Escolar Documentos
Profissional Documentos
Cultura Documentos
283
E-FILED
01-30-2015, 15:00
Clark County
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SECOND AMENDED
) COMPLAINT FOR VIOLATION OF
) WASHINGTON FRANCHISE INVESTMENT
married couple, Rob & Bud's Pizza, an Missouri
) PROTECTION ACT, FRAUD AND
Limited Liability Company, Robe1t J. Dickerson ) NEGLIGENT MISREPRESENTATION
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Trust UA dtd 2-18-98, Rob Dickerson, an
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individual, 4LM Enterprises, Inc., a Texas
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Corporation, Jana and Randell Liles, a married
) CLERK'S ACTION REQUIRED
couple, Ben and Kim Mayfield, a married couple: )
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Reece Alexander Overcash, m, an individual,
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Angelo S. Chantilis, Jr., an individual, Double AA )
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Partners, LLC., a Texas Limited Liability
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Company; IVhtch and Kristen Brink, a married
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couple; Brink Holdings Inc., a North Carolina
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Corporation; Angela Buchanan, an incli vi dual, Tim )
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Forester, an individual, Z-Axis, Inc., a North
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Carolina Corporation: Ffoather and Gary Nychyk, a)
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married couple, Bar-N Pizza, LLC, a Florida
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Limited Liability Company: John DeMattia, an
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individual, DeMattia, LLC, a Texas Limited
Texas Corporation, Douglas and Lesia Billing, a
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Kirkland, WA 98033-7357
425-822-7888
Exhibit B
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Craig Braun, an individual; David Mraz; an
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individual; J1M, LLC, a Florida Limited Liability )
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Company; Philip Wilson and Maria Ahn-Wilson, a
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married couple; Papas South, LLC, a South
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Carolina Limited Liability Company; Steven and
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Holly Mead, a married couple; Thomas Lance, an )
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individual; PMG Tampa, LLC, a Florida Limited
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Liability Company; Ilya and Chantal Rubin, a
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married couple; Pie in the Sky, LLC, a Florida
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Limited Liability Company; Joanna and Glenn
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Patcha, a married couple; Alchemy Foods, LLC, a )
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Florida Limited Liability Company; Ian Hasinoff )
and Susan Lorimer, a married couple; Eddrachillis )
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LLC, a Florida Limited Liability Company; Ann )
and Harvey Callegan, a married couple; Just For )
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Fun, LLC, an Alabama Limited Liability
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Company; Eugene and Joy Hill, a married couple; )
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Edward Conn, an individual; Edward Turnbull, an )
individual; Turnbull Restaurant Group LP, a Texas )
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Limited Partnership; Turnbull Restaurant Group, )
GP, a Texas General Partnership; Turnbull Conn; )
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LLC, a Texas Limited Liability Company; Loralie )
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and Trey Bennett, a married couple; Pizza
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Revolution of Fort Walton Beach, LLC, a Florida )
Limited Liability Company; Pizza Revolution of )
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Panama City, LLC, a Florida Limited Liability
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Company, Pizza Revolution at Tyndall, LLC, a
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Florida Limited Liability Company, Alice and
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Douglas Worthington, a married couple; Thomas )
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Stephenson, an individual; and Make Dough
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Enterprises, Inc., a Florida Corporation; Harry and )
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Terry Olson, a married couple, and Hot Pizza Inc. )
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a Tennessee Corporation
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 2
Plaintiffs,
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vs.
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Papa Murphys International LLC, a Delaware
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Limited Liability Company, Papa Murphys
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Company Stores, Inc., a Washington Corporation, )
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PMI Holdings, Inc., a Delaware Corporation, Papa
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Murphys Intermediate Inc., a Delaware
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Corporation, Papa Murphys Holdings, Inc., a
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Delaware Corporation, Lee Equity Partners, LLC., )
a New York Limited Liability Company, John D. )
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Barr, an individual, Ken Calwell, an individual,
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Thomas H. Lee, an individual, Yoo Jin Kim, an
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individual, Benjamin Hochberg, an individual,
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John D. Schafer, an individual, Achi Yaffe, an
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individual, Janet Pirus, an individual, Victoria
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Blackwell, an individual, Dan Harmon, an
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individual, Kevin King, an individual, Stephen
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Maeker, an individual, Steve Millard, an
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individual, Jim Perkins, an individual, Eric Brown, )
an individual, James Werling, an individual, Jeff )
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Hood, an individual, Mark Levis, an individual,
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Harold Kermen, an individual, Billy Rose, an
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individual, and Mike Norcup, an individual
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Defendants
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A.
Factual Overview
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1.
The Plaintiffs are current and former Papa Murphys franchisees who own or owned Papa
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Murphys stores in the southern United States. The Plaintiffs are individuals, married couples,
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families and high school friends who wanted to become small business owners. Some the
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Plaintiffs decided to purchase a franchise because they had been downsized in the great
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recession and were unable to find other employment. Some of the Plaintiffs decided to
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SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 3
purchase a franchise because they wanted to teach entrepreneurship to their children and pass
the business on to them. Some of the Plaintiffs decided to purchase a franchise to supplement
2.
The Defendants are corporations and individuals who systematically defrauded the plaintiffs
process in which Papa Murphys International and its employees presented itself as the expert
both in the franchise system and selecting successful franchisees. At each stage of the sales
process: qualification, disclosure and approval, the Defendants omitted key material facts
regarding the actual average sales, expenses and profit for new Papa Murphys stores in the
plaintiffs region.
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3.
What Papa Murphys International Knew-As early as 2002, Papa Murphys International
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knew that a stores age and location were crucial factors in its success and that new stores in
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the south and the south east would experience much lower sales, would have to spend
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significantly more on local store marketing to achieve to those sale s and that it would take
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several years for a new store in the south or southeast to achieve sales which were equal to the
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system average. This knowledge was confirmed by the comprehensive sales, expense and
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profit information Papa Murphys International collected on each of its franchised stores.
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Papa Murphys International did not share this information with the plaintiffs, all of whom
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were located in the south and the southeast. Had Papa Murphys International shared this
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information with the plaintiffs; they would not have purchases their stores.
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4.
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comprehensive financial information regarding their net worth and liquid assets to determine
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if they were qualified franchisees. Only those individuals who Papa Murphys
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franchises. What Papa Murphys International knew but did not tell the plaintiffs was that
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 4
given the low sales, high marketing costs and long operating period to reach average sales
typical of new stores in their region, the plaintiffs lacked the financial resources to operate
their franchise. Because they were under-capitalized from day one, the plaintiffs have been
forced to drain their personal savings and retirement accounts to feed a failing businesses that
they were trapped in. They would not have invested had Papa Murphys International
accurately informed them that based on their qualification report they were not financially
qualified to operate a Papa Murphys franchise. Papa Murphys International has profited
to stay open for the term of the franchise agreement, Papa Murphys International would
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collect the franchise fee and up to seven percent of the franchisees net sales including royalties
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and mandatory contributions to the national advertising fund. If a franchisee was forced by a
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lack of capital to leave the franchise system, Papa Murphys International could, as it did with
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Mr. and Mrs. Olson, resell the store to a new franchisee or allow another existing franchisee to
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5.
Disclosure Process- Papa Murphys International gave each of the plaintiffs a copy of the
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company publishes prior to issuing stocks or securities. Like a stock prospectus, the FDD is
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intended to provide full and accurate disclosure of material facts about the franchise system.
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Under Federal and state law, franchisors are encouraged, but not required, to provide material
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facts related to the historic financial performance of their franchisees. If the franchisor elects
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to make such disclosures, which are called financial performance representations, they must
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The plaintiffs who purchased their franchises prior to July of 2008 may have received a Uniform Franchise
Offering Circular rather than a Franchise Disclosure document. Regardless of the title of the document, they
contained the same disclosures and were regulated in the same manner. For the purpose of simplicity the
plaintiffs will use the term FDD to refer to either the Franchise Disclosure Document or the Uniform Franchise
Offering Circular.
be truthful, accurate and complete. In this case, Papa Murphys International elected to make
financial performance representations by disclosing the average sales for the franchise system
as whole, and for each of the high, medium and low tiers of stores. What Papa Murphys
International knew but did not share with the plaintiffs was that new stores in their region had
average sales which were well below the system average and that the majority of new stores in
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Papa Murphys Internationals material omissions in the FDD were compounded by its sales
teams wide spread (and unlawful) practice of making financial performance representations
outside of the FDD that supplemented the FDD disclosures with specific estimates as to what
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sales and profits the plaintiffs could expect for their stores. The plaintiffs believed these
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statements because they did not appear, on their face, to be inconsistent with the FDD and
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because the Papa Murphys International salesmen presented themselves as experts on the
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subject. What the Papa Murphys International salesmen knew but did not share with the
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plaintiffs was that their statements were either literally false, were based on average sales and
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profits for well-established stores outside the plaintiffs region or that despite their claimed
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franchises, it asked them to develop business plans, pro-formas or break even analyses. Papa
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Murphys International provided the templates for these plans. The Papa Murphys
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International sales staff told many of the plaintiffs that their business plans needed to be
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submitted to senior sales and franchise staff for their review. The plaintiffs developed
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business plans in which they estimated their average sales, expenses, break even and profits
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International either approved their plans without comment or told the plaintiffs that their
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estimates were too conservative and that they could expect to do much better than they had
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 6
estimated. What Papa Murphys International knew but did not tell the plaintiffs was that,
given the average sales and expenses for new stores in their region, their business plans were
wildly over-optimistic.
a. Averages Sales-The plaintiffs typically estimated that their average sales would be slightly
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below the system average and that they would grow by three to five percent annually. In
reality, new stores in the plaintiffs region had average sales that were almost 30% below
the system average and frequently sales decreased after the first year. Papa Murphys
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information provided by Papa Murphys International, that they would spend between six
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and eight percent on local store marketing to reach average or slightly below average sales.
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In reality, new stores in the plaintiffs region spent up to twenty percent of their net sales to
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reach sales which were much less than the system average. Papa Murphys International did
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c. Breakeven-The plaintiffs estimated that they would need average weekly sales of between
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$6,000 to $7,000 a week to reach break even. These estimates were slightly above the
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$5,300 in average weekly sales breakeven point touted by Papa Murphys International
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CE0, Ken Calwell in 2014. In reality, even in 2014, less than three percent of Papa
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Murphys franchises break even with average weekly sales below $6,000 and the majority
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of stores did not reach breakeven until they have average weekly sales of at least $8,000.
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debt service, amortization, reserves for capital expenditures, compensation of owners and
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return on investment.
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8.
Before they purchased the franchise, the plaintiffs attempted to independently investigate the
franchise by contacting existing Papa Murphys franchisees. Frequently, the Papa Murphys
International sales person would steer the Plaintiffs toward particular franchises by suggesting
they were the best sources. When the Plaintiffs did contact a dissatisfied franchisee and
confronted Papa Murphys International with what the unhappy franchisee had said, Papa
Murphys International would dismiss the complaints and claim that the unhappy franchisees
stores were under-performing because the franchisee was an absentee or bad operator.
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If Papa Murphys International had provided a complete, truthful and accurate FDD which
fully disclosed the disparities in sales based on the region and age of the stores and the
substantial investment in local marketing required to achieve average sales; the Plaintiffs
would not have purchased Papa Murphys franchises. If Papa Murphys International had
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truthfully informed the Plaintiffs that based on their financial information, they were not
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qualified to successfully operate a franchise; the Plaintiffs would not have purchased the
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franchise. If Papa Murphys International had truthfully informed the Plaintiffs that based on
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the actual sales and expenses of franchises in their region, their business plans overestimated
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sales and underestimated expenses; the Plaintiffs would not have purchased the franchises.
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10.
For all the plaintiffs, the decision to invest in a Papa Murphys franchise has been personally
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and financially devastating. They invested their savings and 401(k)s in their franchises.
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Many of the plaintiffs left successful careers to manage their Papa Murphys franchises and
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have not been able to reliably take any salary from the business in years. Several of the
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plaintiffs have been forced to sell their homes or let properties go into foreclosure. Some of
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the plaintiffs have seen their marriages fall apart due in part to the increased stress of owning a
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failing business. All of the plaintiffs have suffered physical and emotional stress from
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Conversely, since it defrauded the first plaintiff, Papa Murphys International has been sold
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twice to private equity firms. Each time the seller has walked away many millions of dollars
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richer. Papa Murphys International has now done an initial public offering making millions
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 8
of dollars for its officers, directors and principal owner (a private equity firm). Papa Murphys
International has continued collect franchises fees and royalties from each Plaintiff, even
while their stores continue to lose moneyin some cases over one thousand dollars per week
per store. It has touted its low Small Business Administration default rate while encouraging
franchisees to finance new stores through 401(k) rollovers rather than SBA loans. Papa
Murphys International continues to sell franchises using the same inaccurate and misleading
information which led the Plaintiffs to invest in their failed or failing franchises.
B.
Plaintiffs
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Parties
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The Barnetts- Plaintiffs Alan and Denise Barnett are the managing members of LMP
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Enterprises LLC and AD Pizza Enterprises, LLC and are also guarantors of their liabilities
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and obligations under the relevant franchise agreements. They were dedicated Papa
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Murphys customers and were excited when Papa Murphys International began selling stores
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in Texas. Plaintiff LMP Enterprises LLC is a Texas Limited Liability Company with its
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principal place of business in Fort Worth, Texas, which owned and operated a Papa Murphys
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franchise outlet at relevant times. Plaintiff AD Pizza Enterprises LLC is a Texas Limited
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Liability Company with its principal place of business in Fort Worth, Texas, which owned and
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The Billings- Plaintiffs Douglas and Lesia Billing are the President and Vice President,
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respectively, of DDB Enterprises, Inc. and are also guarantors of its liabilities and obligations
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under the relevant franchise agreements. Plaintiff DDB Enterprises, Inc. is a Texas
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corporation with its principal place of business in Wichita Falls, Texas, which owned and
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Robert Dickerson- Robert Dickerson is the managing member of Plaintiff Rob & Buds Pizza.
He and the Robert J. Dickerson Trust UA dtd 2-18-98 are guarantors of its liabilities and
obligations under the relevant franchise agreements. Plaintiff Rob & Buds Pizza LLC is a
Missouri Limited Liability Company with its principal place of business in Missouri, which
owned and operated 13 Papa Murphys franchises in Arkansas, Kansas and Missouri at
relevant times.
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The Liles Family- Plaintiffs Jana and Randell Liles and their daughter and son in law,
Kimberly and Ben Mayfield are officers of 4LM Enterprises, Inc. and guarantors of its
liabilities and obligations under the franchise agreement. The family established 4LM
Enterprises in the hopes of the realizing the American Dream of owning their own successful
and profitable business. They hoped owning a Papa Murphys franchise would provide a
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more stable income for Mr. and Mrs. Mayfield, who work as airline pilots and increase Mr.
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and Mrs. Liles retirement income. Plaintiff 4LM Enterprises, Inc. is a Texas Corporation
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with its principal place of business in Keller, Texas, which owned and operated a Papa
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The Overcash Group- Plaintiffs Reece Alexander Overcash, III, and Angelo S. Chantilis, Jr.
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are managing members of Double AA partners and guarantors of its liabilities and obligations
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under the franchise agreements. Mr. Overcash and Mr. Chantilis have been friends since high
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school. Plaintiff Double AA Partners LLC., is a Texas limited liability company with its
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principal place of business in Arlington, Texas, which owned and operated three Papa
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The Brinks- Plaintiffs Mitch and Kristen Brink are the officers of Brink Holdings, Inc. and are
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also guarantors of its liabilities and obligations under the relevant franchise agreements
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(hereinafter collectively the Brinks). The Brinks had been regular Papa Murphys customers
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in Illinois and they loved the pizza. They were hoping owning a Papa Murphys franchise
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would provide flexibility and increased income for the family as the children entered college
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SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 10
Plaintiff Brink Holdings, Inc. is a North Carolina Corporation, which owned and operated a
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The Forester-Buchanan Group- Plaintiffs Angela Buchanan and Tim Forester are the officers
of Z-Axis, Inc. and are also guarantors of its liabilities and obligations under the relevant
franchise agreements. They are high school friends who decided to invest in a franchise
together. Z-Axis, Inc. is a North Carolina Corporation, which owned and operated a Papa
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The Nychyks- Plaintiffs Heather and Gary Nychyk are managing members of Bar N Pizza,
LLC and are also guarantors of its liabilities and obligations under the relevant franchise
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agreements. Mr. and Mrs. Nychyk loved Papa Murphys pizza when they lived in the Dalles
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and wanted to introduce the product to Mr. Nychyks hometown of Fort Myers, Florida
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.Plaintiff Bar-N Pizza, LLC is a Florida Limited Liability Company, which owned and
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John DeMattia-Plaintiff John DeMattia is the managing member of DeMattia LLC and is also
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the guarantor of its liabilities and obligations under the relevant franchise agreements. Mr.
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DeMattia grew up in his mothers Italian restaurant and wanted to duplicate the experience at
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family owned pizza business of his own. Plaintiff Demattia, LLC is a Texas Limited Liability
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Company, which owned and operated a Papa Murphys franchise at relevant times.
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The Braun Group- Plaintiffs Steven Pyatt, Craig Braun, and David Mraz are managing
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members of J1M, LLC and are also guarantors of its liabilities and obligations under the
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relevant franchise agreements. They have been lifelong friends and wanted to invest in a
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business together. Plaintiff J1M, LLC is a Florida Limited Liability Company, which owned
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The Wilsons- Plaintiffs Philip Wilson and Maria Ahn-Wilson are its managing members of
Papas South LLC and are also guarantors of its liabilities and obligations under the relevant
franchise agreements. Plaintiff Papas South, LLC is a South Carolina Limited Liability
Company, which owned and operated four Papa Murphys franchises at relevant times.
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The Meads-Plaintiffs Steven and Holly Mead and Thomas Lance are managing members of
PMG Tampa, LLC and are also guarantors of its liabilities and obligations under the relevant
franchise agreements. Mr. and Mrs. Mead worked for decades in the food and beverage
industry and wanted to own their own business. Plaintiff PMG Tampa, LLC is a Florida
Limited Liability Company, which owned and operated a Papa Murphys franchise at relevant
times.
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The Northwinds Partners- The Northwinds Partners is a group of friends and neighbors who
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decided to invest in several Papa Murphys franchises. Northwinds Partners, LLC is a North
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Carolina Limited Liability Company, which owned and operated three Papa Murphys
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franchises in Florida at relevant times. Plaintiffs Ilya and Chantal Rubin acting on behalf of
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and through Pie in the Sky LLC, a North Carolina Limited Liability Company; Joanna and
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Glenn Patcha acting on behalf of and through Alchemy Foods, LLC, a North Carolina Limited
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Liability Company; and Ian Hasinoff and Susan Lorimier, acting on behalf of and through
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Eddrachillis LLC, a North Carolina Limited Liability Company; are its managing members
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and are also guarantors of its liabilities and obligations under the relevant franchise
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agreements.
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The Callegans- Plaintiffs Ann and Harvey Callegan are managing members of Just for Fun,
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LLC and are also guarantors of its liabilities and obligations under the relevant franchise
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agreements. They invested to in their Papa Murphys store to supplement their retirement
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income. Plaintiff Just for Fun, LLC is an Alabama Limited Liability Company, which owned
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The Hills-Plaintiffs Joy and Eugene Hill are residents of Texas, who owned and operated two
Papa Murphys franchises at relevant times. Mr. and Mrs. Hill and their two boys were Papa
Murphys regulars when they lived in Northern California and they wanted to bring the
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The Conn-Turbull Group- Edward Conn and Edward Turnbull are college friends and are
partners and managing members and are also guarantors of its liabilities and obligations of
several corporate entities under the relevant franchise agreements. Turnbull Restaurant Group,
LP, Turnbull Restaurant Group, GP, and Turbull Conn, LLC are, respectively, a Texas
Limited Partnership, General Partnership and Limited Liability Company, which owned and
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The Bennetts- Loralie and Trey Bennett are the managing members of several Plaintiff
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companies and are also guarantors of the companies liabilities and obligations under the
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relevant franchise agreements. They are high school sweethearts and serial entrepreneurs who
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invested in several Papa Murphys franchises to teach their high school aged sons how to run a
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business. Plaintiffs Pizza Revolution of Fort Walton Beach, LLC, Pizza Revolution of
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Panama City LLC, and Pizza Revolution at Tyndall, LLC, are Florida Limited Liability
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Companies, which each owned and operated three Papa Murphys franchises at relevant times.
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The Worthingtons- Alice and Douglas Worthington and Thomas Stephenson are officers of
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Make Dough Enterprises, Inc. and are also guarantors of its liabilities and obligations under
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the relevant franchise agreements. They are residents of Florida. Mr. and Mrs. Worthington
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and her brother, Mr. Stephenson, invested their retirement savings in a Papa Murphys
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franchise. Plaintiff Make Dough Enterprises, Inc. is a Florida Corporation, which owned and
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. The Olsons- Harry and Terry Olson are officers of Hot Pizza, Inc. and are also also
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guarantors of its liabilities and obligations under the relevant franchise agreements. Mr. and
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Mrs. Olson invested in a Papa Murphys franchise after Mr. Olson was downsized in the great
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SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 13
recession. Plaintiff Hot Pizza, Inc. is a Tennessee Corporation, which owned and operates a
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place of business in Vancouver, Washington that offers and sells Papa Murphys franchises.
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Papa Murphys International LLC is a Delaware Limited Liability Company with its principal
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Papa Murphys Company Stores Inc., is a Washington corporation, of which Papa Murphys
International, LLC is a wholly owned subsidiary, that directly and indirectly controls Papa
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PMI Holdings Inc. is a Delaware corporation of which Papa Murphys Company Stores, Inc.
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and Papa Murphys International LLC are wholly owned subsidiaries, that directly and
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indirectly controls Papa Murphys Company Stores, Inc. and Papa Murphys International,
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LLC.
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Papa Murphys Intermediate Inc., is a Delaware corporation of which PMI Holdings, Inc.,
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Papa Murphys Company Stores, Inc. and Papa Murphys International, LLC are wholly
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owned subsidiaries, that directly and indirectly controls PMI Holdings, Inc., Papa Murphys
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Papa Murphys Holdings, Inc. is a Delaware Corporation, that directly and indirectly controls
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Papa Murphys Intermediate, PMI Holdings, Inc., Papa Murphys Company Stores, Inc. and
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Papa Murphys International, LLC and which owns or claims ownership of the Papa Murphys
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Lee Equity LLC, is a New York limited liability company, which owns the majority interest in
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Papa Murphys Holdings, that directly and indirectly controls Defendants Papa Murphys
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Holdings which directly and indirectly controls Papa Murphys Intermediate, PMI Holdings,
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Inc., Papa Murphys Company Stores, Inc. and Papa Murphys International, LLC .
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Additionally, Lee Equity exerts significant control over the operations of Papa Murphys
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 14
International including controlling the appointment and approval of its executives and board
members. Lee Equity acquired Papa Murphys Holdings, Papa Murphys Intermediate, PMI
Holdings, Inc., Papa Murphys Company Stores, Inc. and Papa Murphys International, LLC
in the middle of 2010. Plaintiffs who purchased their franchises after that date are asserting
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The following Defendants are or were at relevant times, officers or directors of the corporate
defendants. At all relevant times they were persons as defined by RCW 19.100.010(13). At
relevant times, the following Defendants were persons in act of control of the activit[ies] of
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Defendant Papa Murphys International. Under the Washington law, persons in positions of
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control of a franchisor at the time the franchisor commits FIPA violations are liable for its
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violations. On information and belief, the listed Defendants were control persons at relevant
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times and had actual or constructive knowledge of the manner in which Papa Murphys
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International sold franchises, including the unlawful sales practices set forth below.
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a. John D. Barr was at relevant times the Chairman of the Board of Directors and Chief
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resident of Washington. Mr. Barr joined Papa Murphys International in June of 2004. All
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b. Ken Calwell, is and was at relevant times the Chief Executive Officer of Defendant Papa
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Calwell joined Papa Murphys International as President in June of 2011. Plaintiffs who
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purchased their franchises after June 2011are asserting claims against Mr. Calwell.
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Additionally, Mr. Calwell has stated that the break even for a Papa Murphys franchise is
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$5,300 in average weekly sales. In recent survey conducted by the Papa Murphys
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SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 15
International Franchisee Association, less than three percent of franchisees surveyed stated
that their break even was less than $6,000 in average weekly sales.
c. Janet Pirus, was at relevant times the Chief Financial Officer of Defendant Papa Murphys
International. On information and belief she is a resident of Washington. Ms. Pirus joined
Papa Murphys Internationals predecessor in 2000 and continued when it became Papa
Murphys International. Ms. Pirus was responsible for directing the organizations
financial planning and accounting practices. . All of the plaintiffs are asserting claims
d. Thomas H. Lee is and was at relevant times a Director of Defendant Papa Murphys
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Holdings and at least one of its wholly owned subsidiaries which wholly owns and controls
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York. Plaintiffs who purchased their franchises after the middle of 2010 are asserting
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e. Yoo Jin Kim is and was at relevant times a Director of Defendant Papa Murphys
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International. On information and belief he is a resident of New York. Yoo Jin Kim joined
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purchased their franchises after May of 2010 are asserting claims against Mr. Kim.
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f.
Benjamin Hochberg is and was at relevant times a Director of Defendant Papa Murphys
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Murphys Internationals Board of Managers in May of 2010. The plaintiffs who purchased
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their franchises after May of 2010 are asserting claims against Mr. Hochberg.
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g. John D. Shafer is and was at relevant times a Director of Defendant Papa Murphys
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purchased their franchises after October of 2006 are asserting claims against Mr. Shafer.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 16
h. Achi Yaffe is and was at relevant times a Director of Defendant Papa Murphys
1
2
International, Defendant Papa Murphys Holdings and at least one of its wholly owned
subsidiaries which wholly owns and controls Defendant Papa Murphys International. On
information and belief he is a resident of New York. He joined the Papa Murphys
International Board of Managers on December 31, 2011. The plaintiffs who purchased their
franchises after that date are asserting claims against Mr. Yaffe.
i.
International in September of 2012. The plaintiffs who purchased their franchises after that
date are asserting claims against Mr. Harmon.
10
j.
11
12
13
14
Internationals Chief Financial Officer and Senior Vice President of Finance. Mr. King was
15
directly involved in preparing the FDD disclosures. All of the plaintiffs are asserting claims
16
17
18
38.
At relevant times, the franchise sales and development defendants were employees of Papa
19
Murphys International and were directly involved in the franchise sales process including the
20
creation and approval of the relevant franchise disclosure documents and agreements.
21
39.
The franchise sales and development defendants drafted, reviewed or approved of the use of
22
the franchise disclosure documents (hereinafter FDDs) which included fraudulent financial
23
24
Plaintiffs legal remedies. These documents were used by Defendants in the offering and sale
25
of Papa Murphys franchises to the Plaintiffs. The franchise sales and development defendants
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 17
a. Victoria Blackwell is a Senior Vice President and General Counsel of Defendant Papa
information and belief, Ms. Blackwell was hired as general counsel in part because of her
knowledge and experience in franchise law. Ms. Blackwell joined Papa Murphys corporate
predecessor in July of 2001. She is responsible for the maintenance of franchise documents
and overseeing franchise law compliance. Ms. Blackwell prepared the FDDs including the
Item 19 representations which are at issue in this case. All of the Plaintiffs are asserting
10
11
b. Jim Perkins was at relevant times, a Regional Vice President, Eastern Region. On
12
13
International in October of 2004. All of the Plaintiffs are asserting claims against Mr.
14
15
i. The Braun Group-In May of 2010, Mr. Perkins told Steven Pyatt of the Braun
16
Group that his sale projections of $9,600 in average weekly sales were too
17
conservative and should be more aggressive. Mr. Perkins helped Mr. Pyatt
18
develop a business plan in which he estimated good, better and best average
19
20
c. Defendant Stephen Maeker was a Vice President of Franchise Sales of Defendant Papa
21
22
employed by Papa Murphys between January 2011 and December 2011. The plaintiffs
23
who purchased their stores during that time are asserting claims against Mr. Maeker.
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 18
Murphys International and the Northwinds Partners. During that meeting, Mr.
Patcha made a comprehensive presentation regarding their expected sales, costs and
break even point, each of which were unrealistic the performance of existing new
stores in the plaintiffs region. The Northwinds Partners had no knowledge that
their predictions were unrealistic and could not have reasonably discovered such
information. Mr. Maeker knew or reasonably should have known that the estimates
and the underlying business plan were unrealistic. He did not share this information
10
11
12
International in January 2007 and has served as franchise sales manager and a director of
13
franchise development in addition to his current role. The plaintiffs who purchased their
14
stores during that time are asserting claims against Mr. Millard. Additionally, Mr. Millard
15
16
17
i. The Northwinds Partners: In March of 2011, Mr. Millard told Mrs. Rubin
1. that the stores doing $8,000 in average weekly store sales did nothing but
18
open their doors; that the stores doing $9,000-10,000 did sampling and local
19
events; that the stores doing $13,000 and more in average weekly sales were
20
21
22
23
24
2. The stores in the lowest tier of sales performance did no local store
marketing and they were still making money.
3. That stores doing more than $10,000 a week in average weekly sales were
very common and with advertising, school contracts and community
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 19
sales.
e. Eric Brown was at relevant times a Senior Franchise Sales Manager for Defendant Papa
Papa Murphys International in April of 2005 and left the company in September of 2011.
The plaintiffs who purchased their stores during that time are asserting claims against Mr.
