THE FRANCHISE FRAUD
In the book the Franchise Fraud, a book the Morris family wishes it had read before buying a franchise, the author said that franchisees should not expect to find justice in the courts. Simply put, the scams were too slick for courts and law enforcement to understand. The author, Robert Purvin, should know what he is talking about he is a lawyer who represented franchisees and he does.
THE FALSE PROMISE OF A FRANCHISE
Let's face it, what attracts people to a franchise is not to have the high cost of getting started in a business, which includes the time it takes to learn the business, and franchising is supposed to reduce the risk of failure. Look at the motto you constantly see from franchises: "You are in business for yourself but you are not by yourself."
It is bad enough that franchisors in general sell this lie by building up misleading government statistics and cleverly hiding the awful truth of failure. But the really bad franchisors actually want you to fail.
THE MORRIS STORY
The Morrises' sad tale of woe began in 1995 when Richard W. Morris (RWM) and his wife Claudine (CAM) went to a "business opportunity" show in Phoenix, Arizona. There the went to many booths, among them Sign-A-Rama (SAR). The salesman said that there were really three companies at the booth: 3M, Minuteman Press and SAR. Certainly 3M sounded respectable. (The FTC didn't think this misrepresentation was respectable. Read the FTC v. Minuteman/Sign-A-Rama order by the U.S. District Court in New York. But that wasn't written until 1998, even though the lawsuit had been pending for years and years. You can read this at www.franchisevictims.com)
SAR courted the Morrises, and eventually sold them a franchise that opened In Phoenix on March 1, 1996. The Morrises formed an LLC named Great Signs of Arizona, LLC (GS) under which to operate the business, but elected not to do so and did business only under their personal names using the trade name of Sign-A-Rama.
LOST ABOUT $5,000 PER MONTH
The Morrises operated the business for about five months. They lost money every month. The amount varied from month to month, but it always seem they lost about $5,000 per month. This was true even though they were doing exactly what the franchisor said they should do. Rather than wait until they were broke, they decided to sell the franchise and cut their losses. SAR found a buyer, and the new owner took over March 1, 1997. Little did the Morrises know that this was part of the business plan of SAR.
THREATS AT REGIONAL MEETING
Not long after opening the business, the Morrises went to a Regional Meeting of SAR franchisees. In retrospect it was a curious meeting because all the franchisees in attendance were at a general meeting when the president of the company, Ray Titus, threatened all franchisees not to get into a legal battle with SAR. He bragged to the audience of franchisees that SAR will spend $300,000 if they have to win, but win they will and you had best not tangle with them. The exact words used by Titus: "Don't mess with us."
What a curious thing to say when everyone was supposed to be happy with their franchise and making money. Titus the Younger (Titus the elder, is Roy Titus, his father, whose boots he apparently licks quite well.) Went into quite a bit of detail explaining that once in a while somebody has a franchise that is not successful and needs to sell it. (Hmm, there were, mostly new franchisees and he is telling us of failure.) Yes, said the Younger, but you don't just want to close the doors and leave. You have too much money invested, and you probably will have to pay the lease on the store even if it is not open. Above all else, though, don't think about going to court against SAR. **
So, what to do? Well, sell it of course, said the younger Titus, and, SAR being the gracious folks they are, will even help you do so. That part is true. The re-sale program is an integral part of their scam. The franchisees in attendance were told this was rare. But it isn't rare. Titus the Younger lied. They charge a hefty fee every time they have a re-sale. Of course, that was not on the minds of anyone there. At least, not anyone the Morrises met.
Later the Morrises learned from some of these attendees that they were in dire financial straights, their stores had been for sale for a long time, and they did not know how long they could hold on. In fact, the Morrises learned several of the franchise owners they visited before buying had lied to them about the business because they wanted to sell their stores and stop losing money.
Finally, the Morrises got out of the losing franchise and the "closing" of the sale took place February 11, 1997, at the store. The closing was rushed. In fact, the closing had been postponed twice by SAR. When they finally did show up, they were an hour late for the appointment. In other words, the Morrises think SAR set up the closing to induce rushing, presented many papers that were signed, and due to the time constraints none were read by either the new buyers or the Morrises. (One of those "I'll never do that again" stories.)
