June 3, 2010
America’s Incredible Pizza Company claims that it has 100 franchise locations “scheduled to be built,” including 20 in Mexico. According to its website, “the sky is the limit for America’s Incredible Pizza Company!”
However, that sky grew a bit cloudier when the franchisor – with fewer than 20 locations open – was hit by a franchisee lawsuit.
Incredible Pizza Company Franchise Group, LLC is being sued by area developer FEC Holdings, LP, and its related franchisee entities for fraud, negligent misrepresentation, price discrimination,violation of relevant state consumer protection and business opportunity laws. breach of contract and the implied covenant of good faith and fair dealing.
The complaint filed by America’s Incredible Pizza Company franchise owner Lloyd Robert (Robin) French, III alleges “As a result of Defendants’ breaches of their affirmative legal duties to Plaintiffs, Plaintiffs have invested over $46 million in family entertainment centers that operate at a substantial loss.”
Jillian M. Suwanski of Baker Donelson Bearman Caldwell & Berkowitz PC has written an article on the case, and on the effect that the Quiznos franchisee settlement may (or may not) have on it and other franchise supply chain disputes. (See Quiznos settlement sparks franchisee focus on supply chain disputes).
Incredible Pizza requires its franchisees to purchase food and supplies from particular vendors and has entered into national and regional contracts with vendors for food, supplies and merchandise. The plaintiffs allege that Incredible Pizza “solicited and accepted payments by third-party vendors” which were “in fact, kickbacks which have not been paid for services rendered in connection with the sale or purchase of goods, wares, and/ or merchandise.” As a result of the “kickbacks,” the plaintiffs argue that they were “restricted in their choice of and access to independent vendors and consequently have paid prices for goods, wares, and/or merchandise, and other products that were higher than they would have paid in the absence of [Incredible Pizza]’s kickback scheme.”
The plaintiffs also allege that Incredible Pizza had agreed in the Area Development Agreement and disclosed in its Item 8 that “it would not accept any vendor rebates, commissions, and kickbacks as a result of franchisee purchases from required suppliers, other than a 10% markup on proprietary items and [a] Coca-Cola rebate.” The rebates were more extensive than the 10% markup and the Coca-Cola rebate, according to the FEC plaintiffs, resulting in a breach of the Area Development Agreement and rendering the Item 8 disclosures false.
The Incredible Pizza case was recently transferred from the Southern District of Texas to the Western District of Missouri, and Incredible Pizza filed an amended Answer in mid-March. It will be worth watching how the case progresses. Because of the settlement, the Quiznos cases did not set any formal legal precedent on which franchisees can rely. However, the franchisee friendly results of the Quiznos settlement should make franchisors cognizant of the risks of inflated prices and rebates and any perception that improper “kickbacks” are being received.
Vendor rebates, even when properly disclosed, are often perceived as “kick-backs” and are one of the most contentious areas of the franchisee – franchisor relationship.
Franchisees ask: why do franchisors believe that it’s acceptable to profit from the purchases of franchisees – and to intercept funds that could either be passed on to franchisees or deposited in the systemwide advertising fund?
Aren’t most franchise opportunities marketed with “group buying power” being a key benefit?
Isn’t the implication that the franchisor derives its income from the franchise fees and royalties and that the benefits of group buying are passed on to the franchise owners?
Poor Strategic (Greedy?) Decisions Can Stunt Growth.
The America’s Incredible Pizza Company website states the goal of donating millions of dollars to Christian missionary groups. Unfortunately, at the present time those funds will be needed for a legal battle with its own franchisee.
If this potentially incredible pizza franchise fails to reach its lofty goals and stalls out, the cause will likely be traceable to two (in our humble opinion) bad decisions: Selling pie-in-the-sky Area Development agreements and keeping vendor rebates.
Read the initial complaint (.pdf format): FEC Holdings, LP v. Incredible Pizza Franchise Group, LLC, 2009-cv-03289, S.D. Tex. (October 9, 2009)
Also read: Incredible Pizza” Franchisee Loses $46 Million (Blue Mau Mau)
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