Brown. Additionally Mr. Brown made the following statements to the Plaintiffs:
i. The Barnetts-Mr. Brown told Mr. and Mrs. Barnett that if they opened three stores
that they would earn enough in salary and profits to replace Mr. Barnetts existing
10
salary of $135,000 and that they could expect average weekly sales of $12,000-
11
14,000 after the first year. Mr. Brown knew or reasonably should have known this
12
statement was not true for new stores in the Barnetts region. He did not share this
13
14
15
16
f.
James Werling was at relevant times a Franchise Sales Manager for Defendant Papa
17
18
Papa Murphys International in January of 2003 and left the company in March of 2011.
19
The plaintiffs who purchased their stores during that time are asserting claims against Mr.
20
Werling. Additionally, Mr. Werling made the following statements to the Plaintiffs:
21
i. The Hills-In 2005, Mr. Werling told the Hills that average sales for a Papa
22
Murphys franchise were between $450,000 and $500,000 and that that average
23
profits for a Papa Murphys franchise were 12-20 percent of net sales. Mr. Werling
24
knew or reasonably should have known this statement was not true for new stores in
25
the Hills region. He did not share this information with the Hills.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 20
ii. The Billings-In 2004, Mr. Werling told Mr. and Mrs. Billings that they could expect
to make $100,000 per store and that they could easily pay off their stores in five
years. He also told Mr. and Mrs. Billing that average annual sales for a Papa
iii. The Conn-Turnbull Group- Mr. Werling provided sales for Papa Murphys
franchises information to Mr. Turnbull prior to his purchase of the franchise. Mr.
Werling told Mr. Turnbull that the average sales for a Papa Murphys store were
between $450,000 and $500,000 and that the profits for a Papa Murphys store were
between 12 and 20 percent of net sales. Mr. Turnbull and Mr. Conn used the sales
10
information to develop a business plan which they provided to Mr. Werling. Mr.
11
Werling that the sales projections in the business plan were correct and
12
conservative and that they had been approved by operations. Mr. Werling knew
13
or reasonably should have known that the sales information he provided was not
14
representative of actual sales for new stores in their region. He did not share this
15
information with Mr. Conn or Mr. Turnbull and instead approved their business
16
plan.
17
iv. The Braun Group-In May of 2012, Mr. Werling told Steven Pyatt of the Braun
18
group that his estimated average weekly sales of $7,577, $9,019 or $12,000 for his
19
Florida store were very realistic. Mr. Werling knew or reasonably should have
20
known that the estimates and the underlying business plan were unrealistic. He did
21
not share this information with the Braun group and instead praised their plan.
22
v. The Wilsons-Mr. Werling told Mr. Wilson that the average Papa Murphys
23
franchisee makes an annual return on investment of about twenty percent and that
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 21
g. Jeff Hood is a Direct of Franchise Sales for Defendant Papa Murphys International. On
International in May of 2007 and has served as a director of franchise operations in addition
to his current role. The plaintiffs who purchased their stores during that time are asserting
h. Mark Levis is a Director of Franchise Sales for Defendant Papa Murphys International. On
in December of 2011. The plaintiffs who purchased their stores during that time are
asserting claims against Mr. Levis. Additionally, he made the following statements to the
Plaintiffs.
10
i. The Worthingtons-Mr. Levis told the Worthingtons that they could expect above
11
average sales in their Fort Myers store because of the high snowbird population.
12
ii. The Brinks-Mr. Levis told Mr. and Mrs. Brink that their estimated sales of $430,820
13
14
annually, with a $60,000 managers salary for Mr. Brink and $33,430 in net profits
15
was very conservative and that they would have no problem hitting them in six
16
month of opening.
17
i.
Harold Kermen is a Franchise Sales Manager for Defendant Papa Murphys International.
18
19
Murphys International in December of 1998. All plaintiffs are asserting claim against Mr.
20
Kermen.
21
j.
Billy H. Rose, Jr. is Franchise Sales Manager for Defendant Papa Murphys International.
22
On information and belief he is a resident of Ohio. Mr. Rose joined Papa Murphys
23
International in January 2007 and left the company in 2012. The plaintiffs who purchased
24
their stores during that time are asserting claims against Mr. Rose. Additionally, Mr. Rose
25
i. The Callegans-In 2009, Mr. Rose told Mr. and Mrs. Callegan that he thought their
1
2
store would make enough in two to five years to earn their investment back, that
they could expect a ten percent annual increase in sales and that the average store
5
6
poorly because of bad management and that with proper management Mr. Olson
k. Mike Norcup is a Franchise Sales Manager for Defendant Papa Murphys International. On
10
11
information and belief he is a resident of Washington. Mr. Norcup joined Papa Murphys
12
International in April of 2011. All plaintiffs who purchase a franchise after that date are
13
asserting claims against Mr. Norcup. Additionally Mr. Norcup made the following
14
15
16
Overcash that their estimated average weekly sales of $8,500 or $442,000 annually
17
and their estimate sales growth of four to five percent annually was too
18
conservative and that they could expect to make much more, Mr. Chantilis and Mr.
19
20
21
40.
22
Protection Act (RCW 19.100.160), Washington common law and as agreed by the parties in
23
24
25
41.
Venue is appropriate in Clark County Superior Court because Papa Murphys International
corporate headquarters is located therein and as agreed in the respective franchise agreements.
D.
1
2
42.
FIPA JURISDICITON
Many of the Plaintiffs are asserting claims under Washingtons Franchise Investment
Protection Act (FIPA). Under Washington law, a plaintiff may assert FIPA sales claims if 1)
the franchise was offered or sold in Washington state 2 or 2) if the offer originated in this state
43.
Plaintiffs whose franchises were sold in Washington State- Robert Dickerson, Rob and
Buds Pizza and the Robert Dickerson Trust may assert FIPA claims pursuant to RCW
19.100.020(3) because they signed their Area Developer Agreement in which they agreed to
purchase their franchises and they paid a portion of their franchise fees at Papa Murphys
Internationals corporate headquarters in Vancouver, Washington.
10
11
44.
Plaintiffs whose franchise offers originated in this state and violated laws of the state in
12
which it was received- The Florida plaintiffs, including the Nyckyks, the Worthingtons, the
13
Bennetts, the Rubins, the Braun Group, and the Meads and the Texas plaintiffs, including the
14
the Billings, the Barnetts, the Liles family, the Hills, John Demattia, the Conn-Turnbull group
15
and the Overcash Group may assert FIPA claims because the offer for the sale of the franchise
16
originated in Washington and violated laws of state in which the offer was directed and the
17
franchise was sold. Additionally, the Braun group is also asserting FIPA claims based on
18
violations of Wisconsin law because Mr. Mraz and Mr. Pyatt met with Mr. Werling and Mr.
19
Perkins in Green Bay, Wisconsin during the sales process, Mr. Mraz received his copy of the
20
FDD in Wisconsin and both Mr. Mraz and Mr. Pyatt signed their franchise agreements in that
21
state.
22
23
24
25
a. The offer originated in this state-In this case, the many of the fraudulent statements were
1
2
made in FDDs and their accompanying exhibits which were prepared by Papa Murphys
were then either delivered the Plaintiffs by Papa Murphys International employees, United
States Postal Service or were made available to the Plaintiffs on a secure website.
employees and sales people were made in conjunction with or in support of the offering of a
Papa Murphys franchise under the terms of the FDD and the franchise agreement, both of
10
11
the FDDs to Plaintiffs in the States of Texas 4, Florida 5 and Wisconsin 6 which violated the
12
13
4
14
15
16
17
18
19
20
21
22
23
24
25
In the State of Texas, the offer and sale of franchises are regulated through the Texas Business Opportunity Act
which applies to the sale or lease for initial consideration of more than $500 of products, equipment, or services
that will be used by or for the purchaser to begin a business in which the seller represents that (1) the purchaser
will earn or is likely to earn a profit in excess of the amount of the initial consideration the purchaser paid, and
(2) the seller will (A) provide a location or assist the purchaser in finding a location for the use or operation of
the products, equipment, supplies or services on the premises that are not owned or leased by the purchaser or
the seller; (B) provide a sales, production or marketing program. Under Texas law, a franchisor is exempt from
the Business Opportunity Act only if the franchisor complies in all material respects in this state with 16 C.F.R.
Part 436 [the FTC Franchise Rule] and each order or action of the FTC. In this case, Papa Murphys
International is not exempt because it had not complied in all material aspects with the FTC Franchise Rule in
that it made Item 19 representations which did not disclose characteristics of either the system store or the
benchmark stores which were materially different than the Plaintiffs stores.
5
In the State of Florida, the offer and sale of franchises are regulated through by the Florida Franchise Act,
which defines a franchise as contract wherein the operation of the franchisees business is substantially reliant
on a franchisor for the basic supply of goods including any article thing or thing without limitation or any part
of such article or thing, including any article or thing used or consumed by the franchisee in rendering a service
established, organized, or directed by the franchisor. Fla. Stat. Ann. 817.416 (1)(b)(4). Florida courts have
repeatedly is business a franchise and subject to the statute even if the franchisor does not directly supply good
but instead requires the franchisee to purchase the goods through a network of approved suppliers. See Boca
Mara Properties, Inc. v. International Dairy Queen, Inc., 732 F.2d 1550, 1551 (11th Cir. 1984). In this case,
Papa Murphys International requires its franchisees to purchase inventory, equipment and advertising materials
directly from it or form an approved supplier. It is therefore subject to the Act.
6
In the state of Wisconsin, the offer and sale of franchises are regulated by the Wisconsin Franchise Investment
act which defines a franchise as a contract between two or more persons by which 1) a franchisee is granted the
right to engage in the business of offer, selling, or distributing goods or services under a marking plan or system
prescribed or suggested in substantial party by the franchisor; and 2) the operation of the franchisees business
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 25
i. Texas- Under Texas law it is a violation of the Texas Business Opportunity Act to a
fact. V.T.C.A., Bus & C., 51.301 (2007). Papa Murphys International violated
the Texas Business Opportunity Act by 1) representing that the Plaintiffs were
the average sales it presented in Item 19 were only achievable if the Plaintiffs
spent two or three times the amount of the disclosed marketing expenditure.
10
ii. Florida-Under the Florida Franchise Act it is unlawful for any person when selling
11
12
13
14
Stat. Ann. 817.416. In this case, Papa Murphys International violated the Act by
15
16
17
representations which were based on stores which were materially different than
18
new stores in the plaintiffs region; and 3) failing to disclose the massive advertising
19
20
iii. Wisconsin-Under the Wisconsin Franchise Investment act it is unlawful for any
21
22
that includes an untrue statement of material fact or which omits to state material
23
24
25
pursuant to such plan or system is substantially associated with the franchisors business and trademark..3) and
the franchisee is required to pay directly or indirectly a franchise fee. Wis. Stat. 553.03(4)(a). Papa Murphys
International is subject to the Act.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 26
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. Wis. Stat. 553.41(3).
In this case, Papa Murphys International violated the Act by 1) failing to disclose
the average sales it presented in Item 19 were not even achievable if the Plaintiffs
spent two or three times the amount of the disclosed marketing expenditure and 3)
stating that the sales estimated by the Braun group in their business plan were
10
11
45.
Facts
The plaintiffs are a diverse group of families and individuals who invested in a Papa Murphys
12
franchise with hopes of operating their own business and realizing a moderate return on their
13
investment. Few of the plaintiffs had any franchise experience and none had any experience
14
15
46.
Throughout the franchise sale and approval process, Papa Murphys International promoted
16
itself as an expert both in terms of the franchise system and its own ability to select successful
17
franchisees. Papa Murphys International sold the plaintiffs their franchises by promoting
18
sales averages, marketing expenses, and break even points which were not representative of
19
new stores in the plaintiffs region. Additionally, many of the plaintiffs developed business
20
plans based on those sales averages, marketing expenses and break even points which they
21
submitted for Papa Murphys Internationals approval. Papa Murphys International not only
22
approved the Plaintiffs business plans but several Papa Murphys International sales people
23
told the plaintiffs that their sales estimates were too conservative.
24
25
47.
At no point did Papa Murphys International tell the plaintiffs their sales, marketing expenses
and break even points were wildly unrealistic for new stores in their region, despite Papa
Murphys actual or constructive knowledge that the majority of new stores in their region has
sales numbers well below the system average and spent vast amounts on local store marketing
48.
and misleading sales averages as well as its approval of their sales estimates and business
plans, the plaintiffs purchased Papa Murphys franchises and suffered devastating financial
losses.
Facts Related to Qualification Reports
8
9
49.
After many of the plaintiffs contacted Papa Murphys International to express interest in
10
11
document called a qualification report. In this report, the plaintiffs were required to list their
12
net and liquid assets and to authorize Papa Murphys International to conduct a background
13
14
50.
The plaintiffs were either told that they were qualified to purchase a franchise directly by
15
Papa Murphys employees or representatives or Papa Murphys International implied that they
16
were qualified by continuing the sales process after receiving the completed qualification
17
18
51.
Papa Murphys International collects vast quantities of sales and expense information from its
19
franchisees who are required to submit extensive accounting information on a regular basis.
20
Papa Murphys International also independently collects information related to sales and
21
22
52.
Prior to selling franchises to any of the plaintiffs, Papa Murphys International had been
23
forced to close stores in other emerging markets. Papa Murphys knew or reasonably should
24
have known that a franchisee opening a store in a new or emerging market or in markets
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 28
outside the Pacific Northwest would need to invest significant amounts in local store
53.
As early as 2006, Papa Murphys International knew or reasonably should have known that
stores in new or emerging markets or markets outside the Pacific Northwest would experience
low sales, increased marketing costs and a lengthy period of time before they would break
54.
Based on the information provided by the plaintiffs, their own internal data and their decades
should have known that many of the plaintiffs lacked the financial resources to successfully
operate their franchises.
10
11
12
55.
Papa Murphys International provided each plaintiff with a current copy of the Franchise
13
Disclosure Document (herein after FDD). The FDD contained information regarding the
14
franchise system, the terms of the franchise relationship and financial information related to
15
16
franchisee and its contents are strictly regulated by federal law under the Federal Trade
17
18
Business Opportunities Rule (hereinafter FTC Rule) and FIPA. The sole purpose of the
19
FDD is to inform and guide the potential franchisee in his or her decision to invest in the
20
franchise.
21
56.
What a franchisor may or may not say in a FDD is closely regulated several state governments
22
and the Federal Trade Commission. All franchisors are subject to the Federal Trade
23
Commission Rule on Franchising which was created to eliminate widespread deception in the
24
sale of franchises through both material and misrepresentations and nondisclosures of material
25
facts. Statement of Basis and Purpose, 43 FR 59621, 59625 (December 21, 1978).
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 29
Specifically, the FTC was concerned with pervasive unfair or deceptive business practices
used by franchisors including the use of false or misleading earnings claims to lure
prospective franchisees into buying a franchise. Id. at 59627-39. The FTC Rule required
informed investors can determine for them whether purchasing a particular franchise is in their
best interest. In this case, Papa Murphys International violated their obligations and withheld
material information from the Plaintiffs. Because of Papa Murphys Internationals deliberate
choice to withhold material information regarding the franchise, the plaintiffs could not make
10
11
57.
Under the FTC rule, sales information for franchises are called financial performance
12
representations and while a franchisor is not required to make them; if they elect to do so the
13
representations must be made in Item 19 only of the FDD and each representation must have
14
15
Concerning Franchising, 16 CFR 436 (s) (2007) (Item 19). The FTC also requires the
16
franchisor to disclose the material bases for the representation including Whether the
17
representation relates to the performance of all of the franchise systems existing outlets or
18
only to a subset of outlets that share a particular set of characteristics (for example, geographic
19
location . . . length of time the outlets have operated . . .). Id, 16 CFR 436.5(s)(3)(ii)(A).
20
58.
Finally the FTC rule requires franchisors making financial performance representations to
21
22
paragraph (3)(ii)(A) . . . that may differ materially from those of the outlet that may be offered
23
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 30
a. System Store Sales-In early 2006, Papa Murphys International began making financial
performance representations in the FDD. In Item 19, Papa Murphys International added a
chart claimed System Stores. In the System Store Chart, Papa Murphys International
presented the average annual sales for all of its systems stores divided by high, medium or
low performing tiers. At the bottom of the chart, Papa Murphys International stated the
annual average sales for all of its franchises stores. These representations were fraudulent
because Papa Murphys International failed to disclose that the stores in in the medium and
highest tier shared characteristics which were materially different from the plaintiffs stores,
specifically, the high and medium performing stores were primarily established stores
10
located in the Pacific Northwest (in internal corporate documents Papa Murphys
11
12
stores which shared characteristics such as age and region with stores which being offered
13
to the plaintiff had average sales which put them in the lowest tier of store performance. As
14
early as 2006, Papa Murphys International knew that a stores success or failure depended
15
on where it was located in the county. The vast majority of stores in the high and medium
16
tier were located in the Pacific Northwest while the vast majority of stores in the plaintiffs
17
region (the South and South East) were low tier stores.
18
b. In the System Store chart, Papa Murphys International had taken stores in states where
19
stores do weekly sales of over $15,000 per week and averaged them with stores in states
20
where stores do weekly sales of less than $7,000 a week and sold the concept as doing an
21
22
International then sold the plaintiffs franchises using these inflated average sales knowing
23
that the average weekly sales for stores in the plaintiffs region was less that $7,000 per
24
week. In developing the Franchise Rule, the FTC specifically forbid franchisors from
25
i. Regional Disparity-By presenting the average sales information using a system wide
performance tier, Papa Murphys International implied, that while it could not
achieving the average sales for either the high medium and low tier based on the
individual operators skill and business acumen. Nothing could have been further
ii. Vintage-In the System Store Chart, Papa Murphys failed to disclose that the vast
majority of high and medium tier stores were had been in operation for several years
and virtually all of the newer stores were in the lowest tier of performance.
10
11
c. Benchmark Stores-In April of 2012, Papa Murphys International began making financial
12
13
19 of the FDD which it provided to the Plaintiffs. In the Benchmark Chart, Defendant Papa
14
Murphys International presented information related to average sales, costs and profits for
15
Benchmark Papa Murphys stores which represented one half to on e third of all the Papa
16
Murphys outlets. The Benchmark chart was the only place in the system in which
17
Defendant Papa Murphys International provided any information regarding the average
18
annual profits for its franchised outlets. The average net sales for the Benchmark stores
19
were approximately $50,000 higher than the average net sales set forth in the System Store
20
Chart.
21
d. In the FDD, Papa Murphys International stated that the Benchmark stores were those stores
22
which submitted their profit and loss statements in the correct format for the prior 53
23
weeks. Papa Murphys International disclosed no other material basis for the
24
representations in the chart. In fact, all Papa Murphys franchises were required to provide
25
profit and loss statements in the format specified by Papa Murphys International but
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 32
struggling and low performing store were frequently unable to do so. As a result the
Benchmark stores were primarily high performing stores and not representative of the
profits and costs of either the Papa Murphys system as a whole or the system in the
plaintiffs region.
Statements Related to Local Store Marketing
5
6
59.
Local Store Marketing-In Item Six and Item 19 of the FDD, Papa Murphys International
made several statements related to local store marketing. In these statements, Papa Murphy
International implied that franchisees could expect to spend between five to seven percent of
net sales on local store marketing to achieve the average sales disclosed in the FDD. The
10
statements in Item Six and 19 were the only places in the FDD where Papa Murphys
11
International provided any information related to the cost of local store marketing and the
12
13
60.
At the time that Papa Murphys International made the statements related to local store
14
marketing in Items Six and Item 19, it knew or reasonably should have known that new stores
15
in the Plaintiffs region typically spent two or three items the disclosed amount on local store
16
marketing and only achieved sales which were 30% less than average disclosed in the FDD.
17
18
occasional fees associated with operating a franchise in Item Six of the FDD. Disclosure
19
20
Fed. Reg. 61, 15485 (March 30, 2007) (to be codified at 16 C.F.R. pt.436 and 437). As the
21
22
not limited to the initial franchise feea franchisee may incur considerable costs in the
23
operation of the business, which will significantly impact upon his or her ability to continue
24
in business and ultimately be successful. Id. In Item Six of the FDD, Papa Murphys
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 33
International stated that franchisees would be required to spend 5% of net sales or a set
3
4
statements related to the average sales of its franchised stores. Additionally in Item 19 Papa
Murphys International made statements regarding typical local store marketing expenses of
its company stores. In the Company Stores chart, Papa Murphys International presented
information related to the average sales, costs and profits for its company stores. In a note to
the chart, Papa Murphys International explained that the company stores local marketing
expenses represented the equivalent of a franchisee spending eight percent of net sales on
10
marketing, including a two percent national advertising fund fee, with the remaining six
11
percent going to local store marketing. In later years, Papa Murphys International would
12
amend this chart to state that the Company Stores typically spent between 4-9 percent of net
13
14
61.
At the time that Papa Murphys International was claiming that the typical franchisee would
15
spend five to seven percent of net sales on local store marketing to achieve average sales it
16
was collecting extensive information from franchisees which demonstrated that the vast
17
majority of franchisees in the Plaintiffs region were spending two or three times that amount
18
on local store marketing and only achieving sales which were 30% percent less than the
19
system average. Papa Murphys International made no attempt to revise or any portion of the
20
21
22
62.
Many of the plaintiffs developed business plans either as a condition of purchasing their
23
franchise or to secure a business loan. Papa Murphys International provided the templates for
24
the business plan and a break even analysis. These templates included extensive information
25
related to the historical sales performance for Papa Murphys franchised stores. As in the FDD
SECOND AMENDED COMPLAINT FOR
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and other marketing materials, this information was presented on system wide basis without
63.
Papa Murphys employees reviewed the business plans with several of the Plaintiffs. The
Plaintiffs used both the average sales and the locals store marketing information provided in
the FDD as the basis of their business plans. Papa Murphys International employees routinely
told the Plaintiffs that they needed to submit their business plans to Papa Murphys
International so that Papa Murphys International could determine whether or not they should
franchise sale director, told Angelo Chantilis that his business plan and qualification report
10
needed to be at Papa Murphys Internationals corporate office by a certain date so Mr. King
11
could review them before he met with Mr. Chantilis and his partner Mr. Overcash.
12
64.
Several Papa Murphys International employees told the Plaintiffs that their estimated sales
13
(which were slightly below the system average disclosed in the FDD) were too
14
conservative. For example, in 2010, when Mr. Pyatt shared his business plan and break even
15
analysis with Mr. Perkins, a Papa Murphys International regional vice president, and Mr.
16
Werling, a senior sales director, Mr. Perkins told Mr. Pyatt that his business plan was the best
17
he had ever seen that the sales projections were too conservative and suggested that Mr.
18
19
65.
In their business plans, presentations and break even analyses, the Plaintiffs estimated that
20
they would have average weekly sales of $7,000-$9,000, that their sales would grow between
21
three to seven percent annually and that they would break even with average weekly sales
22
between $5,000-$7,000. 7
23
24
7
25
For details as to each plaintiffs business plan, sales presentation and break even analysis please see the
relevant plaintiffs individual fact section.
66.
Papa Murphys International knew or reasonably should have known that the vast majority of
new stores in the Plaintiffs region had average sales well below the Plaintiffs estimates in
their business plans and sales presentations; that most stores spent far more on advertising
than the Plaintiffs had estimated; that many stores sales decreased between their first and
second years and that most Papa Murphys International stores required weekly average sales
67.
Papa Murphys International did not share this information with the Plaintiffs and approved
them as franchisees.
9
10
68.
As a part of the sales process, Papa Murphys International encouraged many of the plaintiffs
11
to determine what sales they would need to break even. Several of plaintiffs included this
12
information in their business plans. For example, in 2010, Steve Pyatt of the Braun group
13
presented Mr. Werling and Mr. Perkins with a business plan in which they estimated that their
14
break even point was average weekly sales of $6,122. Mr. Werling and Mr. Perkins both
15
approved the plan and said that Mr. Pyatts estimates were very realistic.
16
69.
In June of 2014, Ken Calwell, the CEO of Papa Murphys International told Forbes that the
17
18
weekly sales.
19
70.
In July of 2014, in an interview with Forbes, Jayson Tipp, a Senior Vice President at Papa
20
Murphys International told Forbes that Papa Murphys was a model where around $6,000 a
21
22
71.
These statements were flatly untrue. In a 2014 survey conducted by the Papa Murphys
23
Franchisee Association less than three percent of all franchisees surveyed reported that their
24
breakeven was under $6,000 in average weekly sales and less than 25 percent of the
25
franchisees surveyed reported that they could break even with average weekly sales below
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$8,000. More than twenty five percent of franchisees reported that they needed average
3
4
72.
stores were doing and to ask for their opinions regarding Papa Murphys International.
5
6
Many of the plaintiffs contacted existing Papa Murphys franchisees to evaluate how their
73.
Frequently, the Papa Murphys International salesmen would suggest that the plaintiff should
contact specific franchisees. For example, Mr. Maeker, a vice president of franchise sales for
Papa Murphy International told Mr. Patcha, a member of the Rubin group that he should call
three franchisees including David Myers before purchasing their area developer agreement.
10
Mr. Myers is one of Papa Murphys top performing franchisees. All of the three franchisees
11
that Mr. Maeker suggested are well established high performing franchisees who own stores in
12
13
74.
When the Plaintiffs did contact franchisees who reported that they had low sales or that they
14
were unhappy with their purchase, the Plaintiffs salesman would tell them that the unhappy
15
franchisee had low sales because of their own poor management. For example, when Mr.
16
Brink asked his salesman, Mr. Levis told him that the franchisees low sales were entirely a
17
18
19
75.
During the sales process, Papa Murphys International employees encouraged several
20
plaintiffs including the Barnetts, the Worthingtons, the Olsons and the Buchanan-Forester
21
group to use a financial services company, Directed Equity. The Directed Equity website
22
23
Directed Equity have attended Papa Murphys franchisee trade shows. In February of 2013,
24
Directed Equity stated that it had allocated an additional $12 million dollars to finance
25
purchases of Papa Murphys franchises. Kevin King, chief development officer of Papa
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
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Murphys International praised the very solid and strategic relationship Papa Murphys
76.
While Papa Murphys International employees were steering the relevant plaintiffs to Direct
Equity to finance their stores and while Kevin King was promoting the solid and strategic
relationship with that company, Papa Murphys International was selling franchises using
FDDs which stated that it did not directly or indirectly provide financing for its franchise
stores.
Facts Related to the Plaintiffs Damages
8
9
77.
The plaintiffs purchased their Papa Murphys franchises, signed their franchise agreements
10
and opened their Papa Murphys stores. Shortly after the grand opening, the plaintiffs noticed
11
that their stores sales were dramatically lower than the sales disclosed in the FDD and their
12
own business plan estimates. When they asked Papa Murphys International for assistance
13
and an explanation, Papa Murphys International told the plaintiffs to spend more on
14
advertising, give away more pizza and build more stores and sales would come. In reality,
15
Papa Murphys International knew or reasonably should have known that the Papa Murphys
16
model does not perform well outside of the Pacific Northwest and that increased advertising
17
18
78.
As a result of purchasing their Papa Murphys stores the plaintiffs have suffered devastating
19
financial losses. Many of the plaintiffs were forced to close their stores. The plaintiffs with
20
open stores are spending two or three times their estimated local marketing budget to achieve
21
average sales which are dramatically less than even their conservative estimates. Had the
22
plaintiffs known the actual average sales for their region, the actual advertising expenditure
23
necessary to achieve the sales, the number of years and the capital investment necessary to
24
achieve those sales, they would not have invested in a Papa Murphys franchise.
25
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1
2
The Hills
79.
The Hills contacted Papa Murphys International in early 2005. They had been devoted Papa
Murphys customers when they lived in California and when they discovered that Papa
Murphy's International was expanding into Texas, they visited the Papa Murphys website and
80.
In response, Papa Murphys International asked the Hill to complete a qualification report.
The Hills completed the report which stated that their liquid assets including the entirety of
10
81.
In March of 2005, the Hills met with Jim Werling, a Papa Murphys International franchise
11
sales manager in Tyler, Texas. Mr. Werling gave the Hills a copy of the 2005 FDD. At the
12
time, Papa Murphys International did not provide financial performance representations in
13
the FDD. However, during the meeting, Mr. Werling told the Hills that the average sales for
14
Papa Murphys franchises was between $450,000 and $550,000 annually. He told the Hills
15
that the average annual profit for a Papa Murphys franchise was between 12% to 20% of net
16
sales.
17
82.
required to spend either five percent of net sales or $500 a month on local store marketing.
18
19
In Item Six of the 2005 FDD, Papa Murphys International stated that franchisees would be
83.
After the meeting, Mr. Werling gave the Hills a copy of a business plan template and asked
20
them to develop a business plan. The Hills used the sales numbers provided by Mr. Werling
21
to develop a business plan in which they estimated they would have $302,500 in sales during
22
their first year while spending six and three quarters percent of weekly sales on local store
23
marketing. In their second year, the Hills estimated that they would have $473,000 in sales
24
while spending 5.8 percent of weekly store sales on local store marketing. The Hill gave the
25
plan to Mr. Werling. He told him that they had done a great job crunching the numbers. He
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 39
did not suggest that either the Hills sales or local marketing expense estimates were
unrealistic.
84.
The Hills relied on the business plan and the sales figures provided by Mr. Werling in their
decision to purchase a Papa Murphys franchise. They used money from their retirement
account to purchase the franchise and opened their first store in Longview, Texas in July,
2006. After the grand opening period, the Hills average weekly sale settled at roughly $4,500
a week.