The new owner took over March 1, 1997. Poor sucker. He and his wife only lasted about a year, too. He lost money every month and had to sell. He said that he lost about $5,000 per month. He sold to the third owner and the third owner took over in July of 1998. Normally, one would think this would be the end of the story. The Morrises stopped losing money, the store was gone, and life goes on. But that is not the end of the story.
So how did the Morrises learn about the scam? Back on March 20, 1997, Mario Altiery (a Regional Vice President (RVP) of Sign-A-Rama) came to RWM's office and threatened RWM that if RWM did not pay the royalties allegedly due of about $2,000 that Sign-A-Rama would move the store and leave RWM & CAM with the balance of the five year lease where the store was located, because, Altiery said, "You are still on the lease." That would be close to $100,000.
Until this happened, RWM had believed the SAR line of that the business was good but the Morrises simply could not run this business. When the threat happened, RWM though this is not the way an ethical business conducts operations and began an investigation of Sign-A-Rama.
That decision to investigate SAR triggered a vicious attack by SAR, as you shall see. They did not want the scam known, and certainly did not want their past and present franchisees to know what the Morrises were about to learn.
FTC RULES MAKE INVESTIGATION IMPOSSIBLE
The FTC requires franchisors to disclose the names of former owners. But only for the preceding 12 months. Even then, it is very difficult to locate these former franchisees. It is virtually impossible for a potential franchisee to make an accurate assessment of the viability of the franchise business through this examination.
In addition, and listen to this, the franchisors do not consider a store to have failed unless it actually closes its doors. So, if the store remains open for five years and during that time has had five owners, four of whom went broke and the fifth is close to it, that store is not counted as a failure. To the Morrises, and probably to most people, that was really at least an 80% failure rate. The FTC permits this type of misrepresentation, and that is why the public sees franchisors give such outrageous numbers as 97% success rate. Keep this in mind as you read about the Morris investigation into SAR because they found an incredible number of sold and resold and resold and sold again franchises.
MORRIS INVESTIGATION OF SAR
The results of the investigation were incredible. In short, in the Morrises' opinion, it revealed a pattern by Sign-A-Rama of selling a franchise, virtually designing the operation so the franchisee would go broke, convince the poor franchisee it was his own fault, and then offer to save the day by re-selling the franchise. In this process many innocent franchise purchasers lost their entire life savings, their retirement money, and even their homes that they mortgaged to try to keep their SAR business going. The tragic stories of bankruptcy and broken homes because the marital partners could not stand the strain created by the franchise, and one person even thinks it killed his father. That story was in the newspapers.
Not only did SAR drive their franchisees to the brink of financial disaster, and beyond, then convince (or try to convince) them it was their own fault, they protected themselves with a release. As part of the sale arranged by SAR to save the drowning franchisee, SAR would require that the franchisee sign a release so if the then broke franchisee sued SAR for fraud, SAR could hold up the release and call "Kings X." A pretty slick plan and one that has worked for its principals for 30 years.
SAR LEARNS OF INVESTIGATION
When Sign-A-Rama learned of the Morris investigation, they went ballistic and sent their general manager from Florida and their attorney from New York to Arizona for a 30 minute meeting with RWM and CAM. This was on April 22, 1997.
The lawyer was supposedly from a law firm, that had an independent name. But, guess what, the Morrises are informed that the offices of the law firm are in the same building as Minuteman Press (that is the original operation started by Titus the Elder), the firm has as its only clients companies owned by the Titus family, and that the attorneys and staff are on the payroll of Minuteman Press (MMP) and even get W-2 forms for their pay from MMP. The address part and the clients part is apparently true, at least that is what one of their partners (Cory Covert) told the Morrises, but he would not answer the question about the W-2s.
Back to the meeting of April 22. At the meeting they requested a letter outlining what Morris wanted to settle the dispute, and RWM wrote a letter April 23, 1997. This letter, written at the request of SAR, became crucial in a lawsuit SAR was to file three weeks later.
