Economy | News | Parents

The Columbian: Papa Murphys Sued By Franchisees

The Columbian | April 8, 2014 8:01 p.m. | Updated: April 9, 2014 10:26 a.m. | Vancouver, Washington

Contributed By:

Cami Joner/Columbian staff writer

Local company accused of failing to disclose accurate information

A group of Papa Murphys take-and-bake pizza franchise owners this month filed a lawsuit against the Vancouver-based parent company in Clark County Superior Court.

In the 11-count complaint, more than 20 franchisees accuse Papa Murphys International of failing to disclose accurate information about the financial performance of stores in Southern and Southeastern states and of collecting more than the contracted amount for advertising. The franchise owners, who together represent more than 60 of the companys 1,400 stores, also said they were not told that they would need to spend more on advertising to achieve sales comparable to stores in the Pacific Northwest and other parts of the country, said Howard Bundy, a Kirkland attorney representing the franchisees.

When contacted via email Tuesday, a spokeswoman for Papa Murphys International said the company has not seen the lawsuit.

At this point, the company has not received or seen a copy of the lawsuit filing and, therefore, cannot comment on its contents at this time, said the written statement issued by Jessica Liddell, a senior vice president with the Norwalk, Conn.-based public relations firm ICR.

Papa Murphys International, which is headquartered near Westfield Vancouver mall, last month filed an initial public stock offering with the U.S. Securities and Exchange Commission to raise up to $70 million. The company is still in its quiet periodand is limited as to the amount of information it or related parties can release to the public.

The number of shares to be offered and the price range for the proposed offering have not yet been determined. The company has applied for the ticker symbol FRSH on the NASDAQ, according to the filing.

Bundy called the lawsuits timing, less than one month after the companys SEC filing, coincidental. The plaintiffs are seeking estimated damages of $23 million about $1 million per plaintiff.

The whole purpose is to try to get these investors made whole. They invested their life savings, and in many cases their retirement funds, in something that has not worked out for them, Bundy said. Our goal is to make them whole.

At least nine of the plaintiffs are listed as Texas-based companies. Others are based in Missouri, Georgia, Florida, Louisiana and Tennessee, warm climates where the companys bake-at-home pizza concept can be a tougher sell.

The lawsuit claims Papa Murphys misrepresented and omitted material facts related to the financial performance of its franchises and required advertising contributions? in disclosure documents, a violation of federal law under the Federal Trade Commission. It also would violate Washingtons Franchise Investment Protection Act, Bundy said. Under the law, franchisors cannot make any untrue statement of fact about the franchise.

If you tell me something about the franchise, then you have to tell me the whole truth about whatever it is, Bundy said.

He said he first notified the company of the groups plan to sue in January, originally with a group representing 29 stores. The group has since grown to more than 20 plaintiffs representing more than 60 stores, Bundy said. He filed the lawsuit on April 4, and expects a formal response within the next 30 to 60 days.

Suit names individuals

The legal action names Papa Murphys International and various other entities, including majority owner Lee Equity LLC. Company officers and employees are also named in the suit, specifically those who were directly involved in the franchise sales process, including the creation and approval of the relevant franchise disclosure documents and agreements.

The lawsuit asserts that the officers and employees involved in Papa Murphys franchise sales and development knew the financial performance represented in the Franchise Disclosure Document did not typify those of the franchisees regions. It also claimed company officials knew they were mischaracterizing store performance in those regions.

Some of the Papa Murphys franchisees also alleged that although their agreement requires store owners to contribute a minimum of 5 percent of gross revenue to an advertising pool, franchisees were in reality required to pay sometimes up to twice as much to support additional marketing.

It varied anywhere from 5 to 6 percent all the way up to (between) 9 and 10 percent over time, Bundy said.

Losing money

Among the top pizza chains, Papa Murphys ranks in fifth place in both sales and number of outlets, according to its SEC filing. The companys filing also reveals that while Papa Murphys was adding new cost-competitive products and franchisees over the last three years, it was losing money. As it fought for market share in the highly competitive fast-food industry, Papa Murphys lost $2.6 million on total revenues of $80.5 million in 2013. It lost $2.1 million in 2012 and $606,000 in 2011.

The companys challenges include a lack of national recognition and unsettled relations with some franchisees, as outlined by a Sept. 20 letter to the company from franchisees representing 820 stores.

The letter, obtained by The Columbian, raised issues ranging from poor communication between management and franchisees to faltering profitability at franchise stores; a sense that Papa Murphys was shifting its focus from quality to low-cost offerings; and questions about the companys strategy to pull off a successful public offering. The tactics, the letter asserted, included buying some of its most profitable franchises for conversion into company-owned stores.

As of Dec. 30, the chain had 1,418 stores systemwide 1,349 franchise stores and 69 stores owned by the company. According to Papa Murphys SEC filing, Lee Equity Partners owns 65 percent of the outstanding capital stock in the company. The New York-based company purchased those shares from majority owner Charlesbank Capital Partners for an undisclosed price in 2010.

Cami Joner: 360-735-4532, http://twitter.com/camijoner; http://www.columbian.com/weblogs/strictly-business, or cami.joner@columbian.com.

Comments

blog comments powered by Disqus
Thanks to our Sponsors:
become a sponsor
Thanks to our Sponsors
become a sponsor