85.
In 2009, upon the suggestion of several Papa Murphys employees, the Hills purchased a
second existing franchise in Nacogdoches, Texas. Prior to purchase, Papa Murphys
9
10
International provided the Hills with a copy of the March 2009 FDD which the Hills used to
11
evaluate purchasing the franchise. The Hills had also received information related to the
12
actual sales of the Nacogdoches store but they used the average sale and local store marketing
13
representations in the FDD to determine what the likely sales and expenses would be if the
14
15
86.
Despite extensive local marketing and promotional efforts by the Hills, the Nacogdoches store
16
was unsuccessful and averaged $5,400 ($280,800 annually) in weekly sales since it opened
17
with even lower average weekly sales of $4,910 ($255,320) since 2011. The Hills were
18
forced to close the Nacogdoches store in April of 2014. The Hills invested roughly $415,000
19
in the Nacogdoches stores. The Hills still owe $50,000 on the loan they used to purchase the
20
Nacogdoches store.
21
87.
The Hills Longview store has been only slightly more successful. For a few years, the Hills
22
were able to achieve annual sales on par with the system average but they quickly found that
23
the local marketing required to achieve those sales devoured the majority of their profits. The
24
Longview store has averaged $7,776 ($404,000 annually) since it opened with even lower
25
SECOND AMENDED COMPLAINT FOR
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average weekly sales of $6,928($360,256) since 2011. The Hills have invested a total of
88.
While the Hills have continued to sink their retirement and personal savings into their stores
Papa Murphys International has collected $160,822 from the Longview store and $67,986
89.
If Mr. Werling and his employer Papa Murphys International had not provided the Hills with
the average sales and profit representations in either Mr. Werlings presentation or in the
FDD, had not made representations regarding local marketing costs and had not approved the
Hills business plan, or indicated that they were qualified to purchase a franchise, the Hills
would not have purchased their Papa Murphys franchisees.
10
11
90.
Had either Mr. Werling or Papa Murphys International fully and accurately disclosed the
12
sales discrepancies between the average sales disclosed in the FDD and those of new stores
13
outside the Pacific Northwest, the amount of local store marketing necessary to achieve those
14
sales, or that given their relatively modest liquid assets the Hills were not sufficiently
15
capitalized to successfully operate the franchise, the Hills would not have purchased their
16
17
91.
As a result of their investment in a Papa Murphys franchise, the Hills have lost at least
18
$865,000 (including a lifetime of retirement savings) in their initial investment and continuing
19
operating losses. Joy Hill has been forced to return to work as a teacher and Gene Hill
20
continues to work roughly 40 hours a week in their store without a salary or any other
21
compensation.
22
The Billings
23
92.
24
Douglas and Lesia Billings first tried Papa Murphys pizza in 2002 in Muncie, Indiana. They
had been exploring franchising opportunities and loved the Papa Murphys product. They
25
SECOND AMENDED COMPLAINT FOR
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contacted Papa Murphys International about purchasing a franchise location in Texas. They
were told that Papa Murphys was not selling franchises in Texas at that time.
93.
In October of 2004, the Billings reached out to Papa Murphys again and this time Papa
Murphys International responded that they were selling franchises to qualified franchisees in
Texas. Papa Murphys International sent the Billings a blank qualification report on October
19, 2004.
94.
In their qualification report t, the Billings stated that they had a net worth of just over one
million dollars including their home and personal property. They stated that they had
10
95.
On November 11, 2004, Jim Werling, a Papa Murphys International salesperson called the
11
Billings. They spoke about the system and Mr. Werling stated Papa Murphys International
12
13
96.
The Billings meet with Mr. Werling in November of 2004, in Wichita Falls, Texas. Mr.
14
Werling told the Billings that they could expect to make $100,000 per store and that they
15
could pay off each store easily within 5 years. The Billings asked about average sales and
16
expenses for a Papa Murphys franchise and Mr. Werling stated that the average Papa
17
18
97.
Papa Murphys International gave the Billings a copy of the April 2005. In the FDD, Papa
19
20
month, which ever was great on local store marketing. The Billings asked Mr. Werling for
21
additional information on local store marketing. Mr. Werling stated that franchisees spent as
22
little as two percent of net sales to as much as seven percent of net sales on local store
23
24
25
98.
After the meeting, Mr. Werling gave the Billings a copy of a business plan. He told them that
based on their financial situation, they did not need to develop a business plan. The Billings
developed a business pro-forma in which they created three different sales scenarios. Using
the average sale and profit information provided by Mr. Werling, they estimated their annual
99.
On August 18, 2005, the Billings signed a franchise agreement and purchased their first Papa
Murphys store, TX007. They paid Papa Murphys the initial $25,000 franchise fee using
their personal savings. After the grand opening period, TX007 sales plummeted to $7,840 a
week.
100.
in the product and they believe Papa Murphys Internationals statements that if they
10
11
In 2008, the Billings decided to purchase a second Papa Murphys stores. They still believed
101.
Papa Murphys International gave the Billings a copy of the April 2007 FDD. In Item 19 of
12
the FDD, Papa Murphys International stated that the average annual sales for high, medium
13
and low tiers stores were $726,666 ($13,974 weekly), $470,672 ($9051 weekly), and
14
$312,359 ($6006 weekly), respectively and that the system average was $503,233 ($9,677
15
weekly). The Billings relied on the sales representations in the FDD in deciding to purchase
16
17
102.
The Billings purchased their second Papa Murphys store, TX066 which opened on February
18
11, 2009. As with TX007, TX066 had strong grand opening sales which immediately dropped
19
20
103.
The Billings reached out to Papa Murphys International for assistance with their low store
21
sales. Papa Murphys International employees told them that if they spent more on advertising
22
and more on local store marketing their sales would increase. At no point did anyone from
23
Papa Murphys tell the Billings that their low sales were typical for new stores outside the
24
Pacific Northwest.
25
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 43
104.
In the eight years it has been open, TX007 has had average weekly sales of just $8,205 a
week, only slightly above the Billings worst-case sales scenario for their first year of
operation. During that time, the Billings have invested roughly $250,969 in their store.
105.
The Billings were forced to close TX066 in 2012. During the time that it was open, the store
had average weekly sales of just $4,445 despite the Billings spending almost ten percent of
their net sales on local store marketing. The Billings invested more than $165,000 in the
106.
The Billings have exhausted the majority of their retirement income attempting to keep their
two failing stores in operation. Mr. Billing worked more than full time in store for an average
10
annual salary of less than $25,000. Mrs. Billing works an average of 40 hours a week in their
11
12
107.
If Mr. Werling had not told the Billings that the average sales for a Papa Murphys store were
13
$500,000, that they could expect to make $100,000 per store and pay off each store in five
14
years, and that based on their financial situation the Billings were qualified to purchase a
15
16
108.
If Papa Murphys International had not provided the Billings with an FDD which included
17
representations regarding the amount of local store marketing and the average sales for its
18
19
109.
Had either Mr. Werling or Papa Murphys International fully and accurately disclosed the
20
sales discrepancies between the average sales disclosed in the FDD and provided by Mr.
21
Werling and the actual sales of new stores located outside the Pacific Northwest, the amount
22
of local store marketing necessary to achieve those sales, or the time in operation necessary to
23
achieve those sales, the Billings would not have invested in the franchise.
24
25
110.
As a direct result of their investment in a Papa Murphys franchise, the Billings have lost at
least $416,000 primarily from their retirement savings. While the Billings have lost almost a
half million dollars and eight years of work in their investment, Papa Murphys International
has profited by collecting $40,000 in franchise fees and more than $217,000 in royalties from
The Barnetts
111.
Denise and Alan Barnett were regular Papa Murphys customers when they lived in Colorado.
When they moved to Texas in 2003, they were disappointed to learn that there were no Papa
Murphys franchises in the area. They would often joke that if Papa Murphys ever came to
112.
In 2007, after noticing a Papa Murphys had opened nearby, the Barnetts requested
10
information on purchasing a franchise from the Papa Murphys International website. Papa
11
Murphys International asked them to complete a qualification report and they were also
12
13
113.
After Papa Murphys International approved the Barnetts qualification report, Mr. Brown met
14
with them in Irving, Texas. At the meeting, Mr. Barnett asked Mr. Brown how many stores he
15
would need to open to replace his then current salary at Canon. Mr. Brown told the Barnetts
16
that if they opened three stores, they would be able to make the equivalent of Mr. Barnetts
17
$135,000 salary. Mr. Brown told the Barnetts that each store would have average weekly
18
19
114.
During the sales process, Papa Murphys International also provided the Barnetts with a copy
20
of the 2007 FDD. In Item six of the FDD, Papa Murphys International stated that stated that
21
the Barnetts would be required to spend either five percent of net sales or $500 a month,
22
whichever was greater on local store marketing. In Item 19, Papa Murphys International
23
stated that the average annual sales for high, medium and low tiers stores were $726,666
24
($13,974 weekly), $470,672 ($9,051 weekly), and $312,359 ($6,006 weekly), respectively and
25
that the system average was $503,233 ($9,677 weekly). In Item 19, there was a company
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 45
store chart which stated that the high, medium and low tiers stores respectively spent five, six
115.
Based on the information provided by Mr. Brown and in the FDD, the Barnetts developed a
business plan in which they estimated that their average weekly sales for the first year would
be $10,000. As their store became established they expected their sales would increase to
$12,000 to $14,000 a week as their store and Papa Murphys brand became well known in
Texas.
116.
The Barnetts signed the sales agreement for their first store, TX058, on or about September
27, 2007 in Texas. The Barnetts opened TX058 in December of 2008. Although their grand
9
10
opening sales were strong, their sales dropped off dramatically after the grand opening
11
advertising stopped.
12
117.
When the Barnetts contacted Papa Murphys International for an explanation and assistance
13
for their low sales, Papa Murphys International employees told the Barnetts that they needed
14
to work hard and do more local store marketing. The Barnetts followed Papa Murphys
15
advice and after two years of constant promotion, their sales started to grow.
16
118.
stores and in 2011, the Barnetts began discussing purchasing a second store.
17
18
Papa Murphys International employees constantly stressed the benefits of owing multiple
119.
Papa Murphys International provided the Barnetts with the June 2011 FDD. In item 19 of the
19
June 2011 FDD, the Barnetts saw that average sales had risen across the board. They relied on
20
this information in deciding to purchase their second franchise. Based on the information in
21
the FDD, the Barnetts believed that they were on track to achieve their goals.
22
120.
2011.
23
24
25
The Barnetts signed their franchise agreement for their second store, TX167 on December 5,
121.
The Barnetts funded their second store by rolling over Mr. Barnetts 401(k) using the financial
services company Directed Equity. They were referred to Directed Equity by another Papa
Murphys franchisee who said that Papa Murphys International had suggested them. The
Convention and the company was listed at a preferred vendor on Papa Murphys
122.
The Barnetts second store, TX167 opened in April of 2013. During the time it was open,
TX167 had average weekly sales of $3,900 despite the Barnetts spending nearly 25% of their
net sales on local store marketing. After 11 months the Barnetts were forced to close TX167
after losing their $350,000 investment in the store, the majority of which came from Mr.
10
123.
Since it opened in 2008, the Barnetts first store, TX058 has had average weekly sales of
11
roughly $8,300 almost $2,000 below the first year average sales that Barnetts predicted in
12
their business plan. The Barnetts have invested $353,260 in TX058, including the initial
13
14
124.
If Mr. Brown had not told the Barnetts that the average Papa Murphys franchise have average
15
weekly sales of $10,000 during its first year, that those sales grow to $12,000-$14,000 during
16
the later years and that the Barnetts would make enough profits on three stores that they would
17
be able to replace Mr. Barnetts salary, the Barnetts would not have purchased their Papa
18
Murphys franchise.
19
125.
If Papa Murphys International had not made representations regarding average sales and
20
locals store marketing expenses in either the April 2007 or the June 2011, the Barnetts would
21
22
126.
If either Mr. Brown or Papa Murphys International fully and accurately disclosed the sales
23
discrepancies between the average sales disclosed in the FDD and provided by Mr. Brown
24
and the actual sales of new stores located outside the Pacific Northwest, the amount of local
25
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 47
store marketing necessary to achieve those sales, or the time in operation necessary to achieve
those sales, the Barnetts would not have invested in their Papa Murphys franchises.
127.
Today, the Barnetts have one failed store (TX167) and another store with no value as the store
sales are barely enough to pay monthly expenses. Mrs. Barnett still works 40 to 50 hours a
week in her store with no compensation. They have lost roughly $628,000 in their investment,
mostly from their retirement saving and are seriously considering bankruptcy.
128.
In contrast, Papa Murphys International has made a tidy profit on the Barnetts store. The
Barnetts have paid Papa Murphys International roughly $40,000 in franchise fees and roughly
$126,000 in royalties since they purchased their failed and failing franchises.
10
11
129.
12
13
130.
Mr. Turnbull contacted Papa Murphys International in late 2005 or early 2006. He was
contacted by Mr. Werling who worked with Mr. Turnbull during the sales process.
14
15
Edward Conn and Edward Turnbull have been friends for more than 20 years. In 2006 or
131.
Mr. Turnbull received a copy of the April 2005 FDD. In Item six of the FDD, Papa Murphys
16
International stated that he would be required to spend either five percent of net sales or $500
17
a month, whichever was greater on local store marketing. Papa Murphys International did
18
19
132.
However, Mr. Werling gave Mr. Turnbull extensive sales information. He told Mr. Turnbull
20
that the average sales for a Papa Murphys franchise were between $450,000 and $500,000
21
and that each Papa Murphys store generated profits of 12-20% of net sales.
22
133.
Mr. Turnbull used this information to develop a business plan for his store. Mr. Conn
23
estimated that their stores first year average sales would be $462,000 ($8,884 weekly) and that
24
their average store contribution would be $57,288 or just under 12.5% of net sales.
25
SECOND AMENDED COMPLAINT FOR
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134.
Mr. Turnbull gave Mr. Werling a copy of the business plan to review. Mr. Werling told Mr.
Turnbull that the sales and profit estimates looked correct and conservative and that he
would send them to operations for review and a second opinion. A few weeks later, Mr.
Werling told Mr. Turnbull that operations agreed with his evaluation.
135.
spring of 2006.
6
7
Mr. Turnbull signed his franchise agreement and paid his $25,000 initial franchise fee in the
136.
Mr. Conn attended an owners training session hosted by Papa Murphys International. He
asked the trainer, Jamie Wilson, about whether or not the weather would affect our sales
volume since Texas and the southern states were considerably warmer than the Pacific
10
Northwest. Mr. Conn does not recall her exact response but it was something to the effect
11
that it may have a relatively small effect but it shouldnt make much of a difference. Mr. Conn
12
also asked for regional sales information from other franchisees. She said she could not get
13
14
137.
They signed the lease for their Bryan Store in May of 2007. Since it opened their store has
15
had average annual sales of $426,800, roughly $35,200 less than what they had estimated for
16
their first year sales. Rather than earning a profit of 12% of net sales like they had estimated,
17
Mr. Conns and Mr. Turnbulls store has lost money almost every year. Since they opened
18
the store they have lost almost a half million dollars in their investment.
19
138.
Mr. Conn and Mr. Turnbull asked Papa Murphys International for assistance. They were told
20
to spend more on advertising. Mr. Conn repeatedly asked for sales information for other
21
franchisee in his region. Each time he was told that Papa Murphys International could not
22
23
139.
If Mr. Werling had not told Mr. Conn and Mr. Turnbull that the average annual sales for a
24
Papa Murphys store were $450,000-500,000; that a Papa Murphys franchise had profits of
25
12-20 percent of net sales, and that their estimates of annual sales of $462,000 and profits of
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 49
$57,288 were conservative and correct, Mr. Conn and Mr. Turnbull would not have
140.
Had either Mr. Werling or Papa Murphys International fully and accurately disclosed the
sales discrepancies between the average sales disclosed in the FDD and provided by Mr.
Werling and the actual sales of new stores located outside the Pacific Northwest, the amount
of local store marketing necessary to achieve those sales, or the time in operation necessary to
achieve those sales, Mr. Conn and Mr. Turnbull would not have invested in the franchise.
141.
As a direct result of their investment in a Papa Murphys franchise, Mr. Conn and Mr.
Turnbull have lost almost a half million dollars. At the same time, Papa Murphys
9
10
International has profited from their failed investment, collecting $25,000 in franchise fees
11
12
John Demattia
13
142.
John DeMattia first tried Papa Murphys pizza in Tyler, Texas in 2008. He thought it was a
14
great food and that it would sell well in his Dallas hometown. At the time, Mr. DeMattia was
15
the president of an IT company but he had fond memories of his childhood in his mothers
16
restaurant and thought owing a Papa Murphys franchise might be a good way to get back
17
18
143.
In the summer of 2008, Mr. DeMattia contacted Papa Murphys International about
19
purchasing a franchise. He was asked to fill out a qualification report listing his net worth and
20
liquid assets. He completed the qualification report and sent it back to Papa Murphys
21
International.
22
144.
In September of 2008, Mr. DeMattia was contacted by Eric Brown, a Papa Murphys
23
salesman. Eric Brown told me that that the average net sales of Papa Murphys owned Papa
24
Murphys stores was $569k and that each store generated $85,0000 or more in profit and he
25
should expect the average to grow to about $585k next year. Mr. Brown did not distinguish
SECOND AMENDED COMPLAINT FOR
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NEGLIGENT MISREPRESENTATION - 50
between the performance of Papa Murphys owned stores and franchisee owned stores. Mr.
Brown also sent Mr. DeMattia a break even analysis and business plan template to use in
145.
Mr. DeMattia received a copy of the April 2008 FDD. In Item six of April 2008 FDD, Papa
Murphys International stated that stated that he would be required to spend either five percent
of net sales or $500 a month, whichever was greater on local store marketing. In Item 19,
Papa Murphys International stated that the average annual sales for high, medium and low
tiers stores were $755,787 ($14,534 weekly), $484,320 ($9,313 weekly), and $316,221
($6,081 weekly), respectively and that the system average was $518,815 ($9,977 weekly). In
10
the company store chart, Papa Murphys International stated that company stores were
11
spending roughly six to eight percent of net sales on local store marketing.
12
146.
Based on the information provided by Mr. Brown, by Papa Murphys International in the FDD
13
and his own investigation with other Papa Murphys franchisees, Mr. DeMattia developed a
14
business plan. In his business plan, he estimated that he would spend 5% of his net sales on
15
local store marketing. He estimated that his first year average weekly sales would be $6,846 or
16
$356,000 annually. He estimated that his second year average weekly sales would be
17
18
147.
Mr. DeMattia showed his business plan to Jerry Defeo and Jeff Hood, Papa Murphys
19
International employees. The only feedback he got was that his forecasts were possible but
20
not guaranteed. No one from Papa Murphys International told Mr. DeMattia that his
21
22
148.
23
24
25
Mr. DeMattia signed his franchise agreement on or around November 3, 2008 in Texas. He
149.
Mr. DeMattia opened his store on October 20, 2008. Since opening his store has averaged
roughly $7,700 a week in average weekly sales, well below the system averages in the FDD
and what he had projected in his business plan. In order to achieve those low sales, Mr.
DeMattia is spending approximately 10 percent of his net sales on local store marketing, twice
150.
Mr. DeMattia worked full time in his Papa Murphys store. During that time, he took less than
$30,000 in compensation. His hard work in his store has paid off in the form of excellent
inspections scores from Papa Murphys International and the local health department. Mr.
DeMattias store is yelps highest rated pizza store on Yelp. Yet in terms of sales and profits
151.
Since Mr. DeMattia purchased his store, he has lost more than $400,000 in his investment. He
10
has been forced to raid his 401(k). In 2014, Mr. DeMattia was forced to take another full
11
time job to make ends meet. He now works full time at his paying job and then goes back to
12
his store to work another 40 to 45 hour week. Before he invested with Papa Murphys
13
International, Mr. DeMattia had an active social life, was involved in community
14
organizations such as Rotary International and the YMCA. Since investing with Papa
15
Murphys International, Mr. DeMattia struggles to get eight hours of sleep and his marriage of
16
17
152.
If Papa Murphys International had not provided Mr. DeMattia with an FDD which included
18
representations regarding the amount of local store marketing and the average sales for its
19
20
153.
stores in his region his business was not realistic he would not have invested in his franchise.
21
22
If Mr. Defeo or Mr. Hood had told Mr. DeMattia that given the performance of other new
154.
If Mr. Brown had told Mr. DeMattia that the company store sales information he gave him
23
was not representative for new stores in his region, and that new stores in his region had
24
dramatically different sales averages and sales growth, he would not have invested in his
25
franchise.
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 52
155.
Had either Mr. Brown, Mr. Hood or Papa Murphys International fully and accurately
disclosed the dramatic difference between the average sales disclosed in the FDD and the
actual sales of new stores located outside the Pacific Northwest, the amount of local store
marketing necessary to achieve those sales, or the time in operation necessary to achieve those
156.
Jana Liles, her husband Randell Liles and their daughter and son in law Kimberly and Ben
Mayfield wanted to invest in Papa Murphys franchises to provide extra retirement income for
Mr. and Mrs. Liles and a secondary income for Mr. and Mrs. Mayfield.
10
157.
They contacted Papa Murphys International in late 2006 or early 2007. They were asked to
11
fill out a qualification report and return it to Papa Murphys International. In their
12
qualification report Mr. and Mrs. Liles stated that they had a net worth of $398,741 including
13
their home, personal items, savings and retirement. Mr. and Mrs. Liles stated that they had
14
$59,127 in liquid assets. Mr. and Mrs. Mayfield stated that they had net worth of $202,033
15
16
158.
Shortly, they sent in their qualification report, Papa Murphys International gave them a copy
17
of the August 2006 FDD. In Item six of the FDD, Papa Murphys International stated that
18
stated that the Liles family would be required to spend either five percent of net sales or $500
19
a month, whichever was greater on local store marketing. In Item 19, Papa Murphys
20
International stated that the average annual sales for high, medium and low tiers stores were
21
$707,673 ($13,609), $462,256 ($8890 weekly), and $293,167 ($5,637 weekly), respectively
22
and that the system average was $487,699 ($9,378 weekly). In Item 19, there was a company
23
store chart which stated that the high, medium and low tiers stores respectively spent five, six
24
or seven and a half percent on local store marketing. In a note the company store chart, Papa
25
Murphys International stated that the advertising level for Company Stores is equivalent to a
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
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Franchised Stores 8% per period contribution for marketing the Papa Murphys Brand
159.
Based on the information provided by Papa Murphys International in the FDD, the Liles
family developed a business plan using a template provided by Papa Murphys International.
They estimated that their average weekly sales for the first year would be $7,252 for annual
average sales of $377,080. They estimated that during their second year, they would have
anticipated that their initial advertising expenses would be eight percent of net sales (including
their national ad fund contribution). They estimated that their annual profits for their franchise
would be 12-14% of annual sales.
10
11
160.
The Liles family signed their franchise agreement and purchased their franchise on or about
12
March 30, 2007 in Texas. Their Keller, Texas store opened on May 20, 2008. They paid a
13
$25,000 franchise fee to Papa Murphys International and spend roughly $247,000 to build
14
their store. Since the store opened, the Liles family has invested roughly $145,485 in their
15
store.
16
161.
In the almost six years the store has been open, their store has averaged roughly $7,925 in
17
average weekly sales, just slightly above what the Liles family estimated they would make
18
during their first year. In order to reach those sales, they have spent roughly ten percent of net
19
sales on local store marketing, two percent more than they had estimated in their business
20
plan, and four percent more than was represented in the FDD. In the six years the store has
21
been open, the Liles family has been able to take a grand total of $21,500 in compensation for
22
the time they have worked in the store. In their business plan, they estimated that they would
23
make profits which would amount to 12%-14% percent of net sales. In reality, they have been
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 54
162.
In July of 2013, Mrs. Liles attended the Papa Murphys Franchisee Association meeting. At
that meeting, Dave Myers, a long term Papa Murphys franchise gave a presentation. In his
presentation, Mr. Myers talked about the annual sales for the Pacific Northwest, which he
called the land of milk and honey and then he talked out the annual sales for the Eastern
Region (which currently includes Texas) and they were much lower. He called the Eastern
Region the land of oil and vinegar. The difference in the sales between the Pacific
Northwest was shocking. It was then that Mrs. Liles realized her stores low sales were part of
much bigger problem and that the numbers she and her family saw in the original FDD were
10
163.
If Papa Murphys International had not provided the Liles family with an FDD which included
11
representations regarding the amount of local store marketing and the average sales for its
12
13
164.
Had Papa Murphys International fully and accurately disclosed the sales discrepancies
14
between the average sales disclosed in the FDD and the actual sales of new stores located
15
outside the Pacific Northwest, the amount of local store marketing necessary to achieve those
16
sales, the time in operation necessary to achieve those sales or that given their relatively
17
modest liquid assets, the Liles family were not sufficiently capitalized to successfully a
18
franchise, the Liles family would not have invested in their franchise.
19
165.
As a direct result of their investment in a Papa Murphys franchise, the Liles family has lost at
20
least $417,485 from their failed investment. While the Liles family lost almost a half million
21
dollars and several years of their life operating a failing Papa Murphys store, Papa Murphys
22
International has profited by collecting $25,000 in franchise fees and more than $126,000 in
23
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 55
166.
Alexander Overcash and Angelo Chantilis are high school friends. In 2011, Mr. Overcash was
considering investing in a franchise and he contacted Mr. Chantilis for his insight because Mr.
Chantilis worked for years in his familys restaurant chain. Mr. Overcash was considering a
Papa Murphys franchise and after learning about the concept, Mr. Chantilis asked if he could
167.
Mr. Overcash and Mr. Chantilis contacted Papa Murphys International through its website.
Papa Murphys International contacted them and asked them to fill out a qualification report.
Mr. Overcash and Mr. Chantilis completed their qualification report and submitted it to Papa
Murphys International. Mr. Overcash stated that he had a net worth of 1..3 million dollars
10
and $583,479 in liquid assets. Mr. Chantilis stated that he had a net worth of $230,550 and
11
12
168.
On February 9, 2012, Mr. Overcash and Mr. Chantilis met Mike Norcup, a Papa Murphys
13
International salesman at a Holiday Inn in Grapevine, Texas. They discussed the Papa
14
Murphys business model, marketing fees and projected sales volume. Mr. Overcash and Mr.
15
Chantilis stated that they were interested in purchasing multiple units. Mr. Norcup also
16
provided them a copy of the June 2011 FDD. After the meeting, Mr. Norcup sent Mr.
17
Chantilis and Mr. Overcash templates for a break even analysis and a business plan.
18
169.
In Item Six of the June 2011 FDD, Papa Murphys International stated that Mr. Chantilis and
19
Mr. Overcash would be required to spend either five percent of net sales or $1,5000 a month,
20
whichever was greater on local store marketing In Item 19 of the June 2011 FDD, Papa
21
Murphys International stated that the average annual sales for high, medium and low tiers
22
stores were $792,515 ($15,241 weekly), $492,327 ($9,469 weekly), and $330,636 ($6,358
23
weekly), respectively and that the system average was $503,233 ($9,677 weekly). In the
24
company store chart of Item 19, Papa Murphys International stated that company stores spent
25
170.
Mr. Chantilis and Mr. Overcash used the sales information Papa Murphys International
provided in the business plan template and any other documents Mr. Norcup had provided to
them, the FDD sales averages and the sales numbers they had obtained from several other
franchisees, including Brian Watson, to develop their business plan. Mr. Chantilis and Mr.
Overcash estimated that their first year net sales would be $8,500 or $442,000 annually, that
their break even average sales were $7,000. They estimated that local store marketing would
be two percent of net sales every month in addition to a six percent advertising cooperative
contribution. They estimated that their store sales would grow by four to five percent every
year.
10
171.
In February of 2012, Mr. Chantilis and Mr. Overcash showed their business plan to Mr.
11
Norcup. He said that their numbers were too conservative and that they could expect to do
12
13
172.
Mr. Norcup arranged a meeting for Mr. Chantilis and Mr. Overcash with Kevin King, the
14
Chief Development Officer for Papa Murphys International. Mr. Norcup told Mr. Chantilis
15
and Mr. Overcash that they must sent their business plan and break even analysis and
16
qualification report to Papa Murphys International before their meeting with Mr. King so he
17
could review them before the meeting. Mr. Chantilis and Mr. Overcash provided
18
173.
Mr. Chantilis and Mr. Overcash had a lunch meeting with Mr. King and Mr. Norcup in Texas,
19
on March 29, 2012. At no point during the meeting did either Mr. King or Mr. Norcup
20
suggest that any aspect of Mr. Chantilis and Mr. Overcashs qualifications, break even
21
analysis or business plan were unrealistic or not achievable for a new store in their region.
22
174.
On April 17, 2012, Mr. Overcash and Mr. Chantilis meet with Jerry Defoe and Gail Lawson,
23
the regional vice-president for the Southwest region. At no point during the meeting did either
24
Mr. Defoe or Ms. Lawson suggest that any aspect of Mr. Chantilis and Mr. Overcashs
25
qualifications, break even analysis or business plan were unrealistic or not achievable for a
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 57
new store in their region. The next day, Mr. Norcup called Mr. Chantilis and Mr. Overcash to
tell them that they had been approved as Papa Murphys franchisees.
175.
On May 25, 2012, in Texas, Mr. Chantilis and Mr. Overcash signed an Area Development
Agreement with Papa Murphys International to open eight stores in the Dallas Forth Worth
area. They paid Papa Murphys International $60,000 in franchise fees including $25,000 for
their first store and $5,000 deposit on the remaining stores. They signed the franchise
176.