In the April 23 letter to the SAR attorney, the Morrises said they had lost a lot of money and how much they wanted to be paid because of SAR's fraud. But the part that is historically important is that it also said the Morrises thought SAR was not negotiating in good faith and that if SAR did not respond by 5:00 pm, that the Morrises would file a lawsuit against SAR. This one sentence became the basis of law suit.
About a week later, the first part of May, a Phoenix attorney called RWM and asked how it was RWM thought he could sue SAR after signing a release. This was first RWM had heard of the release. (Keep in mind that many papers were signed at the closing, and everyone thought all the papers had to do with the sale of Morris to the new buyer there was no mention of a release.)
RWM asked CAM. She said she did not see a release and would never have signed one. RWM asked the notary, and she said she did not see a release on February 11. RWM asked the buyers if they saw a release on February 11, and they said they did not see one. The attorney then faxed a copy of the release to RWM, and the Morrises took no further action. The Morrises just figured they had been outsmarted by SAR again.
SAR SUES MORRIS NOT TO SUE SAR
Then, on May 15, 1997, out of the blue, Sign-A-Rama sued RWM, CAM, and GS for:
(1) Breach of contract in that they signed a release and covenant not to sue signed allegedly signed in February of 1997, and then "threatened to sue" Sign-A-Rama (the alleged breach was the letter threatening to suethe release barred a lawsuit, it did not bar sword rattling or threatening to sue);
(2) A declaration by the court that the release said what it said (not that it was valid, simply that it said what it said and they quoted part of the release);
(3) Tortious interference with contract in that RWM, CAM, and GS interfered with contractual relationships between Sign-A-Rama and franchisees; and
(4) Injunction to prevent RWM, CAM and GS from suing Sign-A-Rama.
Sign-A-Rama also obtained a Temporary Restraining Order (TRO) preventing RWM, CAM and GS from suing Sign-A-Rama. A court hearing was scheduled for a preliminary injunction. At the hearing the TRO was terminated and the Preliminary Injunction denied on the technical grounds that Sign-A-Rama was not authorized to do business in Arizona. Imagine that, all this ruckus by SAR and the company was not even authorized to do business in Arizona where they claimed it had a regional office. The regional office, by the way, turned out to be the month-to-month apartment of the regional vice-president.
If you want to read SAR's complaint, you may view it and download it from www.franchisevictims.com. In fact, that website has other cases against SAR and other franchises that are of interest, like FTC v. Minuteman Press and SAR (they have the same principals and operate in the same fashion).
Here was a first. A release is supposed to be used when you get sued by somebody who signed it saying they would not sue you. Then you hold up the release and the case is dismissed. Here the Morrises did not sue SAR, but SAR sued the Morrises because SAR was afraid the Morrises might sue them. Just think what it would be like if a traffic cop could write you a ticket because he thought you might drive too fast later.
COMPULSORY COUNTERCLAIM AGAINST SAR
In Arizona, as in most states, when sued, the defendant must file an answer to the complaint and must also file a counterclaim with all claims against the plaintiff or waive them. The idea is to prevent a multiplicity of suits and settle all differences between the parties in one suit, and let the parties go on with life. Therefore, RWM, CAM and GS answered the complaint and denied the allegations. In addition, RWM and CAM, but not GS, counterclaimed against Sign-A-Rama for:
(1) Fraud and Deceit in inducing them to buy the franchise;
(2) Negligent Misrepresentation in that if Sign-A-Rama did not intentionally defraud, then they were negligent by making the misrepresentations they made to induce RWM and CAM to buy the franchise;
(3) Declaratory relief to declare the release and covenant not to sue invalid because it was obtained by fraud and for other reasons; and
(4) Intentional interference with contractual relationship between RWM, CAM and their landlord and the buyer of their franchise for an event that occurred March 20, 1997.
Again, you may view and download this from www.franchisevictims.com. As this report is written, that lawsuit is now on Petition for Review to the Arizona Supreme Court. Here is the story of how it got there.
