provide no proof that they are selling anything of value to prospective franchisees.

    The courts appear to rule that it doesn't matter whether or not a franchise has any value or not for the buyers as long as the contract itself spells out that no success or profits have been promised by the franchisor to the franchisee in the written contract.

    Hopefully, CNBC will not just fold up their tent and go away and will stand behind their coverage of Cold Stone's treatment of their franchisees.

    This is the first time in many years that BIG media has taken a close look at franchising but the reporter hasn't made his name in writing about general business matters. His bio indicates he writes primarily about the Sports World and business, etc..

    When all three branches of government cooperate to promote the sale of franchises without full disclosure of the risk and ignore the flaw in the FTC Rule that enables churning, encroachment, exploitation, etc.. of good faith franchisees, we need some big media entity like CNBC to dare to tell the truth.

    But, will any big media entity take on the status quo and will any reporter be allowed to tell truth that would slow the sale of franchises?