Mr. Chantilis and Mr. Overcash opened their first store, TX 184, on April 22, 2013. During
the time the store was open, TX 184 had post grand opening sales of $5,931 roughly $2,569
9
10
below what they estimated in their Papa Murphys International approved business plan. Mr.
11
Chantilis and Mr. Angelo paid an initial franchise fee of $25,000 and invested an additional
12
$159,355 to open the store. As of September 2014, they spent $57,982 in local store
13
14
177.
Mr. Chantilis and Mr. Overcash opened their second store, TX 137, on September 10, 2013.
15
They purchased that store from another Papa Murphys franchisee. As of September 2014,
16
TX 137 had had post re-grand opening sales of $5,320 roughly $3,180 below what they
17
estimated in their Papa Murphys International approved business plan. Mr. Chantilis and Mr.
18
Overcash purchased that store for $168,849. As of September 2014, they spent $27,005 in
19
local store marketing and paid Papa Murphys International $13,773 in royalties.
20
178.
Mr. Chantilis and Mr. Overcash opened their third store TX 219, on October 14, 2013. As of
21
September 2014, TX 219 had post grand opening average weekly sales of $5,532, roughly
22
$3,114 below what they estimated in their Papa Murphys International approved business
23
plan. They paid an initial franchise fee of $15,000 and invested an additional $150,984 to open
24
the store. As of September 2014, Mr. Chantilis and Mr. Overcash spent $34,687 in local store
25
179.
Mr. Overcash and Mr. Chantilis contacted several Papa Murphys International employees,
including Dan Harmon and Rob Debrooke, for assistance with their low sales. They were told
to work hard and not give up. No one from Papa Murphys International suggested that their
low sales and high marketing expenses were typical of new stores outside of the Pacific
Northwest.
180.
Overcash were forced to close all three of their Papa Murphys stores.
7
8
In October of 2014, facing continuing losses and with no hope in sigh, Mr. Chantilis and Mr.
181.
At the time that Mr. Chantilis and Mr. Overcash invested in their Papa Murphys franchises
they were attempting to make an investment for their future and their families. Instead Mr.
10
Overcash was forced to sell his house to help with debt servicing on their investment. In the
11
time their stores were open, each store had average weekly net sales that were two to three
12
thousand dollars below the sales they had estimated in their Papa Murphys approved
13
business plan. To achieve those sales, Mr. Chantilis and Mr. Overcash spent roughly eighteen
14
percent of their net sales on local store marketing, twice the amount they had estimated in their
15
business plan.
16
182.
If Mr. Norcup had not told Mr. Angelo and Mr. Overcash that their estimated average weekly
17
sales of $8,500 or $442,000 annually and their estimate sales growth of four to five percent
18
annually was too conservative and that they could expect to make much more, Mr. Chantilis
19
20
183.
If Papa Murphys International had not provided Mr. Chantilis and Mr. Overcash with an FDD
21
which included representations regarding the amount of local store marketing and the average
22
sales for its franchises, Mr. Chantilis and Mr. Overcash would not have purchased their
23
franchises.
24
25
184.
Had either Mr. Norcup, Mr. King, or Papa Murphys International fully and accurately
disclosed the sales discrepancies between the average sales disclosed in the FDD and
provided by Mr. Norcup and the actual sales of new stores locate outside the Pacific
Northwest, the amount of local store marketing necessary to achieve those sales, the time in
operation necessary to achieve those sales or that given their relatively modest liquid assets
Mr. Chantilis and Mr. Overcash were not sufficiently capitalized to successfully operate an
eight franchises franchise, Mr. Chantilis and Mr. Overcash would not have invested in their
franchises.
185.
As a direct result of their investment in a Papa Murphys franchise, Mr. Chantilis and Mr.
Overcash have lost at least $519,189 from their failed investment. While Mr. Overcash and
Mr. Chantilis lost more than a half million dollars and two years of work in their investment,
10
Papa Murphys International has profited by collecting $60,000 in franchise fees and more
11
12
13
14
Robert Dickerson
15
186.
Robert Dickerson learned entrepreneurship from his parents. His family owned several
16
businesses and Mr. Dickerson started working for his family when he was 12 years old. He
17
18
187.
In 2005, Mr. Dickerson owned five Papa Murphys franchises. Although Mr. Dickersons
19
stores struggled with low sales, Papa Murphys Internationals representatives told him that
20
his sales would increase if he built more stores and spent more on local store advertising.
21
188.
22
23
24
In 2005, Mr. Dickerson began to pursue purchasing an ADA which would allow him to own
189.
In April of 2006, Papa Murphys International sent Mr. Dickerson a copy of the April 2006
FDD. In Item Six of the FDD, Papa Murphys International stated that Mr. Dickerson would
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 60
be required to spend either five percent of net sales or $1,5000 a month, whichever was
190.
Additionally, in Item 19 of FDD, Papa Murphys International stated that the average annual
sales for high, medium and low tiers stores were $707,673 ($13,609 weekly), $462,256
($293,167 weekly), and $293,167 ($5,637 weekly), respectively and that the system average
was $487,699 ($9,378 weekly). Also in Item 19, Papa Murphys International included a
chart of company stores which stated that the average sales for Papa Murphys company stores
was $466,572 and that Papa Murphys International reached those sales by spending the
equivalent of eight percent of net sales on local store marketing. This included a two percent
10
contribution to the national ad fund with the remaining six percent and two percent. Nowhere
11
in the FDD did Papa Murphys International disclose that the average sale information was not
12
representative of new stores outside the Pacific Northwest, that it would take 5-7 years to
13
reach those averages and new stores outside the pacific northwest typically spent two or three
14
times the disclosed average on local store marketing to reach below average sales.
15
191.
On April 20, 2006, Mr. Dickerson flew to Vancouver, Washington to present his business plan
16
17
information in the qualification report and his business plan. On April 20, 2006, Papa
18
Murphys International approved his qualifications and business plan and he signed an area
19
20
Washington.
21
192.
At the time that Mr. Dickerson signed the Area Development Agreement, he paid Papa
22
Murphys International $65,000. This payment included the franchisee fee for his first store to
23
be developed under the agreement and a $5,000 deposit for each additional store. Mr.
24
Dickerson opened his remaining seven stores under the terms of the Area Development
25
Agreement.
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 61
193.
Mr. Dickerson opened his sixth store, AR009 in October of 2006. It has average weekly sales
of roughly $6,996. In addition to the $5,000 he paid when he signed the Area Development
Agreement in Vancouver, Mr. Dickerson paid an additional franchise fee of $10,000 and
194.
Mr. Dickerson opened his seventh store, AR010 in December of 2006. This store closed in
2010. In addition to the $5,000 he paid when he signed the Area Development Agreement in
Vancouver, Mr. Dickerson paid an additional franchise fee of $10,000 and invested an
195.
Mr. Dickerson opened his eighth store, MO033 in September of 2007. It has average weekly
10
sales of roughly $7,858. In addition to the $5,000 he paid when he signed the Area
11
12
13
196.
Mr. Dickerson opened his ninth store, AR015, in August of 2008. It has average weekly sales
14
of roughly $6,126. In addition to the $5,000 he paid when he signed the Area Development
15
Agreement in Vancouver, Mr. Dickerson paid an additional franchise fee of $10,000 and
16
17
197.
Mr. Dickerson opened his tenth store, AR025 in October of 2009. It has average weekly sales
18
of roughly $6,126. In addition to the $5,000 he paid when he signed the Area Development
19
Agreement in Vancouver, Mr. Dickerson paid an additional franchise fee of $10,000 and
20
21
198.
Mr. Dickerson opened his eleventh store, AR0026 in September of 2010. It has average
22
weekly sales of roughly $5,212. In addition to the $5,000 he paid when he signed the Area
23
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 62
199.
Mr. Dickerson opened his twelfth store, AR027, in August of 2010. In addition to the $5,000
he paid when he signed the Area Development Agreement in Vancouver, Mr. Dickerson paid
an additional franchise fee of $10,000 and invested an additional $184,830 to open the store.
Given the stores abysmal sales of $4,862 per week, Mr. Dickerson closed the store in January
of 2014.
200.
In 2013, Mr. Dickerson signed franchise renewal for his first store MO018 on or about March
29, 2013. Prior to signing the franchise agreement, Papa Murphys International provided him
with copies of the November 2012 FDD. In addition to the representations regarding average
sales and local marketing expenditures that Papa Murphys International had made in prior
10
FDDs, in the November 2012 FDDs Papa Murphys International made representations
11
regarding the benchmark stores which showed that the benchmark stores were earning
12
profits of between three and eighteen percent of their net sales. When he saw those numbers
13
Mr. Dickerson felt that the model must be working for some franchisees and he believed he
14
15
201.
Since purchasing his area developer agreement, Mr. Dickerson has spent between seven to
16
ten percent of his net sales on local store marketing. For example, in 2012, his stores gave
17
away more than 10,000 certificates for free mini-murph pizzas to children in vacation bible
18
school. Although the promotion increased his labor and food usage and his discount rate it did
19
20
202.
Mr. Dickerson served on the Papa Murphys Franchisee Advisory board with other franchisees
21
from around the country. It was during conversations with other PMFA board members in
22
2012 and 2013 that Mr. Dickerson realized it wasnt just his stores that had below average sale
23
sand above average local marketing expenses but that most stores in his region struggled with
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 63
203.
If Papa Murphys International had not provided Mr. Dickerson with misleading average sales
information in the FDD and had not made representations regarding local marketing in the
FDD, Mr. Dickerson would not have purchased his franchises. Papa Murphys International
fully and accurately disclosed the sales discrepancies between the average sales disclosed in
the FDD and new stores outside the Pacific Northwest, the amount of local store marketing
necessary to achieve those sales, or that most stores took five to seven years to reach those
average sales, Mr. Dickerson would not have purchased his Papa Murphys franchises.
204.
As a direct result of Papa Murphys Internationals lies and misrepresentations, Mr. Dickerson
has suffered devastating financial losses. Since purchasing his area developer agreement, Mr.
9
10
Dickerson has invested more than a million dollars in his Papa Murphys stores. He has
11
personally guaranteed debts and liabilities which amount for an additional $750,000. He
12
devotes roughly 50 hours a week to his Papa Murphys stores. While Mr. Dickerson has lost
13
more than a million dollars in his investment, Papa Murphys International has collected
14
roughly $505,996 in royalties and $125,000 in franchise fees from Mr. Dickersons stores.
15
Alabama Plaintiffs
The Callegans
16
205.
Ann and Harvey Callegan first tried Papa Murphys Pizza in Baton Rouge, Louisiana. They
17
were very impressed by the product and wanted to introduce Papa Murphys to their new
18
home town in Alabama. They were first told that Papa Murphys International wasnt selling
19
franchisees in their area but in 2009, Billy Rose contacted the Callegans and asked if they
20
206.
The Callegans completed a qualification report and sent it back to Papa Murphys
22
207.
In 2009, Mr. Rose delivered the March 2009 FDD to the Callegans at their home in Orange
24
Beach, Alabama. Mr. Rose sat with Mr. and Mrs. Callegan at their dining room table and
25
208.
In the FDD, Papa Murphys International stated that franchisees were required to spend 5% of
net sales or $500 a month, which ever was greater on local store marketing. In Item 19 of the
FDD, Papa Murphys International stated the average sales for Papa Murphys franchises as
well as the average sales for high, medium and low tiered stores. Item 19 also included the
average sales and expenses for high, medium and low tier company stores. The average
209.
Mr. Rose went over the sales information with Mr. and Mrs. Callegan. Mrs. Callegan asked
where he though their store would fall on the chart. Mr. Rose said he thought the Callegans
store would be in the low tier in the beginning but that they could expect their sales to grow
ten percent each year and that in two to five years they could make their investment back.
10
11
210.
said that the Callegans could expect to take home 20% of net sales in profits.
12
13
Mr. Callegan asked what the take home profits were for a Papa Murphys franchise. Mr. Rose
211.
Mr. Callegan then pointed out that some of Mr. Rose was saying did not appear to match the
14
statistics in the company stores chart. Mr. Rose responded that the company stores were an
15
example of dont do as we do; do as we say. Mr. Rose said that the company stores spent
16
too much on advertising and were always trying crazy things that cost too much to the bottom
17
line.
18
212.
Based on the FDD and Mr. Roses statements, the Callegans estimated that the take home
19
profit on their first store would be roughly $60,000 in the beginning. They estimated that
20
given the low tier average of $300,000 in sales and with both Mr. and Mrs. Callegan working
21
in the store and doing local store marketing to save on expenses, they would make roughly
22
$320,000 in net sales during their first year. They estimated that if sales grew 10% each year,
23
after five years they would have average sales of roughly $520,000 or $10,000 a week.
24
25
213.
The Callegans signed their franchise agreement on June 5, 2009. They purchased their
franchise using their savings and the profits from the sale of Mrs. Callegans business.
214.
Mr. Rose and other Papa Murphys employees repeatedly offered to recommend companies
that would help [the Callegans] get money. In Item 10 of the FDD Papa Murphys
International states that it does not assist franchisees with financing or refer them to
215.
The Callegans store opened on December 7, 2009 in Foley, Alabama. Since the store opened
it has had average weekly sales of $7,170. The Callegans have invested more than $500,000
in their store.
216.
The Callegans spend 15%-20% of their net sales on local store marketing. Ironically, this is
significantly more than the 8-13.5% percent that the company stores were spending when Mr.
9
10
Rose told the Callegans that the company stores were spending too much on local store
11
marketing.
12
217.
The Callegans give away pizzas to local schools. They do print, radio and television
13
promotions. They have given away pizzas at the YMCA and other local businesses. For the
14
last two years, Mr. Callegan has baked and grilled pizzas and Mrs. Callegan has hosted ladies
15
16
218.
The Callegans realized shortly after their store opened that their sales were well below the
17
disclosed average and their own estimates. When they contacted Papa Murphys International
18
for assistance, they were told to keep sampling the pizzas and to increase their local store
19
marketing and the sales would increase. They did not realize that their low sales were typical
20
for their region until late 2012 or 2013 when a Market Leader for Papa Murphys International
21
22
219.
The Callegans decision to invest in Papa Murphys was personally and financially disastrous.
23
Since purchasing their Papa Murphys franchise they have suffered more than $500,000 in
24
damages including their franchise fee, their initial investment and operating loses. While the
25
Callegans have lost the entire investment and continue to struggle to reach break even on their
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 66
store, Papa Murphys International has made more than $100,000 from the Callegans store in
220.
If Mr. Rose and his employer Papa Murphys International had not provided the Callegans
with misleading average sales information in the FDD, had not made representations regarding
local marketing in the FDD, had not told the Callegans the average take home profits were
twenty percent of net sales, and had not told the Callegans to expect a ten percent annual
increase in sales, the Callegans would not have purchased the franchise. Had either Mr. Rose
or Papa Murphys International fully and accurately disclosed the sales discrepancies between
the average sales disclosed in the FDD and new stores outside the Pacific Northwest, the
10
amount of local store marketing necessary to achieve those sales, or that most stores took five
11
to seven years to reach those average sales, the Callegans would not have purchased their Papa
12
Murphys franchisee.
13
221.
As a direct result of their investment, the Callegans have lost at least $500,000 in their initial
14
investment and continuing operating losses. Ann Callegan continues to work 60-70 hours a
15
week in her store without adequate compensation and both Ann and Harvey Callegan struggle
16
17
Florida Plaintiffs
18
222.
Steven Pyatt, Craig Braun and David Mraz are lifelong friends. In 2009 Mr. Pyatt moved
20
from Minneapolis to Marco Island, Florida. He, Mr. Braun and Mr. Mraz began talking about
21
starting some kind of business together. They had tried Papa Murphys in the Midwest and
22
223.
In late 2009 or early 2010, Mr. Pyatt and Mr. Braun attended a Papa Murphys International
24
Sales meeting in Jacksonville, Florida. Billy Rose, Jim Werling and Jim Perkins hosted the
25
meeting. During the meeting, the salesmen repeatedly said that our store average is $580,000
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 67
per year in net sales. At no point in the meeting did any of the salespeople disclose, mention
or imply that there any differences in average sales based on age or location of the franchise.
Mr. Pyatt and Mr. Braun were very impressed by the presentation and began speaking with
Mr. Werling about purchasing a multi store area development agreement for Papa Murphys
224.
Mr. Werling emailed a link to the March 2010 FDD to Mr. Pyatt along with template for a
business plan and a break even analysis. He asked Mr. Pyatt to develop a business plan using
the templates.
225.
Mr. Pyatt studied the FDD in great detail. He carefully reviewed Item Six and Item 19 of the
10
FDD. In Item six of the FDD, Papa Murphys International stated that franchisees would be
11
required to spend either five percent of net sales or $1,500 a month which ever was greater on
12
local store marketing. In Item 19 of the FDD, Papa Murphys International stated that the
13
average annual sales for high, medium and low tiers stores were $818,955 ($15,749 weekly),
14
$517,871 ($9,950 weekly), and $343,806 ($6,611 weekly), respectively and that the system
15
average was $560,171 ($10,772 weekly). In Item 19, there was a company store chart which
16
stated that the high, medium and low tiers stores respectively spent seven, eight or twelve
17
18
226.
Mr. Pyatt and Mr. Braun had some concerns about whether or not Floridas climate would
19
affect store sales. Mr. Werling did directly respond to their concerns but suggested that they
20
should contact Matt Terry, a franchisee in Texas and Doug Miller, a multi-unit franchisee in
21
Idaho who had just signed a 15 store area developer agreement for Austin, Texas.
22
227.
Based on the information provided at the sales conference, in the FDD and the other
23
franchisees, Mr. Pyatt developed a business plan, a break even analysis and a sales projection
24
spreadsheet. He presented these documents at a meeting with Mr. Werling and Mr. Perkins in
25
Green Bay, Wisconsin on May 18, 2010. Mr. Perkins said that the business plan was one of
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 68
the best he had ever seen. However, he said the sales projections spreadsheet was too
conservative and he asked Mr. Pyatt to revise it to include a more aggressive projection. Mr.
Pyatt then revised the document to include three sales scenarios; Good, Better, and Best. In
the revised sales projection spreadsheet, Mr. Pyatt estimated his stores Good, Better and
Best sales as $7,577a week, $9,019 a week and $12,000 a week. Mr. Pyatt estimated that his
stores would spend three to four percent on local store marketing and eight percent on
advertising overall.
228.
Mr. Werling again reviewed the changes and told Mr. Pyatt that he was being very realistic in
his expectations. Mr. Pyatt paid a $30,000 franchise fee to Papa Murphys International at the
10
Green Bay meeting. Mr. Pyatt, Mr. Braun and Mr. Mraz entered into a multi-store agreement
11
in which they would build three stores with a right of first refusal for up to 10 more to be
12
developed in the Fort Myers/Naples area of Florida. During the sales process, Mr. Werling
13
had stressed the short time line for development and stated that Papa Murphys Internationals
14
new owners (Lee Equity) were anxious to develop as many new stores as possible.
15
229.
16
17
Mr. Pyatt and Mr. Braun built their Naples, Florida store themselves using Mr. Brauns
230.
Mr. Pyatts store was considered one of the best built and run stores in the entire chain by
18
every Papa Murphys employee who visited. During the 31 months the store was open, Mr.
19
Pyatts store was consistently ranked one of the top performing stores in the entire chain based
20
on customer surveys. Papa Murphys International consistently gave the store triple AAA
21
22
231.
Unfortunately, Mr. Pyatts store sales never came close to the sales which he had estimated
23
and which were approved by Mr. Werling. After 31 months of operation, Mr. Pyatts store
24
had average weekly net sales of only $4,515. When Mr. Pyatt contacted Papa Murphys
25
International for assistance they suggested more sampling and other store marketing. No
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 69
individual from Papa Murphys International informed Mr. Pyatt that his stores weak sales
232.
Mr. Pyatt, Mr. Braun and Mr. Mraz realized that in light of their stores continuing losses and
with no reasonable expectation of improving sales, it was necessary to close the store, which
233.
Mr. Pyatt, Mr. Braun and Mr. Mraz invested at least $100,000 in their Papa Murphys
franchise. While they lost their entire investment, Papa Murphys International collected
234.
If Mr. Werling and Mr. Perkins had not told Mr. Pyatt, Mr. Braun and Mr. Mraz that their
10
business plan was the best they had ever seen but that their projected sales were too
11
conservative and encouraged them to develop a more realistic plan with even higher sales
12
13
235.
If Papa Murphys International had not provided Mr. Pyatt, Mr. Braun and Mr. Mraz with the
14
average sales and profit representations in the FDD, had not made representations regarding
15
local marketing costs, or approved their revised sales projections, they would not have
16
17
236.
Had Papa Murphys International fully and accurately disclosed the sales discrepancies
18
between the average sales disclosed in the FDD and those experienced by new stores
19
outside the Pacific Northwest, or the amount of local store marketing necessary to achieve
20
those sales, they would not have purchased their Papa Murphys franchise or signed their area
21
developer agreement.
22
237.
As a result of their investment in a Papa Murphys franchise, Mr. Pyatt, Mr. Brain and Mr.
23
Mraz have lost at least $100,000 of their investment. While they lost their entire investment,
24
Papa Murphys International collected $66,930 from them in royalties and franchise fees
25
238.
Ilya and Chantal Rubin were devoted Papa Murphys customers in the Midwest and in their
new home in Charlotte, North Carolina. In Charlotte, they became acquainted with Cole
Kilen, the store manager for the Charlotte Papa Murphys. Based on their belief in the Papa
Murphys product and the success they had seen with stores in the Midwest, the Rubins along
with their friends and collegues, Glenn and Joanna Patcha, Ian Hasinoff and Susan Lorimer,
239.
In March of 2011, Chantal Rubinn and Glenn Patcha met with Steve Millard to discuss
investing in an area development agreement with Papa Murphys International. Mr. Millard
discussed the business model. Mr. Millard also showed Chantal, Cole and Glenn a large
binder which he claimed has the sales numbers for Papa Murphys franchises.
10
11
240.
Mrs. Rubin looked at several pages in the binder and saw pages and pages of stores which
12
had average sales of more than ten thousand dollars a week. Mr. Millard stated that those
13
sales levels were very common and that with advertising and involvement in the local schools
14
and community the Rubin group could easily find themselves reaching $13,000 or more in
15
16
241.
Mrs. Rubin also noticed a short list of stores with average weekly sales of under $5,000 a
17
week. She asked Mr. Millard about the list and he stated that because of the low break even
18
levels even t the people who owed those stores were still making a profit.
19
242.
Later that day, Mr. Millard met with Ian Hasinoff and Ilya Rubin at the hospital where they
20
worked. During this meeting, Mr. Millard told Mr. Rubin and Mr. Hasinoff that the Papa
21
Murphys model was universally successful. He also stated that if the Rubin group decided to
22
apply for a business loan he could guide them to banks and lenders who would be able to
23
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 71
243.
In fact, in Item 10 of the FDD provided by Mr. Millard, Papa Murphys International stated
that we do not provide direct or indirect financing. We do not assist in providing financing
for you.
244.
The Northwinds Partners also reviewed the 2011 FDD. The Northwinds Partners relied on the
average sales information Papa Murphys disclosed in Item 19 in their investment analysis and
used it to develop their business plan and break even analysis. Glenna Patcha developed both
the break even analysis and the business plan using templates Mr. Millard provided to him.
The Northwinds Partners were told that Papa Murphys International would use this
10
245.
On April 25, 2011, the Rubins, Glenn Patcha and Ian Hasinoff met with Mr. Millard and
11
Steven Maeker for a dinner meeting. At that meeting, Glenn Patcha made a power point
12
presentation. In the power point, Northwinds Partners stated their goal was to open 10-15
13
stores in their area over seven years with each store averaging at least $550,000 in net sales
14
($10,576 in average weekly sales) and each store would make an operating profit of $80,000
15
annually.
16
246.
comments or suggestions that either the estimated sales or costs were incorrect or unlikely.
17
18
Both Mr. Millard and Mr. Maeker praised the business plan. Neither salesperson made any
247.
After listening to the presentation, Mr. Millard told the Northwinds Partners that after they
19
opened their first two stores they would be generating enough income to own real estate and
20
they would be able to open their later stores in properties that they owned.
21
248.
Mr. Patcha asked Mr. Maeker if he could contact current Papa Murphys franchisee to ask
22
about their experiences with the franchise. Mr. Maeker suggested that he call three specific
23
franchisees: Dave Myers and two other franchisees, one in Colorado and one in Minnesota.
24
Mr. Patcha was able to contact Dave Myers and the Colorado franchisee. Both of men
25
praised the Papa Murphys model and said that most of their stores were doing very well.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 72
249.
After that meeting, Mr. Patcha developed a business plan using the information provided by
Mr. Millard, the FDD and the templates for the breakeven plan and the breakeven analysis. In
the business plan, Mr. Patcha estimated that their stores would start at $7,110 a week in
average weekly sales or $370,000 annually and that same store sales would increase four
percent each year. Based on the information provided by Papa Murphys International, they
determined that they would need to have average sales above roughly $7,500 to break even.
The first year operating loss was based primarily on the start up costs, including grand
opening expenses for their stores The Northwinds Partners expected to break even after their
first year. Mr. Patcha was very conservative in developing the business plan and deliberately
10
used the lowest possible sales the Northwind Partners could have and still operate the
11
business.
12
250.
In addition to sales, the business plan and break even analysis also included the Northwind
13
Partners estimates for local store marketing, cost of goods, rent and discount percentage.
14
They provided a copy of their business plan to Mr. Millard on April 27, 2011. At no point did
15
Mr. Millard tell them than any of the estimates in the business plan needed to be adjusted or
16
17
251.
Based on the information provided by Papa Murphys International in the FDD, the statements
18
made by Mr. Millard, the business plan and the break even analysis approved by Mr. Millard
19
and Mr. Maeker, the Northwinds Partners decided to invest in an area developer agreement
20
with Papa Murphys International. They signed an area developer agreement and the
21
franchise agreement for their first store, FL022, on June 27th, 2011. They paid an area
22
23
24
252.
The Northwinds Partners first store (FL022), opened in November of 2011 and had average
weekly sales of roughly $7,297. FL022s annual sales ranged between a high of $410,836 in
25
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VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 73
2012 and a low of $367,809 in 2013. The Northwinds partners invested a total of $424,726 in
FL022 including the franchise fee, build out and operating expenses.
253.
The Northwinds Partners second store (FL034) opened in February of 2013 and had average
weekly sales of roughly $7,001 a week. Between February of 2013 and July of 2014 the store
made $546,059 in net sales for an annualized net sale average of $364,039. The Northwinds
partners invested a total of $348,000 in FL034 including the franchise fee, build out and
operating expenses.
254.
The Northwinds Partners third store (FL037) opened in January of 2014 and had average
weekly sales of roughly $6,000 a week, excluding grand opening sales. Between November of
10
2013 and July of 2014, FL037 made $185,018 in net sales. The Northwinds invested a total of
11
$250,531 in FL037 including the franchise fee, build out and operating expenses.
12
255.
The Northwinds Partners were baffled by their low sales and reached out to Papa Murphys
13
and Dave Myers to ask for help. Both Dave Myers and Papa Murphys International suggest
14
more local store marketing. Additionally, Papa Murphys continued to encourage the
15
Northwinds Partners to open more stores to increase sales. No one told the Northwinds
16
Partners that their low sales and high local store marketing costs were typical for their region.
17
Even more challenging, the Northwinds Partners discovered that breakeven point was
18
significantly higher than they had estimated in their business plan and break even analysis,
19
both of which were approved by Papa Murphys International. The Northwinds partners
20
stores had an actual breakeven of roughly $8,500 in average weekly sales, a thousand dollars
21
above their estimates and almost three thousand dollars more than the break even point touted
22
23
256.
The Northwinds Partners became suspicious of the sales information provided by Papa
24
Murphys International and Mr. Maekers and Mr. Millards statements in early to middle
25
2013.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 74
257.
The first clue came from their new accountant. Until late 2012, the Northwinds Partners had
been using a Papa Murphys approved accounting service in Oregon. In late 2012, they hired
a new accountant who had almost 30 years of experience working with franchisees. After the
new accountant reviews the books for the Northwinds Partners she told Mrs. Rubin that these
franchises are not making money and will not make money. You need to draw a line in the
258.
The second clue came from a Papa Murphys International employee and led the Northwinds
partners to realize that their low sales and high expenses were endemic to most Papa
Murphys franchises in their region. In March of 2013, Steve Daniels, a DFO for Papa
Murphys International came to the grand opening of the Northwinds Partners third store.
10
11
259.
Mrs. Rubin told Mr. Daniels how concerned her group was about their store performance. Mr.
12
Daniels agreed and told Mrs. Rubin that he had told people at the corporate office that he
13
could not keep getting off a plane and seeing the faces of doom and gloom where these
14
15
260.
Southeast and he did not believe that Papa Murphys International knew either.
16
17
Mr. Daniels went on to say that he did not know how to make the business model work in the
261.
In late 2014, the Northwinds Partners realized that their failing stores were unlikely to even
18
reach the break even mark. They closed all three stores in October of 2014 after losing almost
19
$1,000,000 in their investment. During that time Papa Murphys International made $84,237.
20
262.
If Mr. Millard or Mr. Maeker or their employer Papa Murphys International had not provided
21
the Rubins with the average sales and profit representations in either Mr. Millards
22
presentation or in the FDD, had not made representations regarding local marketing costs and
23
had not approved Northwinds Partners business plan or break even analysis, the Northwinds
24
25
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VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 75
263.