THE COURT SYSTEM
Robert Purvin, in his book The Franchise Fraud, says that most people have "an idyllic picture of hope and faith, and of confidence in the American system of justice. ...Unfortunately, in my more than 20 years in the practice of law, I have developed a new perspective on Blind Justice. I still see justice as blind. But the blindfolds no longer represent the lack of bias. Rather the presence of it."
He goes on to explain: "I don't mean to indict our judicial system, but the following maxim certainly is a fated truth: Money buys better justice. Our judges appreciate the thorough presentation that a well-heeled law firm can bring to a dispute. Judges tend to be short with attorneys who are less prepared even thought eh attorney may have lacked sufficient economic resources to properly build his case." Purvin reports that it is not uncommon for a franchisor to spend $300,000 in a $30,000 dispute. Interesting, $300,000. The same figure used by Titus the Younger at the regional meeting mentioned above. As it turned out, SAR probably spend $100,000 suing the Morrises, who defended themselves without a lawyer for most of the proceedings.
THE SAR LAWSUIT RESULTS
SAR Complaint Count 1. RWM, CAM, and GS brought a Motion for Summary Judgment in the trial court to say that the release was obtained by fraud and that, in any event, "threatening to sue" (the April 23 letter) was not a breach of the agreement because threats were not covered. The Trial Court found that all defendants breached the agreement by (i) RWM sending the April 23, 1997, letter to the attorney for Sign-A-Rama and (ii) by filing the counterclaim. Filing the counterclaim. The counterclaim was filed after SAR sued, yet the court found that filing the counterclaim in June was a breach of the contract committed in May when SAR filed the suit. Preposterous, you say?
What seems preposterous here gets worse. The purpose of a lawsuit, any lawsuit, is to get money. Technically called damages. When you are damaged by somebody else, that somebody else should pay for the damage they caused. If it is a breach of contract case, you must say there was a contract, the other party breached it, you were damaged, and by how much. If that is all true, then the court awards you money equal to the damages you suffered. That seems fair.
You can see from this that for a breach of contract you must allege and prove damages. After all, the courts don't want to be listening to people just because they are angry. If they just want to spout off, they can call Dr. Laura. The courts want to dispose of contract disputes where there is money involved, and the Superior Court of Arizona does not want cases unless the amount in controversy is over $5,000.00. Below that, you go to the Justice Court.
Well, Sign-A-Rama sued in Superior Court. Then, in open court, admitted it had no damages, but wanted attorneys fees for bringing the lawsuit. That is what we ended up arguing about because SAR spend over $70,000 to sue Morris and did not have any damages. They sued, as is obvious to almost anyone, for a different reason. Just as Titus the Younger threatened, "Don't mess with us, we will win in court because we will outspend you." We shall get back to the attorneys fees below, but now we must get on with the story here.
To the Morrises, and to most people who are not judges, it is difficult to see how the filing of a counterclaim in June can be the subject of a breach of contract in a case filed in May. But the trial judge assigned to the case had no difficulty with that issue. In fact, as we shall see, the Court of Appeals had no difficulty with the issue either. The appeals court ruled that the letter of April 23 was not a breach of contract, but the filing of the counterclaim was a breach. Go figure.
When one reads the letter, it would seem that if there is a breach, only RWM was in breach by sending the letter, CAM and GS did not send the letter.
Definitely GS did not breach by counterclaiming, because it did not counterclaim. Only RWM and CAM did. This detail did not stop either the trial court or the Court of Appeal, no sir. They found that all threeRWM, CA, and GSbreached the release by filing the counterclaim even though GS didn't file it. One can only wonder what these judges could have been smoking. This ends, for now the story of Count 1.
SAR Complaint Count 2. SAR brought a Motion for Summary Judgment, and the trial court ruled that the contract said what it said. Nobody can disagree with that. SAR did quote the contract. The interesting point is that the trial court went beyond what SAR asked in the complaint and said the release was valid and it barred the Morrises from suing SAR. SAR did not ask to the court to make such a ruling in its complaint; SAR simply asked the court to rule that they quoted it correctly. This is hard to believe, but you can read it for yourself when you read the SAR complaint. But, hey, when you're a judge you are god and you are not really bound by those silly rules that others are. That ended any controversy dealing with Count 2.