Had either Mr. Millard, Mr. Maeker or Papa Murphys International fully and accurately
disclosed the sales discrepancies between the average sales disclosed in the FDD and new
stores outside the Pacific Northwest, the amount of local store marketing necessary to achieve
those sales, or five to seven years of operation required to break even, the Northwinds Partners
The Meads
264.
Both Steven and Holly Mead have most of their careers in the hospitality industry. Mr. Mead
has worked in management at casinos and high end restaurants. Mrs. Mead is a culinary
school graduate who has worked in the food and beverage industry since high school.
10
265.
In 2011, the Meads decided to return home to the United States and open their own business.
11
Mrs. Meads father in law sent them an article on Papa Murphys franchises and they decided
12
to investigate. They visited a Florida Papa Murphys store and bought several pizzas to share
13
with family and friends. Everyone agreed that the pizza was good and the concept appeared
14
straight forward.
15
266.
The Meads contacted Papa Murphys International and Billy Rose, a Papa Murphys
16
International salesman contacted them and invited them to franchise sales seminar in Tampa,
17
18
267.
In January of 2012, the Meads received an email from Papa Murphys International stating
19
that it was only selling franchisees to franchisees who purchase multi-unit franchises and open
20
three or more stores. The Meads lacked the financial resources to purchase so many stores on
21
their own, so Mrs. Meads father, Thomas Lance, agreed to join the group.
22
268.
On January 26, 2012, the Meads received an email with a link to download a copy of the June
23
2011 FDD. The Meads and Mr. Lance carefully reviewed the FDD. In Item six of the FDD,
24
Papa Murphys International stated that stated that they would be required to spend either five
25
percent of net sales or $1,5000 a month, whichever was greater on local store marketing. In
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 76
Item 19, Papa Murphys International stated that the average annual sales for high, medium
and low tiers stores were $792,515 ($15,241 weekly), $494,327 ($9,506 weekly), and
$330,636 ($6,358 weekly), respectively and that the system average was $538,493 ($10,355
weekly). In Item 19, there was a company store chart which stated that the high, medium and
low tiers stores respectively spent seven, nine or eleven percent on local store marketing.
269.
At Mr. Roses request the Meads prepared a break even analysis and a business plan using
templates provided to them by Papa Murphys International. In their business plan, they
estimated that their first year average weekly net sales could be as low as $6,162 but their goal
was $410,000 in first year sales ($7,884). The Meads projected that they would need average
10
weekly net sales of $7,020 to break even. They estimated that their same store sales would
11
grow by five percent each year. Mr. Mead showed a copy of the business plan to Mr. Rose for
12
his review and Mr. Rose said that the plan was great. He did not tell the Meads estimated
13
weekly sales, sales growth or break even amounts were overly optimistic or not representative
14
of the region.
15
270.
In March of 2012 in Florida, The Meads signed their franchise agreement in Tampa, Florida.
16
They sent a copy of our agreement to Papa Murphys Internationals corporate office in
17
Vancouver, Washington along with a check for $55,000 which included the franchise fee for
18
their first store as well as the two other stores they planned to develop.
19
271.
The Meads opened their Papa Murphys store on December 27, 2012. During their grand
20
opening period, they spent tens of thousands of dollars to promote the store. During that time
21
the Meads had one week in which they made just over $9,000 in average weekly sales. As
22
soon as the Meads pulled back from the grand opening expenses their average weekly sales
23
24
25
272.
During the 18 months that the Meads store was open, they spent nearly $100,000 in
advertising. They each worked 60 to 70 hours a week in the store without a salary. They were
default on their mortgage of a piece of land they had planned to retire to and it is currently in
foreclosure.
273.
In the Spring of 2014, Mr. Mead called 911 because he thought he was having a heart attack.
The realization that the stress of owning a failing store was giving him anxiety attacks led the
Meads to sit down and decide that their Papa Murphys franchise was ruining them physically
274.
If Papa Murphys International had not provided the Meads with an FDD which included
representations regarding the amount of local store marketing and the average sales for its
10
275.
Had Papa Murphys International fully and accurately disclosed the sales discrepancies
11
between the average sales disclosed in the FDD and provided by Mr. Norcup and the actual
12
sales of new stores locate outside the Pacific Northwest, the amount of local store marketing
13
necessary to achieve those sales, or the time in operation necessary to achieve those sales
14
15
The Nychyks
16
276.
Gary Nychyk contacted Papa Murphys International in 2011. At the time, he and his wife,
17
Heather, lived in the Dalles, Oregon with their young boys. Mr. Nyckyk worked for the
18
19
277.
20
21
The Nychyks were regulars as the Papa Murphys store in the Dalles and they were very
278.
On June 2005, 2011, Mr. Nychyk attended a discovery day at Papa Murphys Internationals
22
23
International was not selling franchisees in Pacific Northwest to new franchisees. He asked
24
Billy Rose, a Papa Murphys International salesperson, if he could purchase a franchise in his
25
hometown of Fort Meyers, Florida. At the time Papa Murphys Internationals website stated
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 78
that they were only selling Florida franchises to franchisees would could purchase multiple
stores.
279.
A few weeks later, Mr. Rose contacted Mr. Nyckyk and told him that Papa Murphys
International would be willing to sell him a franchise in Fort Meyers Florida. Throughout the
sales process, Mr. Nychyk expressed concern that he would not meet the financial
qualifications to be a franchisee. He was concerned that he only had the resources to open one
store and because he had no experience in the food industry. Each time Mr. Nychyk
expressed these concerns, Mr. Rose would assure him that he was qualified. At Papa
10
stated the amount of his assets including all savings. He provided this information to Papa
11
12
280.
The Nychyks received a copy of the June 2011 FDD by email on September 26, 2011 and Mr.
13
Nychyk read it cover to cover. Mr. Nyckyk looked closely at Item six of the FDD which
14
listed fees and costs he would be responsible for and Item 19, which listed the average sales of
15
existing Papa Murphys franchises. In Item Six, he saw that he would be responsible for
16
spending five percent of net sales or $1,500 a month which ever was greater on local store
17
marketing. In Item 19, he saw that the average annual sales for high, medium and low tiered
18
stores were $792,515 ($15,240 weekly), $492,327 ($9,468 weekly), and $330,636 ($6,358
19
weekly).
20
281.
Harold Kermen, another Papa Murphys International salesperson sent Mr. Nyckyk a
21
Breakeven Analysis template. Mr. Nychyk used the FDD and information he had gathered
22
from current Papa Murphys franchisees in the Southeast to develop a break even analysis.
23
282.
Mr. Nychyk concluded that based on the information provided in the FDD and his breakeven
24
analysis, he would breakeven if he had average weekly sales of $6,000. Using the sales and
25
expense information provided in the FDD, Mr. Nychyk developed his business plan in which
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 79
he estimated that his store would have average weekly sales of $$6,000 during his first year
and $6,700 and $7,500 during his second and third year. He estimated his stores annual sales
would be $307,500 for year one, $348,500 for year two, and $389,500 for year three.
283.
The Nychyks signed their franchise agreement on March, 19, 2012. The Nychyks used their
personal savings to purchase their franchise and build their store. After several months of
delays, the Nychyks were able to open their Fort Meyers, Florida store on January 27, 2013.
284.
Mr. Nychyk knew immediately after he opened that his sales were not matching his estimates
based on the FDD. He spent $17,000 in local store marketing in seven days for his grand
opening event and his store only achieved about $7,000 in net sales. During the time the
Nychyks store was open his weekly sales average was roughly $5,207.
10
11
285.
Mr. Nychyk contacted Papa Murphys International and asked for assistance. The Nychyks
12
were told to spend more money in local store marketing including sales building coupons,
13
14
ever informed the Nychyks that their stores low sales were typical for their region.
15
286.
Mr. Nychyk spent an average of 65 hours a week in his store. Mrs. Nychyk devoted herself to
16
local store marketing. She built relationships with schools, churches and other community
17
organizations. Between October of 2013 and October of 2014, Mrs. Nychyk planned and
18
hosted events where she sampled pizzas for over 10,000 people. The Nychyks store received
19
two AAA scores on surprise inspections by Papa Murphys international and their customer
20
21
287.
The Nychyks first learned that their low sales were typical for their region in late 2013 or early
22
2014 when Papa Murphys International began publishing the weekly sales numbers for their
23
region. The Nychyks realized that for their region sales which were well below the system
24
average or even the low tier system average were the norm.
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 80
288.
In late 2014, the Nychyks realized they could no longer sustain the financial losses of
operating their store and they closed their Papa Murphys franchise. At that time they had
invested almost $400,000 of their personal savings in the business. During the time, the
Nychyks store was open Papa Murphys International collected almost $50,000 in royalties
289.
If Papa Murphys International had not provided the Nycyks with the average sales and profit
representations in the FDD, had not made representations regarding local marketing costs or
indicated that they were qualified to purchase a franchise, the Nychyks would not have
purchased their Papa Murphys franchise. Had Papa Murphys International fully and
10
accurately disclosed the sales discrepancies between the average sales disclosed in the FDD
11
and those experienced by new stores outside the Pacific Northwest, the amount of local store
12
marketing necessary to achieve those sales, or that given their relatively modest liquid assets
13
the Nychyks were not sufficiently capitalized to successfully operate the franchise, the
14
Nychyks would not have purchased their Papa Murphys franchise. As a result of their
15
investment in a Papa Murphys franchise, the Nychyks have lost almost $400,000 of their
16
personal savings.
17
The Bennetts
18
290.
Trey and Loralie Bennett met in high school. Their first joint venture was selling donuts to
19
raise money for their class. Four years later, they became the youngest subway franchisees in
20
the systems history. They pioneered three counties in Florida and built, open and operated
21
seven locations over 23 years with the company. They sold those stores and moved to
22
Colorado.
23
291.
In 2007, the Bennetts tried Papa Murphys pizza for the first time. They noticed that concept
24
was similar to Subways. The Bennetts had been considering starting purchasing another
25
292.
February of 2012. They were asked to fill out a qualification report. In their qualification
report they stated that they had 1.3 million dollars in liquid assets and 2.4 million in net worth.
293.
Papa Murphys International sent the Bennetts a link to the June 2011 FDD in February of
2012. They carefully reviewed the entire FDD including Items six and 19 which addressed
the fees they would be required to pay and the average sales figures for existing Papa
Murphys Stores. In Item six of the FDD, Papa Murphys International stated that stated that
the Bennetts would be required to spend either five percent of net sales or $1,500 a month,
whichever was greater on local store marketing. In Item 19, Papa Murphys International
10
stated that the average annual sales for high, medium and low tiers stores were $792,515
11
($15,241 weekly), $494,327 ($9,506 weekly), and $330,636 ($6,358 weekly), respectively and
12
that the system average was $538,493 ($10,355 weekly). In Item 19, there was a company
13
store chart which stated that the high, medium and low tiers stores respectively spent seven,
14
15
294.
Papa Murphys International asked the Bennetts to develop a business plan and provided a
16
template. It was their understanding that Papa Murphys International would use the business
17
plan to determine whether or not they had the right stuff to become franchisees.
18
295.
The Bennetts used the average sales is in FDD to develop their business plan, break even
19
analysis and to calculate debt service on their loans. In their business plan, they estimated
20
that minimum first year net sales for each store would be $492,000 ($9,4621 weekly) per store
21
with same store sales growth of at least 2-3%. In our business plan they stated that they
22
created the plan based on the averages promoted by Papa Murphys. They estimated that
23
their local store marketing would be 4-5% of gross sales each month. They submitted their
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 82
296.
As the Bennetts began their due diligence, either Mr. Levis or Amy Stevens suggested that
they contact David Myers. They spoke at length with Mr. Myers who had many positive
297.
On April 24, 2012, Mr. Levis emailed the Bennetts and told them that Papa Murphys
International had approved their business plan. At no point did Mr. Levis or anyone else at
Papa Murphys International suggest that their sales estimates were too high, our advertising
estimates were too low or that we were underfinanced to open four stores.
298.
On April 26, 2012, the Bennetts signed multi-store commitment letter in Grand Junction,
Colorado. In that letter, they agreed to purchase and open four Papa Murphys franchises in
9
10
and around Panama City, Florida. They paid Papa Murphys International $70,000 in
11
12
299.
13
14
On May 23, 2012, in Grand Junction, Colorado, the Bennetts signed their franchise agreement
300.
The Bennetts moved to Florida in July of 2012 and began scouting for locations. While they
15
were looking for locations, they learned that an existing Papa Murphys store was available for
16
purchase in Fort Walton Beach, Florida. The Bennetts were concerned about the existing
17
stores low sales but Doug Carroll and Steve Daniels, both Papa Murphys employees assured
18
the Bennetts that the low sales were the result of an absentee owners since they lived in
19
Kansas City.
20
301.
The Bennetts signed the franchise agreement for the Fort Walton Beach store on August 22,
21
2012 in Florida. They took ownership of the Fort Walton Beach store on October 2, 2010.
22
The Fort Walton Beach store had average weekly sales of $7,575 roughly $1,887 a week
23
below what they estimated in their business plan. They paid $192,000 for the store. Since
24
then, they have invested an additional $82,980 in the store including loans from credit cards
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 83
and the other businesses they owned. The Bennetts used money from their personal savings
and from a trust account to purchase the Fort Walton Beach store.
302.
The Bennetts second store, Panama City, opened in July of 2013. It has average weekly sales
of $6,992 a week, roughly $2,470 below what they estimated in their business plan. They paid
an initial franchise fee of $25,000 and invested an additional $182,483 to build the store.
Since the store opened, they have invested an additional $37,572 in the store.
303.
On October 10, 2013, the Bennetts opened their Callaway store. Even at grand opening the
sales were well below what they had estimated. The Callaway store has weekly sales of
$5,779 a week, roughly $3,683 below what they estimated in their business plan. The
10
Bennetts paid an initial franchise fee of $15,000 and invested an additional $145,297 to build
11
the store. During the time the store has been open, they invested an additional $69,439 in the
12
store.
13
304.
In addition to sales which are well below what was stated in the FDD, the Bennetts struggle
14
with local store marketing cost which are much higher than the amount disclosed in the FDD.
15
The Bennetts spend ten to eleven percent on local store marketing including cooperative fees.
16
305.
At the time the Bennetts invested in their Papa Murphys franchises they had substantial liquid
17
assets and were excited to teach their sons how to run a family business. After investing in
18
Papa Murphys franchises, the Bennetts have been forced to liquidate most of their assets.
19
Their marriage is under significant stress and their relationship with their sons, both of whom
20
21
306.
If Papa Murphys International had not provided the Bennetts with a FDD which included
22
representations regarding the amount of local store marketing and the average sales for its
23
24
25
307.
Had Papa Murphys International fully and accurately disclosed the sales discrepancies
between the average sales disclosed in the FDD and the actual sales of new stores located
outside the Pacific Northwest, the amount of local store marketing necessary to achieve those
sales, the time in operation necessary to achieve those sales or that given their relatively
modest liquid assets the Bennetts were not sufficiently capitalized to successfully operate
multiple franchises in that market, the Bennetts would not have invested in their franchises.
308.
As a direct result of their investment in a Papa Murphys franchise, the Bennetts have lost at
least $621,874 from their failed investment. While the Bennetts lost more than a half million
dollars and two years of work in their investment, Papa Murphys International has profited by
collecting $42,250 in franchise fees and more than $71,402 in royalties from their failing
stores.
10
The Worthingtons
11
309.
In early 2013, the Worthingtons were living in Fort Myers, Florida. Mr. Worthington was
12
retired and Mrs. Worthingtons brother, Thomas Stephenson was looking for new
13
opportunities. They investigated several franchises but were more familiar with Papa
14
Murphys because they had grown up on Iowa and Minnesota where Papa Murphys is well
15
known.
16
310.
17
18
The Worthingtons contacted Papa Murphys International through its website. Mr. Levis
311.
The Worthingtons also received a copy of the March 2013 FDD. The Worthingtons diligently
19
reviewed the FDD before they decided to purchase the franchise. In Item six of the FDD,
20
Papa Murphys International stated that they would be required to spend five percent of our
21
net sales or $1,500 a month which ever was greater on local store marketing. In Item 19 of the
22
March 2013 FDD, Papa Murphys International stated that stated that the average annual sales
23
for high, medium and low tiers stores were $845,432 ($16,258 weekly), $527,386 ($10,142
24
weekly), and $351,858 ($6,766 weekly), respectively and that the system average was
25
$574,858 ($11,054 weekly). In Item 19 of the FDD, Papa Murphys International also
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 85
included a Benchmark Costs chart which stated that of the benchmark stores the high,
medium and low tiers stores were spending five, six and seven percent on advertising and
were earning profits that were nineteen, twelve and a half and five percent of net store sales.
312.
When the Worthingtons met with Mr. Levis in April of 2013, he told the Worthingtons that
they would exceed the sales averages stated in the FDD because there was a strong snowbird
313.
As the Worthingtons were considering financing their stores, they had a conversation with
financing options for their store. He suggested that using their 401(k) funds to finance their
10
store would be the best option and suggested that we should used Directed Equity. He said the
11
owner also had a Papa Murphys franchise and was very successful. The Worthingtons were
12
sold on the idea of using their 401(k) as they wouldnt have to go into debt to finance the
13
store.
14
314.
On April 29, 2013 in Florida, the Worthingtons signed a franchise agreement for their first
15
store to be located in Fort Myers, Florida. They sent a copy of the agreement to Papa
16
17
franchising fee.
18
315.
The Worthingtons store opened in October of 2013. Their average weekly sales hover at
19
roughly $6,000. They spend roughly 14 percent of net sales on local store marketing. They
20
have operated at a loss since their store opened. In 2014, they lost roughly $70,000 in
21
operating expenses.
22
316.
As a family, the Worthingtons have lost approximately $400,000 of their retirement savings
23
in their investment in a Papa Murphys franchise. Mrs. Worthingtons brother, Mr. Stephenson
24
invested his entire retirement savings and left his managers position to run their store. He
25
now works seven days a week for far less than he earned in his previous job.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 86
317.
If Papa Murphys International had not provided the Worthingtons with an FDD which
included representations regarding the amount of local store marketing, average sales and
profits for its franchises, they would not have purchased their franchise.
318.
Ft. Myers store, they would not have invested in the franchise.
5
6
Had Mr. Levis not told the Worthingtons that they could expect above average sales for their
319.
Had either Mr. Levis or Papa Murphys International fully and accurately disclosed the sales
discrepancies between the average sales disclosed in the FDD the actual sales of new stores
located outside the Pacific Northwest, the amount of local store marketing necessary to
achieve those sales, the time in operation necessary to achieve those sales, or that the sales,
10
expense and profit figures in the Benchmark chart did not reflect vast majority of franchises in
11
their region, the Worthingtons would not have invested in their franchise.
12
Tennessee Plaintiffs
13
The Olsons
14
320.
Harry and Terry Olson had been Papa Murphys customers for 15 years when they lived in
15
Minneapolis. In 2009, Mr. Olson was laid off in the great recession and the family relocated
16
to Tennessee. They noticed the lack of Papa Murphys franchises and decided to explore
17
investing in a store.
18
321.
In the summer of 2010, Mr. Olson contacted Papa Murphys International through its website.
19
He was asked to complete a qualification report. Shortly after Mr. Olson sent in his
20
qualification report, Billy Rose contacted him. Mr. Olson explained that he was interested in
21
investing in a franchise but was concerned that he did not have enough financial resources to
22
qualify.
23
24
322.
Mr. Rose suggested that Mr. Olson could finance his franchise by rolling over his 401(k)
using their partner, Directed Equity. During the time Mr. Olson was exploring purchasing a
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 87
franchise, Mr. Rose and every other Papa Murphys employee he worked with practically
323.
While the Olsons were considering purchasing the franchise, the local owner of the Johnson
City store told Mr. Olson that his store was for sale. Mr. Rose told Mr. Olson that it would be
more beneficial to purchase an existing store rather than build a new one.
324.
Mr. Olson was concerned by the Johnson City stores low sales but the owner told him that he
had not done much to promote the business. More importantly, Mr. Rose confirmed that this
was the case and told Mr. Olson that with proper marketing, he could see at least $8,500 a
10
325.
Mr. Rose gave the Olsons a link to the May 2010 FDD. Mr. Rose and Mr. Olson went over the
11
FDD via the phone and Mr. Rose pointed out the average weekly sale potential and all of the
12
13
326.
In Item six of the FDD, Papa Murphys International stated that stated that the Olson would be
14
required to spend either five percent of net sales or $1,500 a month, whichever was greater on
15
local store marketing. In Item 19, Papa Murphys International stated that the average annual
16
sales for high, medium and low tiers stores were $818,955 ($15,749 weekly), $517,871
17
($9,959 weekly), and $343,806 ($6,611 weekly), respectively and that the system average was
18
19
327.
During the phone conversation, Mr. Rose repeatedly stressed the system average weekly sales
20
of $10,000. At no point in the conversation did Mr. Rose tell Mr. Olson that there was a
21
dramatic difference between the system average and new stores in Mr. Olsons region, that it
22
might take Mr. Olson five to seven years to get to that number and that he would be required
23
to spend substantially more than the disclosed amount for local store marketing to reach those
24
sales. Mr. Rose told Mr. Olson that all he would have to invest in marketing was $1,500 a
25
328.
The Olsons signed their franchise agreement on or around September 29, 2010 in Tennessee.
They took possession of their store on November 11, 2010. They spent $20,000 on grand
opening advertising during the first few months they were open. They did not see any
329.
The Olsons store has average weekly sales of $6,300 roughly $2,200 a week below what they
estimated in their business plan. Their average weekly sales would be even lower if Mr.
Olson had not achieved a contract to supply pizza to the local schools in July 2013, almost
three years after acquiring the business. They spend $1,500 plus in local store marketing per
month. They paid an initial franchise fee of $2,500 and invested an additional $62,700 to
open the store. Since the store opened, they have invested an additional $10,000 in the store.
10
11
330.
Mr. Olson spends sixty hours a week running his store. He always receive Triple A scores on
12
his inspections. His add on sales percentage is one of the highest in the company, and he won
13
the eastern division gift card sales contest one year. Still his sales are dramatically lower than
14
15
331.
Mr. Olson invested his entire 401K and annuity account in this business expecting to at least
16
make a reasonable living. In the four years the store has been open, Mr. Olson has only been
17
able to pay himself $30,000 a year or roughly $9 an hour. Sometimes Mr. Olson has had up to
18
three uncashed paychecks laying on his desk, unable to cash them due to the balance in his
19
business account.
20
332.
If Mr. Rose had not told Mr. Olson that he could easily expect $8,500 in average weekly
21
sales and only need to spend $1,500 in local store marketing, Mr. Olson would not have
22
23
333.
If Papa Murphys International had not provided Mr. Olson with an FDD which included
24
representations regarding the amount of local store marketing and the average sales for its
25
334.
Had either Mr. Rose or Papa Murphys International fully and accurately disclosed the sales
discrepancies between the average sales disclosed in the FDD and provided by Mr. Rose
and the actual sales of new stores locate outside the Pacific Northwest, the amount of local
store marketing necessary to achieve those sales, or the time in operation necessary to achieve
those sales, Mr. Olson would not have invested in his franchise.
335.
As a direct result of their investment in a Papa Murphys franchise, Mr. Olson has at least
$256,000 in his failed investment.
7
8
The Wilsons
336.
Philip Wilson first learned about Papa Murphys International at a franchise trade show in Las
11
Vegas, Nevada. Mr. Wilson is a partner in commercial real estate investment company and
12
13
337.
In the spring of 2010, Mr. Wilson contacted Papa Murphys International to inquire about
14
franchise opportunities. He spoke with Billy Rose, a Papa Murphys International sales
15
personnel who told him that Papa Murphys International was looking for a multi-unit
16
17
338.
Papa Murphys International sent Mr. Wilson a copy of the current FDD. The May 2010 FDD
18
stated that Mr. Wilson would be required to spend five percent on net sales on local store
19
marketing. In Item 19, Papa Murphys International stated that the average annual sales for
20
high, medium and low tiers stores were $818,955 ($15749 weekly), $517,871 ($9,959.06
21
weekly), and $343,806 ($6,611 weekly), respectively and that the system average was
22
23
24
339.
Around that same time, Mr. Wilson spoke with Jim Werling, another Papa Murphys
International employee. Mr. Wilson asked about the annual profitability of Papa Murphys
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 90
franchise and Mr. Werling replied that the average Papa Murphys franchise makes an annual
340.
Mr. Werling visited Mr. Wilson in the summer of the 2010. During his visit they discussed
average store sales extensively. At no point during his visit did Mr. Werling state that there
341.
Mr. Werling told Mr. Wilson that he needed to develop a break even analysis and a business
plan before Papa Murphys International would approve him as a franchisee. Mr. Werling told
Mr. Wilson that the average weekly sales for a Papa Murphys franchise were roughly
$10,500 to $11,000 per week. Mr. Werling told Mr. Wilson that he could expect his sales to
10
be slightly lower than average and to base his break even analysis on $8,500 to $9,000 in
11
12
342.
Mr. Werling assured Mr. Wilson that even low performing stores would realize a small profit.
13
343.
Based on the statements made by Mr. Werling, the information in the FDD and the historical
14
information which was provided in the business plan template, Mr. Wilson developed a
15
business plan. In his business plan, Mr. Wilson stated that he expected to achieve annual sales
16
of $475,000 ($9,134 weekly) for each store during year one of operations and that he expected
17
to consistently grow sales between seven and ten percent annual. Later in the business plan
18
Mr. Wilson presented a range of estimated sales. His lowest estimated sales were $340,000
19
annually ($6,800 weekly). He estimated that he would need annual sales of $328,400 ($6,315
20
21
344.
22
23
24
Mr. Wilson submitted his business plan to Papa Murphys International for approval on
345.
Mr. Wilson signed an Area Developer Agreement with Papa Murphys International in
December of 2010. He paid an area developer fee of $80,000 which included at $25,000
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 91
franchise fee for his first store and a deposit of $5,000 for each additional store. He likely
signed his franchise agreement for his first store, SC013 at the same time.
346.
Mr. Wilson opened three additional stores under the Area Developer Agreement, SC014,
SC015, and SC016 and signed franchise agreements for each those stores in 2011, 2012, and
2013.
347.
Each time Mr. Wilson would open a store he would spend $35,000 in local store marketing for
the grand opening. During grand opening the weekly store sales would be roughly $8,000.
As soon as the grand opening advertising stopped, sales would drop and then settle at a much
lower level.
10
348.
Mr. Wilsons first store (SC013), has average weekly sales of $5,800 roughly $3,000 a week
11
below what he estimated in his business plan. Mr. Wilson paid an initial franchise fee of
12
$25,000 and invested an additional $220,000 to open the store. During the time the store was
13
14
349.
His second store (SC014), had average weekly sales of $7,800 roughly $1,500 a week below
15
what he estimated in his business plan. He paid an initial franchise fee of $25,000 and
16
invested an additional $220,000 to open the store. During the time the store was open, he
17
18
350.
His third store (SC015), had average weekly sales of $6,000 roughly $3,000 a week below
19
what he estimated in his business plan. He paid an initial franchise fee of $25,000 and
20
invested an additional $220,000 to open the store. During the time the store was open, he
21
22
351.
Mr. Wilsons fourth store (SC015), had average weekly sales of $5,500 roughly $3,600 a
23
week below what he estimated in his business plan. He paid an initial franchise fee of $25,000
24
and invested an additional $220,000 to open the store, including the equipment lease. During
25
the time the store was open, he invested an additional $77,518.27 in the store
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 92
352.
Mr. Wilson carefully followed Papa Murphys marketing plan. He spends seven to eight
percent of his stores net sales on local store marketing and achieves sales which are well
below both the system average and his estimates in the business plan. Mr. Wilson has
invested nearly 1.3 million dollars in his four stores. He spends $10,000-15,000 a month
353.
If Mr. Werling had not told Mr. Wilson that 1) the average Papa Murphys store makes an
annual return on investment of about 20% and that 2) he could expect average weekly sales of
$8,500 to $9,000 per store, Mr. Wilson would not have purchased his area developer
10
354.
If Papa Murphys International had not provided Mr. Wilson with an FDD which included
11
representations regarding the amount of local store marketing and the average sales for its
12
13
355.
Had either Mr. Werling or Papa Murphys International fully and accurately disclosed the
14
sales discrepancies between the average sales disclosed in the FDD and provided by Mr.
15
Werling and the actual sales of new stores located outside the Pacific Northwest, the amount
16
of local store marketing necessary to achieve those sales, the time in operation necessary to
17
achieve those sales or told Mr. Wilson that his estimated sales, profits and growth were
18
unrealistic, Mr. Wilson would not have invested in his area developer agreement or his
19
franchises.
20
356.
As a direct result of his investment in a Papa Murphys area developer agreement and four
21
franchises, Mr. Wilson has lost more roughly 1.8 million dollars in his failed investment
22
including his franchising fees, the cost of his build out and the continued operating losses for
23
his stores.
24
357.
Stanley Forester and Angela Buchanan have been friends since high school. Mr. Forester is a
U.S. Navy veteran who worked for 15 years in the semi-conductor industry. Ms. Buchanan
358.
5
6
In late 2009, Ms. Buchanan and Mr. Forester were considering a new business venture. They
359.
They contacted Papa Murphys through their website. They were asked to fill out a
qualification report in which they listed their net worth and liquid assets. Shortly thereafter
360.
In the middle of May, Mr. Forester and Ms. Buchanan received an email with a link to
10
download a copy of the May 2010 FDD. They carefully reviewed the FDD. In Item six of the
11
FDD, Papa Murphys International stated that they would be required to spend either five
12
percent of net sales or $1,500 a month, whichever was greater on local store marketing. In
13
Item 19, Papa Murphys International stated that the average annual sales for high, medium
14
and low tiers stores were $818,955 ($15,749 weekly), $517,871 ($9,506 weekly), and
15
$343,806 ($6,612 weekly), respectively and that the system average was $560,171($10,773
16
weekly). In Item 19, there was a company store chart which stated that the high, medium and
17
low tiers stores respectively spent five, ten or twelve percent on local store marketing.
18
361.
Mr. Forester and Ms. Buchanan with Mr. Werling a few times. Mr. Werling stressed that the
19
average weekly sales in 2009 were over $10,000. Mr. Werling did not state that those
20
averages were affected by region or age of the store. Mr. Werling did not inform them that
21
the average weekly sales for new stores or stores in our region were much lower.
22
362.
On April 22, Mr. Werling sent Mr. Forester and Ms. Buchanan several documents. One
23
document was an excel spread sheet called Pro forma. In the pro forma, the estimated net
24
sales were $650,000 or $12,500 weekly and the estimated net sales for the second year were
25
$715,000 or $13,750. The pro forma estimated that local store marketing would be eight
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 94
percent of net sales each year. The pro forma also estimated that the store would generate
$18,891 (roughly three percent of net sales) in profits the first year and $67,226 (roughly nine
percent of net sales) the second year. Mr. Werling indicated that we should use these numbers
for Papa Murphys to accept their business plan and break even analysis.
363.
In the spring of 2010, Mr. Forester attended a webinar hosted by Papa Murphys International
during that presentation, the presenter showed a power point slide which listed the average
store sales for early 2010. The slide stated that average weekly sales were $10,365 and the
benchmark survey said that that the average profits for stores was 30% of net sales.
364.
Mr. Forester and Ms. Buchanan funded their investment through a self directed 401k set up by
10
Directed Equity. In the Fall of 2010, when Mr. Forester and Ms. Buchanan were looking for
11
financing Mr. Werling introduced them to Steve Millard , who sent them a list of approved
12
vendors for financing. Directed Equity was one and Tom Anderson was the contact. Mr.
13
Millard told Ms. Forester and Mr. Buchanan that with his 25+ years of experience in funding,
14
he strongly encouraged them to pursue a Self Directed 401k with Directed Equity.
15
365.
Mr. Forester and Ms. Buchanan signed a multi-store commitment letter on July 15, 2010 in
16
North Carolina. They believe signed their franchise agreement at the same time. They paid
17
Papa Murphys International $55,000 which included their initial franchise fee and a deposit
18
19
366.
Mr. Forester and Ms. Buchanan opened their first Papa Murphys store in December of 2010.
20
They spent $185,000 to build out our store. They had decent sales during their grand opening
21
period but as soon as they stopped the grand opening advertising spending, their average
22
weekly sales settled at roughly $5,000 a week and less in the summer. Overall, since they
23
opened their store, average weekly sales have been less than $6,000.
24
25
367.
When Mr. Forester and Ms. Buchanan invested in a Papa Murphys franchise, they had large
401(k) accounts and Mr. Forester had a job with an annual salary of $80,000. Today, they
have a store with average weekly sales which are half the system average. Mr. Forester left
his job to work in his store and now earns $36,000 a year which is not enough to pay his
368.
If Papa Murphys International had not provided Mr. Forester and Ms. Buchanan with an FDD
which included representations regarding the amount of local store marketing and the average
sales for its franchises, they would not have purchased their franchise.
369.
Had either Mr. Werling or Papa Murphys International fully and accurately disclosed the
sales discrepancies between the average sales disclosed in the FDD and stressed by Mr.
Werling and the actual sales of new stores located outside the Pacific Northwest, the amount
10
of local store marketing necessary to achieve those sales, the time in operation necessary to
11
achieve those sales or told Mr. Forester and Buchanan that their estimated sales, profits and
12
growth were unrealistic, Mr. Forester and Ms. Buchanan would not have invested their
13
franchise.
14
370.
As a direct result of their investment in a Papa Murphys franchise, Mr. Forester and Ms.
15
Buchanan have lost more than $240,000 in their failed investment. At the same time, Papa
16
Murphys International has made $55,000 in franchise fees and more than $11,260 in royalties
17
18
19
The Brinks
20
371.
Before he purchased a Papa Murphys franchise, Mitch Brink worked as a network engineer
21
while his wife homeschooled their children. In In February of 2012, Mr. and Mrs. Brink
22
decided that the time was right for a change. Their children are approaching college age and
23
they believed that purchasing a franchise would give them some flexibility and that it would
24
grow over the next few years to provide a career for Mr. Brink and college funds for their
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 96
children. They were regular customers of their local Papa Murphys franchise when they lived
372.
They contacted Papa Murphys through their website. Amy Stevens, an employee at Papa
Murphys Internationals corporate office emailed Mr. Brink a blank qualification report on
February 13, 2012. Shortly after I sent the qualification report in to Ms. Stevens, Mr. Brink
373.
In March of 2012, Mr. and Mrs. Brink met with Billy Rose at a local Mooresville hotel. At
the meeting, Mr. Rose told us that the worst case scenario for store profits would be $60,000
a year. Mr. Brink was concerned because that figure was lower than his current job. Mr. Rose
assured him that that was only what the worst of the worst would do.
10
11
374.
Shortly after that meeting Mr. Rose left the company and they met Mark Levis. When we
12
were considering financing options he encouraged us to use Directed Equity. He said that Mr.
13
and Mrs. Brink should use Directed Equity because it was the company that all the franchisees
14
used. They ultimately decided to roll over the entirety of Mr. Brinkss IRA to fund their
15
16
375.
On April 3, 2012, Amy Stevens emailed Mr. and Mrs. Brink a link to the April 2012 FDD.
17
They reviewed the FDD carefully. In Item six of the FDD, Papa Murphys International stated
18
that stated that I would be required to spend either five percent of net sales or $1,500 a month,
19
whichever was greater on local store marketing. In Item 19, Papa Murphys International
20
stated that the average annual sales for high, medium and low tiers stores were $828,296
21
($15,929 weekly), $511,241 ($9,831.56 weekly), and $338,829 ($6,515 weekly), respectively
22
and that the system average was $559,495 ($10,759 weekly). In Item 19, there was also a
23
chart called Benchmark Costs. In this chart, Papa Murphys International disclosed
24
significantly more information about the financial performance of its franchises. In the
25
Benchmark Costs chart, Mr. and Mrs. Brink learned that the high, medium and low tier
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 97
Benchmark stores were spending five, six, and seven percent of net sales on advertising
including a two percent contribution to the national Ad Fund. Papa Murphys International
also stated that the average profits for each tier of benchmark stores were 18, 12, and 3 percent
of net sales.
376.
Papa Murphys International sent the Brinks templates for a break even analysis and a
business plan. They used the financial performance representations provided by Papa
Murphys International to develop their business plan. In their business plan they
conservatively estimated that they would have average weekly sales of $8,285 a week
($430,820 annually) during our first year. Mr. Brink estimated that he would be able to pay
10
himself a $60,000 managers salary and that their store would have an annual net income of
11
$33,430. He shared this information with Mr. Levis. He told Mr. Brink that their numbers
12
were very conservative and they should have no problem hitting them.
13
377.
14
15
During the due diligence process I contacted several Papa Murphys franchisees from all over
378.
Mr. Brink did receive some negative feedback from Ann Callegan, a franchisee in Alabama
16
and Gordon Butler in Winston-Salem, North Carolina. He asked Mr. Levis about Mr. Butlers
17
low sales and lack of profitability, he responded that Mr. Butlers low sales were entirely a
18
19
379.
On or about May 22, 2012 the Brinks signed their franchise agreement with Papa Murphys
20
International. They paid the $25,000 franchise with funds from their personal savings
21
account.
22
380.
In October of 2012, Mr. Brink quit this job with Lowes to go to work in his new store. Their
23
Mooresville, North Carolina store opened on December 22, 2012. In 2013, their average
24
weekly sales were $7,566; in 2014 they were $6,838, almost $1,000 lower. In both years their
25
average weekly sales were well below what we had estimated in our business plan.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 98
381.
Even worse, while Mr. and Mrs. Brinks sales were well below what they had been led to
expect, their advertising costs were much higher. Since the Brinks store has been open they
have spent $20,612 in local store marketing not including their grand opening expenses.
382.
Despite Mr. Roses statement that $60,000 in annual profits was our worst case scenario, the
Brinks have never been able to take any money out of their store. In 2013, Mr. Brink was able
to take a salary of $15,000 for a years worth of work. His salary at Lowes had been $70,000
a year.
383.
When they first opened, the Brinks knew that it would take some time before their store would
hit their projected sales. Mr. Levis told them it would take six months. After 7 months, the
10
Brinks contacted Papa Murphys for some help. They were given the company mantra that
11
they needed to spend more on local store marketing and sampling. No one from Papa
12
Murphys International informed Mr. and Mrs. Brink that their sales were typical of the region
13
and that the sales figures they had seen in the FDD were not representative of new stores in
14
their region.
15
384.
When Mr. and Mrs. Brink purchased their franchise their goals were modest. They wanted to
16
make enough money to send their children to good colleges and to give back to their church.
17
Mr. Brink had a well paid corporate job. After investing in a Papa Murphys franchise, the
18
Brinks have lost at least $375,000. Mr. Brink works more than full time with very little
19
compensation. They struggle with the decision whether or not to close their store every
20
month.
21
385.
If Papa Murphys International had not provided the Brinks with an FDD which included
22
representations regarding the amount of local store marketing, average sales and profits for its
23
24
25
386.
If Mr. Rose had not told the Brinks in the worst case annual store profits would be $60,000
a year, they would not have invested in their franchise.
387.
If Mr. Levis had not told the Brinks that their estimated sales of $430,820 for their first year,
an estimated salary of $60,000 a year and annual profits of $33,430 were very conservative
and they would have no problem hitting them, they would not have invested in their
franchise.
388.
Had either Mr. Rose, Mr. Levis, or Papa Murphys International fully and accurately disclosed
the sales discrepancies between the average sales disclosed in the FDD the actual sales of
new stores located outside the Pacific Northwest, the amount of local store marketing
necessary to achieve those sales, the time in operation necessary to achieve those sales, or that
the sales, expense and profit figures in the Benchmark chart did not reflect vast majority of
franchises in their region, the Mr. and Mrs. Brink would not have invested in their franchise.
10
11
E.
12
Causes of Action
13
14
15
16
17
18
19
389.
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
20
here in full.
21
390.
The actions and omissions of Defendant Papa Murphys International in connection with
22
offering and selling Papa Murphys franchises to the plaintiffs through the use of average sales
23
representations which were dramatically skewed by high performing well established stores
24
and did not accurately represent the average sales of new stores or stores in the plaintiffs
25
region, constitute fraud. Papa Murphys International made (1) representations of an existing
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 100
fact, which was (2) material, and (3) false. Papa Murphys International (4) had knowledge of
the representations falsity and (5) intended that the Plaintiffs would rely on it. The plaintiffs
were (6) ignorant of the falsity of the representation and (7) relied on the representations.
Their (8) reliance was reasonable and (9) they suffered damages as a result of their reliance.
391.
Under the FTC Franchising Rule, Papa Murphys International was required to disclose any
characteristics of the stores included in the Item 19 chart which were materially different than
the stores the Plaintiffs would be opening. Although, Papa Murphys International surrounded
the System Store chart with disclaimers stating essentially that the system store chart was not
a guarantee and a stores individual results would vary, Papa Murphys International did not
10
identify any characteristics of the high and medium tiered stores which were materially
11
different than the plaintiffs stores. By not identifying any distinguishing characteristics, Papa
12
Murphys International represented to the plaintiffs that there was no material difference
13
between the range of sales presented in the FDD and the range of sales for new store in the
14
15
392.
Existing Fact-Since 2006, Papa Murphys International had made statements of existing facts
16
in Item 19 of the FDD. In Item 19 of the FFD, Papa Murphys International has presented the
17
average annual net sales for the franchise system as a whole and the average annual net sales
18
19
393.
20
a reasonable person would attach importance when determining whether to participate in the
21
transaction. Aspelund v. Olerich, 56 Wn.App. 477, 483, 784 P.2d 178 (Div. I, 1990); ); see
22
Morris v. International Yogurt Co., 107 Wn.2d 314, 323, 729 P.2d 33, 38 (1986) (adopting the
23
identical securities law definition of materiality in the context of franchising). The Federal
24
25
franchise context as one which is likely to affect [the] conduct or decisions [of a prospective
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 101
franchisee] with respect to the product at issue [the franchise being offered]. I16 C.F.R. Parts
436 and 437 Disclosure Requirements and Prohibitions Concerning Franchising and Business
Opportunities; Final Rule, page 15455 at note 95; FTC Policy Statement on Deception, 103
FTC 110 (1984). In this case, the representations regarding average sales went to the essence
of the plaintiffs investment, its profitability. Under either the common law or the FTC
standard, it is beyond question that a reasonable person would place a great deal of importance
on the average sales of a franchise system in which they were considering an investment.
394.
Falsity-Under Washington law, falsity is established for the purposes of fraud, when a party
who has a duty to speak fails to disclose a material fact. Guarino v. Interactive Objects, Inc.,
10
122 Wn.App. 95, 127, 86 P.3d 1175 (Div. I 2004). Washington Courts have found that parties
11
have duty to speak when they are required to do so by statute. Boonstra v. Stevens-Norton,
12
64 Wn.2d 621, 625, 393 P.2d 287 (1964). Washington courts have also found that a duty to
13
disclose information can arise in arms length contract negotiations because of the contractual
14
duty of good faith. Landstar Inway Inc., v. Samrow., 181 Wn.App. 109, 124, 325 P.3d 327
15
(Div. II 2014), quoting Liebergesell v. Evans, 93 Wn.2d 881, 891-94 and Oates v. Taylor, 31
16
17
a. Duty to Speak -In this case, Papa Murphys International accepted a statutory duty to
18
speak. Under the FTC franchise rule, Papa Murphys International could choose whether or
19
not to present financial performance information including average sales in the FDD.
20
21
(2007) (Item 19). However if Papa Murphys International chose to make such
22
disclosures, it had a duty to disclose characteristics of the included outletsthat may differ
23
materially from those of the outlet that may be offered to a prospective franchisee. Id, 16
24
CFR 436.5(s)(3)(ii)(F). By not identifying any material differences between the plaintiffs
25
stores and the stores described in Item 19, Papa Murphys International represented that the
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 102
plaintiffs stores would not be materially different than the stores represented in the high,
medium and low tiers and the plaintiffs stores could achieve average sales in any of those
tiers.
b. Undisclosed Material Facts-As early as 2002, Papa Murphys International knew that its
4
5
franchised stores succeeded or failed, in material part, based on the region of the country in
which they were located. Papa Murphys International also knew that it took an average of
five to seven years for a store to achieve average sales. The importance of these factors,
location and vintage, was confirmed by Papa Murphys own internal data which showed that
the majority of stores in the high and medium tiers of sales were established stores in the
10
Pacific Northwest and the vast majority of stores in the low sales tier were new stores
11
located in the South or the Southeast. Papa Murphys did not disclose this information to
12
the Plaintiffs.
13
395.
Speakers Knowledge of the Truth-Under Washington law, another element of fraud is that the
14
speaker making the representation must either have knowledge of its falsity or ignorance of
15
its truth. Holland Furnace Co. v. Korth, 43 Wn.2d 618, 622, 262 P.2d 772 (1953). Actual
16
17
case, Papa Murphys International had actual knowledge that 1) the average sales figures
18
presented in the FDD were misleading and that the high and medium tier store had
19
characteristics which were materially different (location and vintage) than the plaintiffs stores
20
and 2) that the majority of stores in the plaintiffs region were achieving average sales that
21
were 30% or more less than the national average because Papa Murphys International both
22
23
independently collects sales information for its franchised stores. Papa Murphys
24
International collects net sales data from each of franchised stores on a weekly basis in order
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 103
to collect royalties upon those sales. Additionally Papa Murphys International routinely
396.
Intended Reliance-Under Washington law, to establish the fifth element of fraud the plaintiff
must show that the speaker made the representation with the intention and reasonable
expectation that the plaintiffs would take action in reliance upon them. Martin v. Miller, 24
Wn.App. 306, 310, 600 P.2d 698 (Div. III 1979), citing Thorp v. Smith, 18 Wn. 277, 279. 51
P. 381 (1897). In this case, Papa Murphys International provided the FDD which contained
the fraudulent representations during the time the plaintiffs, prospective franchisees, were
evaluating the franchise. The principal purpose of providing the FDD was to encourage the
10
plaintiffs to invest in the franchise. Defendant Papa Murphys International went even further
11
than merely encouraging the plaintiffs to rely on representations in the FDDit encouraged
12
the plaintiffs to rely solely on the representations in the FDD. Each FDD included an exhibit
13
titled Statement of the Franchisee in which the franchisee was required to represent and
14
15
representationswhich expanded upon or were inconsistent with the [FDD] were made to me
16
by any person or entity, nor have I relied in any way on same. Papa Murphys International
17
not only intended that the plaintiffs would rely on the fraudulent representations in the FDD,
18
19
397.
Plaintiffs Ignorance of the Falsity-At the time that they signed the franchise agreements, all of
20
the plaintiffs who were presented with average sales claim in the System Store chart had no
21
knowledge that the representations were false. See Declarations of Plaintiffs, Exhibits 1-3 and
22
5-19.
23
398.
Plaintiffs Reliance upon the Representations-Every plaintiff who was presented with average
24
sales representations relied on those average sales to determine whether or not they should
25
invest in a Papa Murphys franchise. The plaintiffs used the average sales figures to develop
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 104
business plans, break even analyses or to calculate whether or not their stores sales would
399.
representations was not only reasonable based the parties own due diligence but also as a
matter of law. Under Washington law, a party to whom a positive, distinct and definite
representation has been made is entitled to rely on that representation and need not make any
further inquiry. Douglas Northwest, Inc. v. Bill OBrian & Sons Const., Inc., 64 Wn.App.
661, 680, 828 P.2d 565 (1992). A plaintiffs reliance is presumed reasonable when the
representation is based upon facts peculiarly within the speakers knowledge. Jennes v. Moses
10
Lake Dev. Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to rely on tavern
11
12
International was required by both the Federal Trade Commission Franchise Rule and the
13
Washington Franchise Investment Protection Act (as well as state laws in the states where
14
many of the plaintiffs franchises are located) to provide FDDs that are complete, accurate and
15
truthful. The plaintiffs reliance on the comprehensive, detailed average sales figures
16
provided by Papa Murphys International, who had an obligation under state and federal law
17
to be truthful, was reasonable. Finally, each of the plaintiffs attempted to verify the claims by
18
contacting existing franchisees who largely confirmed Papa Murphys Internationals claims
19
in general terms.
20
400.
Damages-None of the plaintiffs who were presented with average sales representations would
21
have invested in the franchise had they known that those sales were not representative of
22
either new stores or stores in their region. They would not have invested had they known that
23
most stores in their region were making more than 30% less than the national average or that
24
9
25
For specific details as to how each plaintiff relied on the average sales figures please see each of the relevant
plaintiffs individual facts and declaration.
most stores did not achieve average sales until they had been open for five to seven years.
But Papa Murphys International fraudulently concealed that information and the plaintiffs
invested in Papa Murphys franchises. Collectively, the plaintiffs have lost many millions of
6
7
8
9
10
11
401.
here in full.
12
13
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
402.
The actions and omissions of Papa Murphys International in connection with the offering and
14
selling of Papa Murphys franchises through the use of average sales figures in the system
15
store chart as described herein constitute negligent misrepresentation in that Papa Murphys
16
International (1) supplied false information for the guidance of others in a business
17
transaction; (2) knew or should have known that the information was supplied to guide the
18
plaintiff in their business transactions; (3) was negligent in in obtaining or communicating the
19
false information; (4) the plaintiffs relied on this information; (5) the plaintiffs reliance was
20
reasonable and (5) the false information was the proximate cause of the plaintiffs damages.
21
403.
Papa Murphys International sold franchises to the plaintiffs through a FDD, a disclosure
22
document which is solely used to help people decide whether or not to purchase a franchise.
23
24
regarding average sales for high, medium and low performing stores in the system store chart.
25
The information in the system store chart was false because Papa Murphys International had
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 106
a duty under federal law to disclose any characteristics of the included stores which were
materially different from the plaintiffs stores and Papa Murphys International failed to
disclose that the stores in the high and medium tiers were materially different from the
plaintiffs stores in terms of location and vintage. Papa Murphys International knew or
reasonably should have known that the plaintiffs would use the system store chart to
determine whether or not to purchase the franchise. Given the quantities of sales data gathered
communicating that information to the plaintiffs. The plaintiffs relied on the system store
chart, particularly the system wide sales average which they believed was achievable for their
10
stores because Papa Murphys International did not disclose the material differences between
11
12
404.
13
International supplied the plaintiffs with FDDs which contained false average sales
14
15
a. Information was provided for guidance in a business transaction- The sole purpose of
16
17
information to guide them in decision to invest in a franchise. The obvious purpose of the
18
19
20
21
22
23
24
25
The Commission promulgated the original Franchise Rule on December 21, 1978. Based
upon the original rulemaking record, the Commission found widespread deception in the
sale of franchises and business opportunities through both material misrepresentations and
nondisclosures of material facts, that franchisors and business opportunity sellers often
made material misrepresentations about: the nature of the seller and its business operations,
the costs to purchase a franchise or business opportunity and other contractual terms and
conditions under which the business would operate, the success of the seller and its
purchasers, and the sellers financial viability. The Commission also found other unfair or
deceptive practices pervasive: franchisors and business opportunity sellers use of
false or unsubstantiated earnings claims to lure prospective purchasers into buying a
franchise or business opportunity, and franchisors and business opportunity sellers failure
to honor promised refund requests. The Commission concluded that all of these practices led
to serious economic harm to consumers.
SECOND AMENDED COMPLAINT FOR
BUNDY LAW FIRM PLLC
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 107
1
2
3
4
To prevent deceptive and unfair practices in the sale of franchises and business
opportunities and to correct consumers misimpressions about franchise and business
opportunity offerings, the Commission adopted the original Franchise Rule, which is
primarily a pre-sale disclosure rule.
FTC Franchise Rule Statement of Basis and Purpose 72 Fed. Reg. 15443, 15445 (Mar. 30,
2007) (emphasis added).
b. False Information-Washington law (and Washington courts) follow the Restatement rule
and imposes liability for negligent misrepresentation when 1) a party provides false
information or 2) a party fails to reveal material facts within ones knowledge when there is
a duty to speak. Oates v. Taylor, 31 Wn.2d 898 (1948); Boonstra v. Stevens-Norton, Inc., 64
Wn.2d 621, 393 P.2d 287 (1964). In the case of the latter, the failure to disclose is in effect,
10
Wn.App. 789, 796, 770 P.2d 686. In this case, Papa Murphys International presented
11
average sales information without disclosing that the stores in the high and medium tiers
12
were materially different than the plaintiffs stores and that the majority of new stores in the
13
14
both under the FTC Franchise Rule and the common law.
15
i. Duty to Speak- In Washington, the court will find a duty to disclose (1) where one
16
party is relying upon the superior specialized knowledge and experience of the
17
other, Hutson v. Wenatchee Fed. Savs. & Loan Ass'n, 22 Wash.App. 91, 588 P.2d
18
1192 (1978); (2) where a seller has knowledge of a material fact not easily
19
discoverable by the buyer, Sorrell v. Young, 6 Wash.App. 220, 491 P.2d 1312
20
(1971); and (3) where there exists a statutory duty to disclose, Kaas v. Privette, 12
21
Wash.App. 142, 529 P.2d 23 (1974) (see also Clausing v. DeHart, 83 Wash.2d 70,
22
515 P.2d 982 (1973)). In this case, Papa Murphys International had a duty to speak
23
24
25
average sales by age and region system wide. Papa Murphys International
plaintiffs to develop and submit a business plan for their approval. The
Plaintiffs were also required to sign franchisee statements which stated that
10
11
12
13
14
15
variances in sales and that new stores in the Plaintiffs region performed
16
below the system average and generally fell into the lowest tier of store
17
18
19
Because Papa Murphys International was the only entity which collected
20
sales information for the entire system, it would have been difficult if not
21
22
based on vintage and location on their own. The Plaintiffs would have been
23
able to detect disparities based upon age and region only if they had
24
25
harder by steering the plaintiffs toward specific franchisees during the sales
process. When individual franchisees did discover stores in their area with
8
9
10
11
than the stores being offered to the plaintiffs. Papa Murphys International
12
13
that the high and medium tier stores (and their sales) were materially
14
different from the stores that the plaintiffs were being offered. The effect of
15
16
difference and the Plaintiffs stores were equally as likely to fall into the
17
high, medium and low sales tiers as any other store in the system. This
18
19
405.
Papa Murphys Knew or Should have Known the Information Was Supplied To Guide the
20
21
franchises and managing its franchise relationships. Papa Murphys International and its
22
predecessors have offered franchises since 1982. Being a mature franchisor, Papa Murphys
23
International had and has actual knowledge that the primary purpose of the government
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 110
Papa Murphys International knew or reasonably should have known that the plaintiffs would
use the average sales information in the system store chart to guide their decision.
406.
Murphys International did not intentionally defraud the plaintiffs by providing them with
fraudulent and misleading average sales information, its decision to provide them with average
sales figures in the system store chart without explaining material differences which separated
the high and medium performing stores and the plaintiffs stores or that the average sales
were dramatically skewed by high performing established stores, when Papa Murphys
Internationals own internal documents proved beyond a doubt that 1) such a disparity existed
10
and 2) the vast majority of new stores in the plaintiffs region were experiencing average sales
11
that were 30% less than the system average was negligent.
12
407.
The Plaintiffs Relied on that Information-The plaintiffs used the System store chart to
13
determine whether not to purchase the franchise. Collectively, they used the average sales
14
figures to develop business plans, break even analyses and to determine return on investment
15
16
408.
The Plaintiffs Reliance was Reasonable-Under Washington law, when a party makes a
17
distinct and definite representation, the party who hears the representation is entitled to rely on
18
the representation and has no obligation to make any further inquiry. Douglas Northwest,
19
Inc., 64 Wn.App. at 680. Furthermore a plaintiffs reliance is reasonable per se when the
20
representation is based upon facts which are particularly within the speakers knowledge.
21
Jennes v. Moses Lake Dev. Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to
22
rely on tavern sellers representations as to the net profit of business). In this case, Papa
23
Murphys International made distinct and definitive statements regarding average sales
24
throughout its franchise system as a whole and those statements were based upon information
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 111
(the store sales for each franchise outlet) which was particularly in Papa Murphy
Internationals knowledge. The Plaintiffs reliance upon those representations was reasonable.
409.
Damages-The average sales information in the system store chart played a pivotal role in the
plaintiffs decision to purchase a Papa Murphys franchise. They used the average sales or a
variant thereof to determine whether or not the franchise would be a good investment. Had
they known that the high and medium tier stores were materially different than their stores and
that those stores sales skewed the system average they would not have purchased a Papa
Murphys franchise. As a direct and proximate result of their decisions to invest in Papa
Murphys franchises, the plaintiffs lost hundreds of thousands of dollars per store
10
11
12
13
14
15
410.
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
16
here in full.
17
411.
The acts and omission of Papa Murphys International in offering and selling Papa Murphys
18
franchises to the plaintiffs as described herein and particularly the presentation of average
19
sales information on a system wide basis without disclosing that 1) the high and medium tier
20
stores were primarily established franchises located in the Pacific Northwest and 2) that the
21
lowest tier stores were primarily new stores in the Plaintiffs region who typically had sales
22
which were 30% less than the system wide average constituted a violation of RCW
23
19.100.170(2) in that Papa Murphys International omitted to state a material fact necessary in
24
412.
Omitted Material Fact-In a seminal Washington franchise case, an en banc Washington State
Supreme Court defined a material fact as a fact to which a reasonable person would attach
International Yogurt Co., 107 Wn.2d 314, 322, 729 P.2d 33 (1986). In Morris, the
Washington State Supreme Court was asked to determine if the franchisors failure to disclose
the fact that the yogurt mix was available to non-franchisees was an omitted material fact
when the franchise agreement and that FDD (UFOC at that time) both stressed the uniqueness
of the yogurt mix. Id. The court concluded it was as a matter of law. The question in this
case is even simpler, would a reasonable person in the plaintiffs position would attach
10
importance to the facts: 1) new stores in their region typically had average sales that were 30%
11
less than the system average and 2) that the stores in the high and medium tiers of sales
12
performance were primarily established stores located outside the Plaintiffs region? The
13
answer is yes.
14
413.
Necessary to Make the Statements Made Not Misleading- In Morris, the court ruled that the
15
material fact which the franchisor omitted (that the yogurt mix was available to non-
16
franchisees) was necessary to make the franchisors statements regarding the uniqueness of
17
the yogurt mix not misleading. In this case, the material fact which Papa Murphys
18
International omitted, that new stores in the Plaintiffs region had sales well below the system
19
average and that the majority of stores in the high and medium tiers were well established
20
stores in other regions, was necessary to make Papa Murphys Internationals statement of
21
22
414.