SAR Complaint Count 3. RWM, CAM and GS brought a Motion for Summary Judgment, Sign-A-Rama admitted in open court it had no evidence that the Morrises or GS had interfered with any contract, properly or improperly, and the court ruled in favor of Morris granting Morris judgment against SAR.
Complaint Count 4. This Count has never been ruled on. SAR abandoned it, so the court ignored it.
THE TRIAL COURT JUDGMENT
The trial court couldn't very well award any damages to SAR when SAR admitted it had none. But, get this, SAR want over $70,000 in attorneys fees and costs for brining the action. The trial court thought that was high, but did award SAR about $30,000 in fees and costs and to appeal the Morrises had to put up $33,000 cash.
The Morrises appealed to the Arizona Court of Appeal, holding onto an idyllic picture of hope and faith, and of confidence in the American system of justice, as Purvin would put it.
The Court of Appeals ruled that the only breach of the release by the Morrises and GS was when they filed the counterclaim. GS did not file a counterclaim. Shows you how much attention the judges paid to what happened in the case.
Keep in mind that the rules of court require that if you have a dispute with somebody and that somebody sues you, you must file a counterclaim or you waive it. This is called a "compulsory counterclaim." Well, SAR sued the Morrises, so they filed the compulsory counterclaim. SAR sued in May claiming the April 23 letter threatening to sue was the breach of the release. The trial court agreed. The Court of Appeal said the April 23 letter was not a breach, but the counterclaim filed in June was a sufficient basis for the SAR lawsuit filed in May. Now the Morrises, still holding onto an idyllic picture of hope and faith, and of confidence in the American system of justice, have asked the Supreme Court of Arizona to look at the case. Only time will tell if their continued holding onto this belief will be justified.
The court granted summary judgment to Sign-A-Rama on all four counts of the counterclaim saying the release was valid. This included Count 4.
Count 4 dealt with an event that happened six weeks after the release was allegedly signed and was not covered by the release. This was the threat by the SAR RVP to move the franchise and leave the Morrises stuck with the rest of a five year lease. There is no question that events after signing a release are not governed by the release. This makes sense to all but you guessed it judges. So, the compulsory counterclaim was killed.
During the Morris investigation of SAR, many people gave information only upon the condition Morris would not tell SAR. That made sense, because as the investigation developed more and more information about SAR it became more and more apparent to the Morrises that they were a scam operation.
The investigation was also finding SAR was very vindictive as to anyone who crossed them, just as threatened by Titus the Younger at the Regional Meeting. This vindictiveness, the Morrises saw was just one of their many ways to intimidate the franchisees who were going broke and could not possibly fight them. SAR bragged at their own regional meetings how they spent money like water to fight anyone who would dare counter them, and poof, SAR faced no opposition.
Starting in July 1997, RWM tried to get Sign-A-Rama to agree to a Protective Order before information would be released. This was to protect those people who had produced information upon the condition the Morrises would not tell SAR. In a lawsuit, though, you tell what you know. So to protect these innocent people Morris wanted an order saying that SAR could not harrass them in any way. SAR, of course, refused.
RWM then brought a motion for Protective Order. A week later, Sign-A-Rama brought a motion to compel discovery. The court heard both motions on the same day. It first granted Morrises' Protective Order motion and then granted the motion to compel. It further ruled Sign-A-Rama was the prevailing party, and sanctioned RWM for failing to give discovery earlier. When the court granted the PO, Morris immediately gave them what they wanted: the names of the folks who snitched on SAR. (By the way, once SAR got this information, it wanted to dismiss the suit against Morris. Gee, I wonder why they brought this suit in the first place?)
Robert Purvin was right. You will not find justice in the courts. Average people simply cannot afford the legal help needed to fight franchisors who will spend hundreds of thousands of dollars to crush opposition. There is one, though, and that is for several franchisees to band together to spread the cost among the members of the group. Another is to be sure to write a Rip-Off Report and file it with www.rip-offreport.com.