Reliance and Damages-Under RCW 19.100.190(2), a franchisee may sue a franchisor who
23
sold or offered a franchise in violation of the act for damages. In Morris, the court held that in
24
an action alleging the omission of a material fact in violation of RCW 19.100.170(2) proof of
25
franchisor can only rebut by proving that the plaintiff would have purchased the franchise
even if the material fact had been disclosed. In this case, the Plaintiffs have demonstrated
that they relied on the average sales figures in deciding whether or not to purchase the
franchise; they developed business plans and break even analyses using those average sales
numbers. Furthermore, each Plaintiff has submitted declarations that they would not have
purchased the franchise had they known the actual sales performance of new stores in their
region.
9
10
11
415.
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
12
here in full.
13
416.
The actions and omissions of Papa Murphys International in connection with offering and
14
selling Papa Murphys franchises to the plaintiffs through the use of average sales
15
representations in the benchmark stores chart which was dramatically skewed upward by the
16
high correlation between the well established high performing stores located in the Pacific
17
Northwest and stores who submitted profit and loss statements in the correct format
18
constitute fraud. Papa Murphys International made (1) representations of an existing fact,
19
which was (2) material, and (3) false. Papa Murphys International (4) had knowledge of the
20
representations falsity and (5) intended that the plaintiffs would rely on it. The plaintiffs were
21
(6) ignorant of the falsity of the representation and (7) relied on the representations. Their (8)
22
reliance was reasonable and (9) they suffered damages as a result of their reliance.
23
417.
Under the FTC Franchising Rule, when a franchisor makes financial performance
24
representations that represent a subset of the of outlets that share a particular set of
25
characteristics such as location or length of time open, the franchisor must identify those
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 114
characteristics and state whether those characteristics are materially different than the outlets
418.
In the Benchmark Store Chart, Papa Murphys International presented information that related
to the average cost, sales and profits of the Benchmark Stores. The number of Benchmark
stores varied between versions of the FDD but the Benchmarks stores represented between
half and two thirds of the all the franchised outlets. The sales averages for the Benchmarks
stores were roughly $50,000 more annually than the average sales for the system stores. In the
note to the Benchmark Store chart, Papa Murphys International stated that the Benchmark
Store subset was characterized as those stores which had submitted profit and loss statements
10
11
common to the Benchmark stores that distinguished them from the stores being offered to the
12
plaintiffs. In reality, all stores were required to submit profit and loss statements in Papa
13
Murphys Internationals specified format. The profit and loss statements were expensive to
14
produce in the required format and there was a strong correlation between stores that were
15
underperforming (the majority of which were located in the plaintiffs region) and stores that
16
did not submit appropriate profit and loss statements. There was also a high correlation
17
between stores which were included in the Benchmark chart and established stores which were
18
based in the Pacific Northwest. Papa Murphys International did not disclose these
19
characteristics to the Plaintiffs or explain that their stores would not share those characteristics
20
21
419.
Existing Fact-Papa Murphys International presented average sale, cost and profit information
22
for benchmark stores in the Benchmark Store chart in Item 19 of the FDD. Papa Murphys
23
International stated that the Benchmark chart represented those stores which submitted profit
24
25
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VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
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420.
a reasonable person would attach importance when determining whether to participate in the
transaction. Aspelund v. Olerich, 56 Wn.App. 477, 483, 784 P.2d 178 (Div. I, 1990). ); see
Morris v. International Yogurt Co., 107 Wn.2d 314, 323, 729 P.2d 33, 38 (1986) (Adopting
the identical securities law definition of materiality in the context of franchising). The
Federal Trade Commission in regulating franchise disclosures has defined a material fact in a
franchise context as one which is likely to affect [the] conduct or decisions [of a prospective
franchisee] with respect to the product at issue [the franchise being offered]. 16 C.F.R. Parts
436 and 437 Disclosure Requirements and Prohibitions Concerning Franchising and Business
10
Opportunities; Final Rule, page 15455 at note 95; FTC Policy Statement on Deception, 103
11
FTC 110 (1984). In this case, the representations regarding average sales went to the essence
12
of the plaintiffs investment, its profitability. Under either standard, it is beyond question that
13
a reasonable person would place a great deal of importance on the average sales, costs, and
14
most importantly profit of a franchise system in which they were considering an investment.
15
421.
Falisity -Under Washington law, falsity is established for the purposes of fraud, when a party
16
who has a duty to speak fails to disclose a material fact. Guarino v. Interactive Objects, Inc.,
17
18
a. Duty to Disclose-Under the FTC Franchise Rule, if a franchisor choses to make financial
19
performance representations about a subset of its franchised stores then the franchisor must
20
identify for the common characteristics of that sub-set and identify any characteristics of the
21
subset which are materially different from the franchisees potential stores.
22
23
representations about a subset of its franchised stores (the Benchmark Stores) and identified
24
one common characteristic of that subset but failed to disclose three other common
25
characteristics, namely that the Benchmark stores were high-performing, well established
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 116
stores located outside the Plaintiffs region. Simply put, in identifying the Benchmark stores
only as those stores which had submitted profit and loss statements in the appropriate
format, Papa Murphys International told some but not all of the truth. Under the FTC
Franchise Rule and the Washington common law of fraud, Papa Murphys International had
a duty to tell the whole truth. It chose not to do so and consequently its statements regarding
422.
Speakers Knowledge of the Truth-Papa Murphys International knew that its statement that
the only common characteristic of the Benchmark Stores was that those stores had submitted
profit and loss statement in the appropriate format was not true. Papa Murphys
10
International knew the average weekly sales for all franchise stores in its system. Papa
11
Murphys International routinely analyzed the sales data by state and region. It was clear from
12
the FDD that the Benchmark Stores outperformed the franchise system as a whole and Papa
13
Murphys International knew that there was a high correlation between struggling stores and
14
15
423.
Intended Reliance-Papa Murphys International intended that the plaintiffs would rely on the
16
Benchmark Store chart in determining whether or not to purchase a franchise. The first page
17
of the FDD states that the FTC requires your franchisor to give you this information. It
18
should help you make up your mind. Study it carefully. The Benchmark Chart had the most
19
comprehensive information related to average costs, expenses and sales for Papa Murphys
20
franchises. It was the sole source of information related to the average profits of a franchised
21
store. Papa Murphys International intended and reasonably expected that franchisees would
22
rely on the Benchmark Store chart in deciding to purchase a franchise. If Papa Murphys
23
International did not intend for its prospective franchisees to rely upon the data provided in
24
Item 19, it had the option of providing no such data together with a cautionary legend
25
424.
Plaintiffs Ignorance of the Falsity-At the time that they signed the franchise agreements all of
the plaintiffs who relied on the Benchmark Store Chart and Papa Murphys Internationals
statement that the only thing which distinguished the Benchmark Stores from the system as a
whole was that the Benchmark Stores had submitted profit and loss statements in an
appropriate format had no reason to believe that Papa Murphys Internationals statements
425.
Plaintiffs Reliance upon the Representations-Every plaintiff who was presented with average
sales, expenses and profits in the Benchmark store chart relied on that information to
10
426.
Plaintiffs Reliance was Reasonable-The plaintiffs reliance on the average sales representation
11
was not only reasonable based the parties own due diligence but as a matter of law. Under
12
Washington law, a party to whom a positive, distinct and definite representation has been
13
made is entitled to rely on that representation and need not make any further inquiry.
14
Douglas Northwest, Inc. v. Bill OBrian & Sons Const., Inc., 64 Wn.App. 661, 680, 828 P.2d
15
565 (1992). A plaintiffs reliance is presumed reasonable when the representation is based
16
upon facts peculiarly within the speakers knowledge. Jennes v. Moses Lake Dev. Co., 39
17
Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to rely on tavern sellers
18
representations as to the net profit of business). In this case, the Benchmark Store chart was
19
20
and only Papa Murphys International knew which stores were included and the characteristics
21
of each store.
22
427.
Damages-None of the Plaintiffs who received FDDs with the Benchmark Chart would have
23
invested in the franchise had they known that the Benchmark stores shared common
24
characteristics, including location and vintage which were materially different than their
25
stores. They would not have invested if they had known that the Benchmark Chart excluded
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 118
the majority of low performing stores which had higher costs, and lower sales and profits than
4
5
6
428.
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
here in full.
8
429.
The actions and omissions of Papa Murphys International in connection with the offering and
selling of Papa Murphys franchises to the Plaintiffs through the use of financial performance
10
representations in the Benchmark Store chart including representations of average sales, costs
11
and profits for Benchmark stores as described herein constitute negligent misrepresentation.
12
Papa Murphys International (1) supplied false information for the guidance of others in a
13
business transaction; (2) knew or should have known that the information was supplied to
14
guide the plaintiff in their business transactions; (3) was negligent in in obtaining or
15
communicating the false information; (4) the plaintiffs relied on this information; (5) the
16
plaintiffs reliance was reasonable and (5) the false information was the proximate cause of
17
430.
As explained earlier in this Complaint, Papa Murphys International had an obligation under
19
federal law to identify relevant characteristic of the Benchmark Stores as subset of the
20
franchise system as a whole. Papa Murphys International also had an obligation to inform the
21
plaintiffs of any characteristics of the Benchmark stores which would be materially different
22
than the Plaintiffs stores. Papa Murphys International disclosed one characteristic of the
23
Benchmark stores, that they were made up of stores which submitted the profit and loss
24
statements in an appropriate format but failed to disclose three other relevant characteristics:
25
1) that there was a high correlation between high performing stores and stores which were
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 119
included in the benchmark store chart and 2) that there was a high correlation between
benchmark stores and stores located in the Pacific Northwest and 3) there was a high degree of
correlation between stores included in the Benchmark store chart and stores which has been in
operation for several years. Because Papa Murphys International failed to disclose these key
characteristics, it led the plaintiffs to believe that the information in the Benchmark Store
Chart was representative of the costs, sales and profits of stores in their region. The plaintiffs
used the information in the Benchmark Store chart to evaluate the franchise and develop their
business plan. They based their decision to purchase a franchise on Papa Murphys
Internationals statements in the Benchmark Store Chart and suffered damages as a result.
10
431.
11
International supplied the Plaintiffs with FDD that contained representations regarding the
12
average sales, cost, and profits of the Benchmark Stores without telling the Plaintiffs that the
13
Benchmark stores were generallly the highest performing stores in the system and shared
14
common characteristics which were materially different than the Plaintiffs stores.
15
a. Information was provided for guidance in a business transaction-the sole purpose of the
16
FDD is to provide a prospective franchisee with truthful, accurate, and complete information
17
18
earlier in this Second Amended Complaint, the FTC adopted the Franchise Rule for the
19
20
21
material facts about the nature of [the franchise]. FTC Franchise Rule Statement of Basis
22
and Purpose, 72 Fed. Reg. 15443, 15445 (Mar. 30 2007). In this case, Papa Murphys
23
International provided the information in the benchmark store chart to guide the plaintiffs in
24
25
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VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 120
b. Information was false-Under the Restatement and Washington law, a statement is false for
the purposes of liability for negligent misrepresentation if the speaker, with a duty to speak,
fails to reveal material facts within ones knowledge. Oates v. Taylor, 31 Wn.2d 898
(1948); Boonstra v. Stevens-Norton, Inc., 64 Wn.2d 621, 393 P.2d 287 (1964). Under
Washington law, a party has a duty to speak in situations where 1) one party is relying on
the speakers superior specialized knowledge and experience; 2) there is a statutory duty to
disclose and 3) the speaker has knowledge of a material fact not easily discoverable by the
other party. See respectively Hutson v. Wenatchee Fed. Savs. & Loan Ass'n, 22 Wash.App.
91, 588 P.2d 1192 (1978); Kaas v. Privette, 12 Wash.App. 142, 529 P.2d 23 (1974);
10
Clausing v. DeHart, 83 Wash.2d 70, 515 P.2d 982 (1973) and Sorrell v. Young, 6
11
12
13
Murphys International has been selling franchises and operating as a franchisor for
14
15
and profits of its company and franchised stores and it had a unique historical
16
perspective as to how the Papa Murphys model performed in new and developing
17
markets and in areas outside the Pacific Northwest. The Plaintiffs evaluated the
18
19
expert in the Papa Murphys system and the most reliable source of information.
20
ii. Papa Murphys had a statutory duty to disclose the information-Under both the
21
FTC Franchise Rule and Washingtons Franchise Investment Protection Act, Papa
22
Murphys International had a duty to disclose to the Plaintiffs that the Benchmarks
23
Stores shared characteristics which were materially different than the Plaintiffs
24
stores. In spite of that duty, Papa Murphys International failed to tell the Plaintiffs
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 121
that the Benchmark stores tended to represent the most successful franchises in the
system, many of which were well established stores in the Pacific Northwest.
iii. Papa Murphys International had information not readily discoverable by the
Plaintiffs-Papa Murphys International not only developed the format in which all
stores were required to submit profit and loss statements; it also was solely
responsible for determining which stores had complied and would be included in the
Benchmark store chart. Because no store knew for certain whether or not their store
was included in the Benchmark Store chart, the Plaintiffs could not have discovered
the disparities even if they had been able to individually contact Papa Murphys
10
franchisees that were willing to share their average costs, sales and profits. Papa
11
Murphys International was the only party who knew or had access to information
12
which showed the high correlations between Benchmark Stores and high
13
14
fraudulent for Papa Murphys International not to share this information with the
15
Plaintiffs.
16
432.
Papa Murphys knew or should have known the information was supplied to guide the
17
18
Papa Murphys International is a mature and experienced franchisor who knew or reasonably
19
should have known that the purpose of FDD was to guide the Plaintiffs in a business
20
transaction.
21
433.
22
International did not intentionally defraud the plaintiffs its decision to provide them with
23
average sales, costs and profit information for the benchmark stores without explaining the
24
material differences between the Benchmark stores and the rest of the system or the plaintiffs
25
likely stores was negligent when such information was readily available in Papa Murphys
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 122
Internationals own internal documentation which included profit and loss statements from all
434.
The Plaintiffs relied on the information-The Plaintiffs used the average sales, costs and profits
disclosed in the Benchmark chart to determine whether or not to purchase the franchise. The
Benchmark information established a range of likely sales, costs and profits and the Plaintiffs
used that information to determine the wisdom of and likely return from their investment.
435.
The Plaintiffs reliance was reasonable- In the Benchmark chart Papa Murphys International
made distinct and definite representations regarding facts which were exclusively within its
knowledge. The Plaintiffs were entitled to rely upon them as a matter of law. See Douglas
10
Northwest, Inc. v Bill OBrian & Sons Const., Inc., 64 Wn.App. 661, 680, 828 P.2d 565
11
(1992) and Jennes v. Moses Lake Dev. Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951).
12
436.
Damages-The plaintiffs used the Benchmark store chart to assess the likely costs, sales and
13
profits of a Papa Murphys store. They decided to invest in the franchise based on the results
14
of that assessment. Had they known that the Benchmark store chart represented the top half of
15
the system and that those stores tended to be well established stores in Pacific Northwest, they
16
would not have purchased their stores. . On average the plaintiffs lost hundreds of thousands
17
18
19
20
21
437.
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
22
here in full.
23
438.
The actions and omissions of Papa Murphys International in connection with offering and
24
selling Papa Murphys franchises to the plaintiffs through the use of average sales
25
representations in the benchmark stores chart which was dramatically skewed upward by the
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 123
high correlation between the well established high performing stores located in the Pacific
Northwest and stores who submitted profit and loss statements in the correct format
state a material fact necessary in order to make the statements made not misleading.
439.
Omitted Material Fact-As an en banc Washington State Supreme Court noted in Morris, a
material fact is a fact to which a reasonable person would attach importance in determining
his choice of action in the transaction in question. Morris, 107 Wn.2d at 322. Here,
Murphys International presented information related to the typical costs, sales and profits of
the benchmark stores to the plaintiffs without disclosing that 1) there was a high correlation
10
between stores including in the benchmark chart and well established high performing stores
11
located in the Pacific Northwest and 2) the sales, costs and profits of the benchmark stores
12
were not representative of the sales, costs and profits of stores in the Worthingtons region.
13
Because each omitted fact went to the essence of the franchise model, its sales, costs, and
14
profits a reasonable person would have placed great importance upon it. Mr. and Mrs.
15
16
440.
Necessary to Make the Statements Made Not Misleading- The omitted material facts that there
17
was a high correlation between stores in the benchmark store chart and stores which were
18
materially different than the one that the Worthingtons were being offered and that the
19
average sales, costs and profits of new stores in their region were dramatically different was
20
necessary to make Papa Murphys Internationals representation about the range of sales, costs
21
22
441.
23
24
franchisor can only rebut by proving that the plaintiff would have purchased the franchise
25
even if the material fact had been disclosed. Morris, 107 Wn.2d 329-330. In this case, the
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 124
Worthingtons have submitted a declaration stating that they relied on the benchmark sales
figures in deciding whether or not to purchase the franchise and that they would not have
purchased the franchise had they known the actual sales performance of new stores in their
region.
6
7
8
9
10
11
442.
here in full.
12
13
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
443.
The actions and omissions of Defendant Papa Murphys International in connection with
14
offering and selling Papa Murphys franchises to the Plaintiffs through the use of
15
representations regarding average sales and local marketing expenditures which read
16
together represented that franchisees were spending five to seven percent of net sales on local
17
marketing to reach the disclosed average sales and failing to disclose that franchisees with
18
new stores outside the Pacific Northwest frequently spent two or three times the represented
19
local marketing expenditure to achieve sales that were approximately 30% below the system
20
average constitutes fraud. Defendant Papa Murphys International made (1) representations
21
of an existing fact, which was (2) material, and (3) false. Defendant PMI (4) had knowledge
22
of the representations falsity and (5) intended that the Plaintiffs would rely on it. The plaintiffs
23
were (6) ignorant of the falsity of the representation and (7) relied on the representations.
24
Their (8) reliance was reasonable and (9) they suffered damages as a result of their reliance.
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 125
444.
this Second Amended Complaint and those allegations are incorporated here by this reference.
In Item Six and Item 20 (the Franchise Agreement) of the FDD, Papa Murphys International
made several representations related to the amount franchisees were required to spend on local
store marketing. The cumulative effect of Papa Murphys representations and omissions
regarding net sales and regarding local advertising expenditures was a representation that
franchisees achieved the average sales disclosed in the FDD by spending five to seven
percent of their net sales on local store marketing. In reality, the majority new stores outside
the Pacific Northwest were spending two or three times that amount in local store marketing
10
and achieving sales which were 20 to 30 percent less than the system average. Papa Murphys
11
Internationals representation that the average sales were achieved by franchisees spending five
12
to seven percent of net sales on local store marketing was either literally false or Papa
13
Murphys International failed to disclose a material fact when it had a requirement to do so.
14
Papa Murphys International knew or reasonably should have known this information and did
15
not disclose it to the Plaintiffs. It was easily derived from its internal spreadsheets from at
16
least 2002. The Plaintiffs purchased Papa Murphys franchises and suffered damages as a
17
result.
18
445.
19
Item Six and Item 20 of the FDD. Papa Murphys International also stated the average sales
20
for its franchised stores in Item 19. The cumulative effect of these statements was a
21
representation that the disclosed averaged sales were reached by spending five to seven
22
percent on local store marketing. In Item Six of the FDD, Papa Murphys International stated
23
that franchisees would be required to spend the greater of five percent of net sales or specific
24
amount (which varied between FDDs) on local store marketing. The five percent was
25
generally a higher number. In paragraph 4.4 of the franchise agreement (Item 20 of the FDD),
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 126
Papa Murphys International represented that franchisees were required to spend a minimum
of the greater of $X (varied over time) or 5 percent [of net sales]. Paragraph 4.5 provided
cooperative but that all contributions to a cooperative would be credited toward their local
marketing requirement (of 5%). In reality, the majority of new stores in the Plaintiffs region
were spending two or three times that amount in local store marketing and achieving sales
which were 20 to 30 percent less than the system average. By failing to disclose just that
combination of two material facts, Papa Murphys International defrauded the Plaintiffs.
446.
10
a reasonable person would attach importance when determining whether to participate in the
11
transaction. Aspelund v. Olerich, 56 Wn.App. 477, 483, 784 P.2d 178 (Div. I, 1990). The
12
Federal Trade Commission, in regulating franchise disclosures, has defined a material fact in a
13
franchise context as one which is likely to affect [the] conduct or decisions [of a prospective
14
franchisee] with respect to the product at issue [the franchise being offered]. In this case, the
15
representations regarding average sales and local marketing expenditure went to the essence of
16
the Plaintiffs investment, its profitability. Under either standard, it is beyond question that a
17
reasonable person would place a great deal of importance on the average sales and the
18
marketing costs necessary to achieve that average. The combination of average sales relevant
19
to the plaintiffs stores being approximately 30% lower than disclosed and the historic local
20
marketing expenditures to achieve those sales being, in many cases, 200% of the amount
21
22
447.
Falsity-Under Washington law, falsity is established for the purposes of fraud, when a party
23
makes a representation which is literally false or when a party who has a duty to speak fails to
24
disclose a material fact. Guarino v. Interactive Objects, Inc., 122 Wn.App. 95, 127, 86 P.3d
25
1175 (Div. I 2004). Washington courts have found a duty to disclose information can arise in
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arms length contract negotiations because of the contractual duty of good faith. Landstar
Inway Inc., v. Samrow., 181 Wn.App. 109, 124, 325 P.3d 327 (Div. II 2014), quoting
Liebergesell v. Evans, 93 Wn.2d 881, 891-94 and Oates v. Taylor, 31 Wn. 2d 898, 904, 119
included in the system store chart were reaching their average sales by spending five to
seven percent on local store marketing was literally false. Many new stores in the Plaintiffs
region were spending two or three times the local store marketing expenditure on local store
marketing.
b. Duty to Speak - -In this case, Papa Murphys International had a duty to disclose any
10
11
material facts exclusively within its control to comply with its either its contractual duty of
12
good faith or its duty of good faith as imposed by statute 10. As between the parties, at the
13
time the Plaintiffs made their investment decisions, only Papa Murphys International knew
14
or could know that its current franchisees with new stores outside the Pacific Northwest
15
were spending materially more than the five to seven percent represented in the FDD to
16
achieve net sales that were approximately 30% below the averages represented in the FDD.
17
Assuming the cumulative representation made was not an actual affirmative false statement,
18
then Papa Murphys International had a duty to disclose that material fact to the Plaintiffs.
19
20
that its newer franchised stores outside the Pacific Northwest were spending
21
materially more than the five to seven percent represented in the FDD to achieve net
22
sales that were approximately 30% below the averages represented in the FDD.
23
24
10
25
RCW 19.100.180 states the following specific rights and prohibitions shall govern relations between the
franchisorand the franchises (1) the parties shall deal with each other in good faith.
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Papa Murphys International did not disclose this information to the Plaintiffsif
448.
Speakers Knowledge of the Truth-Under Washington law, another element of fraud is that the
speaker making the representation must either have knowledge of its falsity or ignorance of
its truth. Holland Furnace Co. v. Korth, 43 Wn.2d 618, 622, 262 P.2d 772 (1953). Actual
Papa Murphys International internal records demonstrate that it had institutional knowledge
449.
Intended Reliance-Under Washington law, to establish the fifth element of fraud the plaintiff
10
must show that the speaker make the representation with the intention and reasonable
11
expectation that the Plaintiffs would take action in reliance upon them. Martin v. Miller, 24
12
Wn.App. 306, 310, 600 P.2d 698 (Div. III 1979), citing Thorp v. Smith, 18 Wn. 277, 279. 51
13
P. 381 (1897). In this case, Defendant Papa Murphys International provided the FDD which
14
contained the fraudulent representations during the time the plaintiffs, prospective franchisees,
15
were evaluating the franchise. The sole purpose of providing the FDD was to encourage the
16
plaintiffs to invest in franchise. Defendant Papa Murphys International went even further than
17
merely encouraging the plaintiffs to rely on representations in the FDDit encouraged the
18
plaintiffs to rely solely on the representations in the FDD as demonstrated by their use of
19
20
Murphys International not only intended that the Plaintiffs would rely on the fraudulent
21
representations in the FDD, they intended that the Plaintiffs would rely on them exclusively.
22
450.
Plaintiffs Ignorance of the Falsity-At the time that they signed the franchise agreements all of
23
the plaintiffs who were presented with an FDD had no knowledge that the local advertising
24
expenditure was false and that franchisees in their region were frequently spending two or
25
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three times that amount to achieve the average sales disclosed in the FDD. See declarations of
Plaintiffs.
451.
Plaintiffs Reliance upon the Representations-Every plaintiff relied on the local marketing
expenditure provided in the FDD to develop their business plan. They used the local
marketing expenditure as a baseline to determine how much they would need to spend on
local marketing to achieve their desired sales. For example, the Liles used Papa Murphys
representations regarding average sales and local store marketing to develop a business plan in
which they estimated that they would spend six percent of net sales on local store marketing to
10
452.
11
representation that they could achieve average sales by spending the local marketing
12
expenditure was not only reasonable based the parties own due diligence but as a matter of
13
law. Under Washington law, a party to whom a positive, distinct and definite representation
14
has been made is entitled to rely on that representation and need not make any further
15
inquiry. Douglas Northwest, Inc. v. Bill OBrian & Sons Const., Inc., 64 Wn.App. 661, 680,
16
828 P.2d 565 (1992). A plaintiffs reliance is presumed reasonable when the representation is
17
based upon facts peculiarly within the speakers knowledge. Jennes v. Moses Lake Dev. Co.,
18
39 Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to rely on tavern sellers
19
20
International was required by federal regulation and state law to provide FDD that are
21
complete, accurate and truthful. The plaintiffs reliance on the comprehensive, detailed
22
average sales figures and the local marketing expenditure provided by Defendant Papa
23
Murphys International who had an obligation under state and federal law to be truthful was
24
reasonable.
25
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453.
Damages-None of the Plaintiffs would have invested in Papa Murphys had they known that
stores in their region were spending two or three times the stated local marketing
expenditure in local store marketing. They would not have invested if they had known that in
order to achieve sales that were thirty percent below the average sales disclosed in the FDD
new stores in their region were spending could only be achieved by spending two or three
times the disclosed local marketing expenditure. But Defendant Papa Murphys
International fraudulently concealed that information and the plaintiffs invested in Papa
Murphys franchises. Collectively, the Plaintiffs have lost millions in their investment in Papa
Murphys franchises.
10
11
12
13
14
15
16
17
454.
here in full.
18
19
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
455.
The acts and omissions of Papa Murphys International in offering and selling franchises
20
through representations regarding local store marketing and average which when read together
21
stated that franchisees were spending five to seven percent on local store marketing to achieve
22
their average sales when Papa Murphys International knew reasonable should have know that
23
franchisees in the plaintiffs region were spending two or three times the disclosed amount on
24
local store marketing and were still not reaching sales which were equal to the disclosed
25
system average constitutes negligent misrepresentation in that Papa Murphys International (1)
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supplied false information for the guidance of others in a business transaction; (2) knew or
should have known that the information was supplied to guide the plaintiff in their business
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
456.
Papa Murphys Internationals representations regarding local marketing and average sales
which were made in Items Six, 19 and 20 in the FDD collectively stated that the average sales
disclosed in either the system, company or benchmark store chart or in oral statements by
Papa Murphys International representatives were reached by franchised stores spending five
10
to seven percent of net sales on local store marketing. In reality, the majority of stores in the
11
plaintiffs region were spending two or three times that amount in local store marketing and
12
achieving sales which were 20 to 30 percent less than the system average. Either the
13
representation was patently false or, at least Papa Murphys International committed negligent
14
misrepresentation. Papa Murphys International knew or reasonably should have known the
15
truth and did not disclose it to the Plaintiffs. The information was easily derived from its
16
internal spreadsheets from at least 2002. The Plaintiffs purchased Papa Murphys franchises
17
18
457.
19
International supplied the Plaintiffs with an FDD which represented that franchisees were
20
reaching the average sales disclosed in Item 19 by spending the equivalent of five to seven
21
percent of net sales in local store marketing as described in Item Six and 20 of the FDD. That
22
23
24
this complaint the principal purpose of the FDD and the sole purpose of the Federal and
25
state laws which regulate its contents is to truthfully and accurately inform prospective
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franchisees about the nature of the franchise by disclosing material facts about the franchise.
Papa Murphys International provided the FDD to the plaintiffs to guide them in their
b. Information was false- As summarized earlier in this complaint, for the purposes of
disclose a material fact (the non-disclosure of which operates a representation of the non-
existence of the omitted material fact). Favors, 53 Wn.App at 796. Under Washington law,
a party has a duty to speak when either one party is relying on the speakers superior
knowledge and experience or when the speaker has knowledge of a material fact not easily
10
discoverable by the other party. See respectively Hutson v. Wenatchee Fed. Savs. & Loan
11
Ass'n, 22 Wash.App. 91, 588 P.2d 1192 (1978) and Sorrell v. Young, 6 Wash.App. 220, 491
12
13
14
franchisor, Papa Murphys International had extensive experience with the Papa
15
Murphys franchise model including information related to average sales by age and
16
region system wide. As between the parties, Papa Murphys International was the
17
only party with access to information regarding how much franchisees, in all parts
18
of their system, were spending on local marketing to achieve their net sales. Papa
19
20
on its knowledge and experience. Prior to being offered a franchise, Papa Murphys
21
22
submit a business plan for their approval. The Plaintiffs were also required to sign
23
franchisee statements which stated that they had relied exclusively on the FDD in
24
25
definitive and only reliable source of information related the franchise, Papa
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ii. Papa Murphys International had information not easily discoverable by the
plaintiffs- Because Papa Murphys International was the only entity which had the
ability to collect sales information and expense information for the entire system, it
would have been difficult if not impossible for the plaintiffs to have discovered that
franchisees in newer stores in their region were having to spend materially more
than stated in the FDD on local marketing in order to achieve net sales that were
10
materially below the national averages represented in the FDD. Papa Murphys
11
12
the Plaintiffs toward specific franchisees during the sales process. When individual
13
franchisees did discover stores in their area with below average sales, Papa
14
15
16
plaintiffs to the average sales in Item 19 of the FDD. The plaintiffs had no other
17
reasonable ability to determine the trutheven had they suspected that their
18
19
458.
Papa Murphys International Knew or Should Have Known The Information Was Supplied To
20
21
business is selling franchises and managing its franchise relationships. Papa Murphys
22
International and its predecessors have offered franchises since 1982. Being a mature
23
franchisor, Papa Murphys International had and has actual knowledge that the primary
24
25
whether to invest in a franchise. Papa Murphys International knew or reasonably should have
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known that the plaintiffs would use the representations made in the FDD to guide their
decision and that the plaintiffs had no duty to second-guess whether Papa Murphys
International was lying to them about individual items in a document of approximately 100
pages
459.
Papa Murphys International was Negligent in Supplying the Information- Even if Defendant
Papa Murphys International did not intentionally defraud the plaintiffs by providing them
with the representation that existing franchisees where achieving their net sales by spending
five to seven percent of net sales on local marketing, its decision to provide them with that
information without explaining material differences between the system average stores and
the stores they were considering investing in was negligent.
10
11
460.
The Plaintiffs Relied on the Information-Each plaintiff used the information that existing
12
franchisees were achieving their net sales by spending between five and seven percent on local
13
marketing in developing their business plans (whether or not formal) and in making their
14
decision to invest in a Papa Murphys franchise. Their reliance was reinforced by Papa
15
Murphys International, in most cases reviewing and approving their business plans. They
16
further relied, in most cases, by using that as an element of their representations they made to
17
18
461.
The Plaintiffs Reliance was Reasonable- Under Washington law, when a party makes a
19
distinct and definite representation, the party who hears the representation is entitled to rely on
20
the representation and has no obligation to make any further inquiry. Douglas Northwest,
21
Inc., 64 Wn.App. at 680. Furthermore a plaintiffs reliance is reasonable per se when the
22
representation is based upon facts which are particularly within the speakers knowledge.
23
Jennes v. Moses Lake Dev. Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to
24
rely on tavern sellers representations as to the net profit of business). In this case, Papa
25
Murphys International made distinct and definitive statements that existing franchisees were
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achieving their net sales by spending the represented five to seven percent of net sales on local
The Plaintiffs had no reason to question the truth of the information being provided by their
putative partner and, had they suspected that partner was lying or hiding material facts,
would have had no source to confirm or deny the information. The Plaintiffs reliance upon
462.
The Plaintiffs Suffered Damages as a Result-Had the Plaintiffs known the truththat existing
franchisees were spending materially more on local marketing than represented in order to
achieve net sales that were 20 to 30% below the represented national averages, none of the
10
Plaintiffs would have invested with Papa Murphys. As a direct and proximate result of their
11
decisions to invest, the Plaintiffs lost massive sums, amounting to hundreds of thousands of
12
13
17
18
463.
14
15
16
here in full.
19
20
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
464.
The actions and omissions of Papa Murphys International in connection with offering and
21
selling Papa Murphys franchises to the plaintiffs through the use of representations regarding
22
average sales and local marketing expenditures which read together represented that
23
franchisees were spending five to seven percent of net sales on local marketing to reach the
24
disclosed average sales and failing to disclose that franchisees with new stores outside the
25
Pacific Northwest frequently spent two or three times the represented local marketing
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expenditure to achieve sales that were approximately 30% below the system average
state a material fact necessary in order to make the statements made not misleading.
a. Omitted Material Fact-As an en banc Washington State Supreme Court noted in Morris, a
material fact is a fact to which a reasonable person would attach importance in determining
his choice of action in the transaction in question. Morris, 107 Wn.2d at 322. Here, Papa
Murphys International represented that its franchised stores were spending five to seven
percent of net sales reach the disclosed sales averages without disclosing that new stores in
the plaintiffs region were spending two or three times that amount to achieve sales which
10
were 30% less than the system average. In fact several of the stores in the plaintiffs region
11
were spending almost 20% of net sales on local store marketing. Would a reasonable person
12
purchasing a franchise attach importance to the fact that new stores in their region were
13
spending significantly more than the disclosed amount on local store marketing to reach
14
sales which were significantly less than the system average? Absolutely.
15
b. Necessary to Make the Statements Made Not Misleading- The omitted material fact that
16
franchisees who owned new stores in the plaintiffs region were spending two or three times
17
the disclosed amount on local store marketing to achieve sales which were 30% less than the
18
system average was necessary to make Papa Murphys cumulative representation that its
19
franchisee were spending five to seven percent on local store marketing to achieve
20
21
22
fact establishes a presumption of reliance which the franchisor can only rebut by proving
23
that the plaintiff would have purchased the franchise even if the material fact had been
24
disclosed. Morris, 107 Wn.2d 329-330. In this case, many of the plaintiff can
25
demonstrated actual reliance through their business plans and break even analyses in which
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the plaintiffs state how much they intended to spend on local store marketing and sales they
3
4
5
465.
The actions and omissions of Papa Murphys International in connection with offering and
selling Papa Murphys franchises to the Plaintiffs through the practice of informing the
8
franchisees that based on their financial resources that they were qualified to purchase a
9
franchise when Papa Murphys International knew or reasonably should have known that
10
based on Papa Murphys Internationals own estimates of the time and expense necessary for a
11
store to break even the franchisees were dangerously undercapitalized was fraudulent.
12
Defendant Papa Murphys International made (1) representations of an existing fact, which
13
was (2) material, and (3) false. Defendant Papa Murphys International (4) had knowledge of
14
the representations falsity and (5) intended that the plaintiffs would rely on it. The plaintiffs
15
were (6) ignorant of the falsity of the representation and (7) relied on the representations.
16
Their (8) reliance was reasonable and (9) they suffered damages as a result of their reliance
17
466.
Papa Murphys International represented that the plaintiffs had sufficient financial resources to
18
operate the franchise either by telling them directly that they were qualified or through
19
conduct by continuing the sales process after the plaintiffs submitted extensive financial
20
the sales process, the plaintiffs were required to complete and submit a qualification report
22
to Papa Murphys. In most cases, Papa Murphys required the plaintiffs to submit this report
23
before they would schedule a sales meeting. In the report, the plaintiffs were required to
24
provide information related to their financial resources including their net worth, their liquid
25
assets and any outstanding liabilities. The Plaintiffs were also required to authorize Papa
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Murphys International to conduct credit checks and contact the listed financial institutions.
The sole purpose of this information was to demonstrate the Plaintiffs had sufficient financial
resources to purchase and operate the franchise. After the plaintiffs sent in their qualifications
reports, the plaintiffs were either told they were approved directly or the sales process
continued. Papa Murphys International knew or reasonably should have known based on its
own internal data that the plaintiffs were dangerously undercapitalized given their prospective
stores locations, Papa Murphys Internationals struggles in that region and Papa Murphys
467.
Existing Fact- Papa Murphys International represented to each Plaintiff that, based on their
10
liquid assets and net worth, and in certain instances business plans, they were qualified to
11
operate a Papa Murphys franchise. Papa Murphy either made this representation directly by
12
informing the Plaintiffs that they were qualified or through conduct by continuing the sales
13
process. Papa Murphy made the following representations. The representation was a
14
statement of then existing fact and was the gateway determination that kept the Plaintiffs in
15
16
468.
17
a reasonable person would attach importance when determining whether to participate in the
18
transaction. Aspelund v. Olerich, 56 Wn.App. 477, 483, 784 P.2d 178 (Div. I, 1990).
19
Throughout the sale process Papa Murphys International employees and agents presented
20
themselves as experts in franchise process and in the operations of Papa Murphys franchise.
21
They indicated that Papa Murphys International was selective in determining who would be
22
offered a Papa Murphys franchise and that the qualification report was an important part of
23
that process. Accordingly, the Plaintiffs placed great weigh upon Papa Murphys
24
Internationals representations that they were qualified franchisees. It is axiomatic that none
25
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of the Plaintiffs would have invested had they been told the truth that only Papa Murphys
International knewthat they were, in fact, based on tangible historical data, not qualified.
469.
Falsity-Washington courts have consistently held that a person is liable for fraud if they make
a representation which is either literally false or if they make a representation recklessly and
carelessly without knowing for certain whether it was true or false. Holland Furnace Co. v.
Korth, 43 Wn.2d 618, 623, 262 P.2d 772 (1953). In this case, Papa Murphys International
represented that the plaintiffs were qualified as franchisees despite knowing that 1) the
Plaintiffs had relatively little liquid assets and low net worth; 2) most stores in the plaintiffs
region had below average sales; 3) most stores in the Plaintiffs region needed to spend large
10
amounts on advertising to reach those sales; and 4) most stores in the Plaintiffs region took
11
several years to reach break even. Papa Murphys Internationals representations that that
12
the plaintiffs were financially qualified to operate a franchise when they were dangerously
13
underfunded were either literally false or reckless guesses based on magical thinking.
14
470.
15
related to store sales, profits, and costs. It frequently analyzed this data by region. By as early
16
as 2002, Papa Murphys International knew that the stores in the plaintiffs region were in
17
trouble and were unlikely to reach average sales without significant advertising expenditures.
18
Papa Murphys International knew that most stores in the plaintiffs region took several years
19
to reach breakeven. Papa Murphys International also knew from the qualification report that
20
the plaintiffs lacked the financial resources to operate their businesses at a loss or below
21
average sales for several years. In spite of this information, Papa Murphys International
22
represented to the Plaintiffs that they were financially qualified to become franchisees.
23
471.
Intended Reliance-Throughout the sales process Papa Murphys International stressed its
24
experience and success as a franchisor. In the FDD it listed the experience and education of
25
its corporate and franchise teams. It also promoted the assistance of its marketing,
SECOND AMENDED COMPLAINT FOR
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the plaintiffs to submit extensive financial information before starting the sales process, Papa
Murphys International lead the Plaintiffs to believe that they were sufficiently capitalized to
operate a franchise. It would be illogical to assume that Papa Murphys International would
go to great lengths to promote its experience and expertise while selling franchises to the
Plaintiffs and then intend that those same Plaintiffs would not rely on Papa Murphys
472.
Ignorance of the Falsity-At the time the Plaintiffs purchased the franchise, they had no
knowledge of the dramatic financial challenges their stores would face. There was no efficient
9
10
means for the Plaintiffs to discovery the information that Papa Murphys International had at
11
its fingertips. The Defendants were the only parties who knew that low sales, massive
12
advertising expenses and an extended period of time in operation to reach breakeven (and
13
longer to reach average sales) characterized stores in the Plaintiffs region. Papa Murphys
14
International was the only party that knew or reasonably could know that the Plaintiffs were
15
16
473.
17
when the representation is based upon the speakers knowledge and experience. See Jennes v
18
Moses Lake Dev. Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951). In this case, each Plaintiff
19
knew their own financial condition and openly provided that information to Papa Murphys
20
International. None of the Plaintiffs knew the truth about how much financial strength they
21
would, in fact, need to survive in the Papa Murphys business. Papa Murphys International
22
did know that. Papa Murphys International either intentionally or recklessly made a false
23
statement that the Plaintiffs were qualified. The Plaintiffs each reasonably relied on the
24
superior knowledge and experience of their putative franchisor that promoted itself as the
25
largest and most successful take and bake pizza company in the country.
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INVESTMENT PROTECTION ACT, FRAUD AND
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474.
Damages-Collectively, the plaintiffs have lost millions in their Papa Murphys franchises.
Because they were under-capitalized from day one, the Plaintiffs have been forced to drain
their personal savings and retirement accounts to feed failing businesses that they were
trapped in. They would not have invested had Papa Murphys International accurately
informed them that based on their qualification report they were not financially qualified to
operate a franchise. Ironically, Papa Murphys International profited from selling franchises
to dangerously undercapitalized franchisees. If the franchisee managed to stay open for the
term of the franchise agreement, Papa Murphys International would collect the franchise fee
and up to seven percent of the franchisees net sales including royalties and mandatory
10
contributions to the national advertising fund. If a franchisee was forced by a lack of capital
11
to leave the franchise system, Papa Murphys International could, as it did with Mr. and Mrs.
12
13
14
15
16
475.
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
17
here in full.
18
476.
The actions and omissions of Papa Murphys International in connection with the offering and
19
selling of Papa Murphys franchises to the Plaintiffs by representing that the Plaintiffs were
20
undercapitalized given the low sales, high necessary advertising expense and extended
22
operations period to achieve breakeven which characterized stores in the Plaintiffs region was
23
information for the guidance of others in a business transaction; (2) knew or should have
25
known that the information was supplied to guide the plaintiff in their business transactions;
SECOND AMENDED COMPLAINT FOR
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(3) was negligent in in obtaining or communicating the false information; (4) the plaintiffs
relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
477.
International represented to the plaintiffs that they were qualified based on their financial
resources to operate a Papa Murphys franchise either by telling the plaintiffs so directly or by
continuing the sales process after the Plaintiffs provided their qualification report.
process Papa Murphys International presented itself as an expert on the franchise system.
10
Both Papa Murphys International employees and promotional materials stressed that only
11
qualified individuals would be offered the chance to purchase a franchise. The Plaintiffs
12
were required to prove they had sufficient resources to operate a franchise by submitting a
13
14
and the Plaintiffs financial information that the Plaintiffs had the right stuff to be Papa
15
Murphys franchisees was fundamental to the plaintiffs decision to purchase the franchise.
16
Each plaintiff, at relevant times, was making a decision whether to invest in a Papa
17
Murphys franchise. Papa Murphys International knew that. Each plaintiff was providing
18
19
of whether they were qualified to become a Papa Murphys franchisee. Papa Murphys
20
International knew that. Indeed, all parties understood that financial qualification was the
21
gateway guidance and determination as to whether the Plaintiffs would even receive an
22
23
24
25
Corp. v. Baik, 147 Wn.2d 536, 547, 55 P.3d 619 (2002) en banc. Comment a of section 522
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
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of the restatement provides that liability is based upon negligence of the actor in failing to
explains that this applies not only to information given as to the existence of facts but also
to an opinion given at to facts. Id. Thus, under the Restatement and Washington law, a
Plaintiffs that they were financially qualified to operate a Papa Murphys store when Papa
Murphys Internationals own internal data strongly suggested that they were not.
478.
Papa Murphys knew or should have known the information was supplied to guide the
10
11
Papa Murphys International is a mature and experienced franchisor. It knew or should have
12
known that the plaintiffs would use its determination that they were financially qualified to
13
14
479.
The Plaintiffs relied on the information-Each of the plaintiffs relied on Papa Murphys
15
Internationals determination that they were financially qualified to operate a Papa Murphys
16
franchise. Many of the plaintiffs had never operated their own business or financed such a
17
long term investment. None of them had any experience operating a Papa Murphys store.
18
They relied on the experts. None of the Plaintiffs would have invested and sustained
19
damages had they been told the whole truth at the beginningthat they were not financially
20
qualified.
21
480.
The Plaintiffs reliance was reasonable- Given its superior knowledge and stated expertise, it
22
was reasonable for the Plaintiffs to rely upon Papa Murphys representations that they were
23
financially qualified to operate a Papa Murphys franchise when Papa Murphys International
24
was an experienced franchisor and it touted its substantial skills in selecting and guiding its
25
franchisees to success. Additionally, under Washington law, when a party makes a distinct and
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 144
definite representation, the party who hears the representation is entitled to rely on the
representation and has no obligation to make any further inquiry. Douglas Northwest, Inc., 64
Wn.App. at 680. A plaintiffs reliance is reasonable per se when the representation is based
upon facts which are particularly within the speakers knowledge. Jennes v. Moses Lake Dev.
Co., 39 Wn.2d 151, 158, 234 P.2d 865 (1951) (plaintiffs entitled to rely on tavern sellers
representations as to the net profit of business). In this case, Papa Murphys International
made distinct and definitive statements that the plaintiffs were qualified to be Papa Murphys
franchisees and those statements were based upon information (the amount of financial
resources it historically took other franchisees in new stores outside the Pacific Northwest to
10
achieve breakeven) which was particularly in Papa Murphy Internationals knowledge. The
11
12
481.
Damages- Collectively, the Plaintiffs have lost millions in their Papa Murphys franchises.
13
They have been forced to drain their personal savings and retirement accounts to feed failing
14
businesses that they were trapped in. They would not have invested had Papa Murphys
15
International accurately informed them that based on their qualification reports they were not
16
17
18
19
20
482.
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
21
483.
The actions and omissions of Papa Murphys International in connection with offering and
23
selling Papa Murphys franchises to the plaintiffs by representing that the Plaintiffs were
24
undercapitalized given the low sales, high necessary advertising expense and extended
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
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operations period to achieve breakeven which characterized stores in the Plaintiffs region
state a material fact necessary in order to make the statements made not misleading.
a. Omitted Material Fact-A material fact is a fact to which a reasonable person would attach
importance in determining his choice of action in the transaction in question. Morris, 107
Wn.2d at 322. Here, Papa Murphys International represented to the plaintiffs that they
were qualified to operate a Papa Murphys franchise when the plaintiffs were wildly
undercapitalized given the low sales, high necessary local marketing costs and extended
operations period to achieve break even much less average sales. A reasonable person
10
would put great importance either the fact that Papa Murphys International did not consider
11
the significant financial challenges faced by newer store in their region in determining
12
whether or not they were qualified to operate a franchise or that, given those challenges,
13
Papa Murphys had no reasonable basis for their representation that the plaintiffs were
14
15
b. Necessary to Make the Statements Made Not Misleading- The omitted material fact that
16
Papa Murphys International did not consider the low sales, high costs and long operations
17
period necessary to reach break even which characterized the experience of newer stores in
18
the plaintiffs region when determining that the plaintiffs were qualified to operate a
19
franchise or that Papa Murphys International had no reasonable basis for their
20
determination was necessary to make its representation that based on the financial
21
information provided by the plaintiffs, they were qualified to operate a franchise not
22
misleading.
23
24
presumption of reliance which the franchisor can only rebut by proving that the plaintiff
25
would have purchased the franchise even if the material fact had been disclosed. Morris,
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 146
107 Wn.2d 329-330. Papa Murphys International cannot meet that burden. Many of the
plaintiffs can demonstrate actual reliance through their business plans and breakeven
analyses which were approved by Papa Murphys International and demonstrate that the
plaintiffs expected to reach break even after the first year, spend certain amounts on local
store marketing and achieve estimated average sales. Had the plaintiffs known what Papa
Murphys International knew, that it would take several years to reach break even, and to get
their they would have to overcome low sales and high local marketing expenses; they would
have been able to conclude that based on their financial situation they did not have the
capital to successfully operate the franchise. Instead, Papa Murphys International told the
10
plaintiffs they were financially qualified to purchase the franchise and the plaintiffs
11
12
13
14
15
here in full.
16
17
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
485.
The acts and omissions of James Werling in connection with the offer and sale of a Papa
18
Murphys constitute fraud in that Mr. Werling (1) representations of an existing fact, which
19
was (2) material, and (3) false. Mr. Werling (4) had knowledge of the representations falsity
20
and (5) intended that the Plaintiffs would rely on it. The plaintiffs were (6) ignorant of the
21
falsity of the representation and (7) relied on the representations. Their (8) reliance was
22
23
a. The Hills-In May of 2005, Mr. Werling told the Hills that that average sales for a Papa
24
Murphys franchise were between $450,000 and $550,000 annually and that Papa Murphys
25
franchisees had annual profits of between 12-20 percent of net sales. On information and
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
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belief, Mr. Werling either knew that those sales and profits figures were based on stores had
materially different characteristics such as age or location and did not disclose those
characteristics or Mr. Werling had no knowledge as to whether or not those numbers were
accurate. The Hills relied on Mr. Werlings statement and invested in a Papa Murphys
b. The Billings- In November of 2004, Mr. Werling told Douglas and Lesia Billing that the
average sales for a Papa Murphys store were $500,000; that they could expect to make
$100,000 in profits for each store; and that they could easily pay off their store in five years.
On information and belief, Mr. Werling either knew that those sales and profits figures were
10
based on stores had materially different characteristics such as age or location and did not
11
disclose those characteristics or Mr. Werling had no knowledge as to whether or not those
12
numbers were accurate. Mr. and Mr. Billing relied on Mr. Werlings statements and
13
14
c. The Conn-Turnbull Group. Mr. Werling told Edward Turnbull that the average sales for a
15
Papa Murphys store were between $450,000 and $500,000 and that the profits for a Papa
16
Murphys store were between 12 and 20 percent of net sales. Mr. Turnbull and Mr. Conn
17
used the sales information to develop a business plan which they provided to Mr. Werling.
18
Mr. Werling that the sales projections in the business plan were correct and conservative
19
and that they had been approved by operations. As to the first statement, on information
20
and belief, Mr. Werling either knew that those sales and profits figures were based on stores
21
had materially different characteristics such as age or location and did not disclose those
22
characteristics or Mr. Werling had no knowledge as to whether or not those numbers were
23
accurate. As to the second statement, Mr. Werling either knew that his assessment that Mr.
24
Conns and Mr. Turnbulls business plan and estimated sales were correct and
25
conservative was either false or that he had no knowledge of its truth. Mr. Conn and Mr.
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
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Turnbull relied on Mr. Werlings statements and invested in a Papa Murphys franchise and
d. The Braun Group-In May of 2012, Steven Pyatt presented Mr. Werling with a business plan
for his Papa Murphys franchise in which he estimated that his Florida store would have
average weekly sales in the amount of $7,577, $9,019 or $12,000. Mr. Werling stated that
Mr. Pyatts sales projections were very realistic. On information and belief, Mr. Werling
either knew that actual new store sales in Florida and in neighboring states were well below
those numbers or had no knowledge as to whether or not his assessment was accurate. The
Braun group relied on Mr. Werlings statement and invested in a Papa Murphys franchise
and suffered damages as a result.
10
e. Wilson- Mr. Werling told Mr. Wilson that the average Papa Murphys franchisee makes an
11
12
annual return on investment of about twenty percent and that he should expect average
13
weekly sales of $8,500 to $9,000 per store. As to the first statement, Mr. Werling either
14
knew his statement was based on stores which were material different than new stores in
15
Mr. Wilsons region or that he had no knowledge as whether or not that statement was true.
16
As to the second statement, Mr. Werling either knew that actual new store sales in the
17
Southeast were well below those numbers or had no knowledge as to whether or not his
18
statement was accurate. Mr. Wilson relied on Mr. Werlings statement and invested in a
19
20
21
22
23
24
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
here in full.
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 149
487.
The acts and omissions of James Werling in connection with the offering and selling of Papa
(1) supplied false information for the guidance of others in a business transaction; (2) knew or
should have known that the information was supplied to guide the plaintiff in their business
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
8
9
a. The Hills-As described above, Mr. Werling told the Hills that the average sales for a Papa
Murphys franchise were between $450,000 and $550,000 annually and that Papa Murphys
10
franchisees had annual profits of between 12-20 percent of net sales. Mr. Werling is an
11
experienced franchise salesman who knew or should have known that Hills would rely on
12
his statements when deciding whether or not to purchase the franchise. These statements
13
were false because Mr. Werling had a duty to disclose that the average sales and profits
14
were representative of new store in the Hills region which had sales and profits that were
15
much lower. Mr. Werling had a duty to speak under the FTC rule and because the Hills were
16
relying on his superior knowledge and franchise experience and the sales and profit
17
information was not easily discoverable. Mr. Werling either made these statements with
18
knowledge that they were false or had no reasonable basis for its truth. The Hills
19
reasonably relied on Mr. Werlings statements and invested in a Papa Murphys franchise.
20
b. The Billings-As described above Mr. Werling told the Billings that the average sales for a
21
Papa Murphys store were $500,000; that they could expect to make $100,000 in profits for
22
each store; and that they could easily pay off their store in five years. These statements were
23
false because Mr. Werling had a duty to disclose that the average sales and profits were
24
not representative of new store in the Billings region which had sales and profits that were
25
much lower. Mr. Werling had a duty to speak under the FTC rule and because the Billings
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 150
were relying on his superior knowledge and franchise experience and the sales and profit
information was not easily discoverable. Mr. Werling either made these statements with
knowledge that they were false or had no reasonable basis for its truth. The Billings
reasonably relied on Mr. Werlings statements and invested in a Papa Murphys franchise.
c. The Conn-Turnbull Group-As described above, Mr. Werling told Edward Turnbull that the
average sales for a Papa Murphys store were between $450,000 and $500,000 and that the
profits for a Papa Murphys store were between 12 and 20 percent of net sales. Mr.
Turnbull and Mr. Conn used the sales information to develop a business plan which they
provided to Mr. Werling. Mr. Werling that the sales projections in the business plan were
10
correct and conservative and that they had been approved by operations. The first
11
statement was false Mr. Werling had a duty to disclose that the average sales and profits
12
were not representative of new stores in their region which had sales and profits that were
13
much lower. Mr. Werling had a duty to speak under the FTC rule and because Mr. Conn and
14
Mr. Turnbull were relying on his superior knowledge and franchise experience and the sales
15
and profit information was not easily discoverable. Mr. Werling either made these
16
statements with knowledge that they were false or had no reasonable basis for its truth. As to
17
the second statement, Mr. Werling is an experienced franchise salesman who knew or
18
should have known that Mr. Conn and Mr. Turnbull would rely on his assessment of their
19
business plan when deciding whether or not to purchase the franchise. Mr. Werling either
20
knew that their sales projections were not conservative and correct or had no basis to
21
determine whether they were or not. Mr. Conn and Mr. Turnbull reasonably relied on Mr.
22
23
d. Braun Group-As described above Mr. Werling told the Braun group that their sales
24
projections were very realistic when they presented their business plan to him. Mr.
25
Werling is an experienced franchise salesman who knew or should have known that the
SECOND AMENDED COMPLAINT FOR
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INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 151
Braun group would rely on his assessment of their business plan when deciding whether or
not to purchase the franchise. On information and belief Mr. Werling either knew that Mr.
Pyatts sales projections were not realistic or had no basis to determine whether they were
realistic or not. The Braun group reasonably relied on Mr. Werlings statements and
6
7
makes an annual return on investment of about twenty percent and that he should expect
average weekly sales of $8,500 to $9,000 per store. These statements were false. Mr.
Werling had a duty to disclose that the return on investment and average weekly sales was
10
not representative of new stores in their region which had much lower sales and profits (or
11
non-existent). Mr. Werling had a duty to speak under the FTC rule and because Mr. Wilson
12
was relying on his superior knowledge and franchise experience and the sales and profit
13
information was not easily discoverable. Mr. Werling either made these statements with
14
knowledge that they were false or had no reasonable basis for its truth. Mr. Wilson
15
reasonably relied on Mr. Werlings statements and invested in a Papa Murphys franchise.
16
17
18
19
488.
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
20
here in full.
21
489.
The acts and omissions of James Werling in offering and selling Papa Murphys franchises to
22
the Plaintiffs as described herein constituted a violation of RCW 19.100.170(2) in that Papa
23
Murphys International omitted to state a material fact necessary in order to make the
24
a. The Hills-As described above Mr. Werlings statement that the Hills that the average sales
for a Papa Murphys franchise were between $450,000 and $550,000 annually and that Papa
Murphys franchisees had annual profits of between 12-20 percent of net sales was a FIPA
violation in that Mr. Werling omitted the material fact that those average sales and profits
were skewed by high performing established store in the Pacific Northwest and that sales
and profits for new stores in their region were typically much lower or that he had no
reasonable basis for his statement. The omitted material facts were necessary to make Mr.
Werlings statements not misleading. The Hills relied on Mr. Werlings statements and
10
b. The Billings-As described above, Mr. Werlings statement that the average sales for a Papa
11
Murphys store were $500,000; that they could expect to make $100,000 in profits for each
12
store; and that they could easily pay off their store in five years was a FIPA violation in
13
that Mr. Werling omitted the material fact that those average sales and profits were skewed
14
by high performing established store in the Pacific Northwest and that sales and profits for
15
new stores in their region were typically much lower or that he had no reasonable basis for
16
making his statement. Either omitted material fact was necessary to make Mr. Werlings
17
statement not misleading. The Billings relied on Mr. Werlings statements and invested in
18
19
c. The Conn-Turnbull Group- As described above, Mr. Werlings statement to Mr. Conn and
20
Mr. Turnbull that the average sales for a Papa Murphys store were between $450,000 and
21
$500,000 and that the profits for a Papa Murphys store were between 12 and 20 percent of
22
net sales and that their business plan was correct and conservative. The first statement
23
was FIPA violation in that Mr. Werling omitted the material fact that those average sales
24
and profits were skewed by high performing established store in the Pacific Northwest and
25
that sales and profits for new stores in their region were typically much lower or that he had
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 153
no reasonable basis for making his statement. Either omitted material fact was necessary to
make Mr. Werlings statement not misleading. The second statement was also a FIPA
violation in that that Mr. Werling omitted the material fact that either 1) the projected sales
were well above typical new average sales in their region or 2) Mr. Werling had basis for
determining that their sales and profit projections were correct and conservative. Either
material fact was necessary to make Mr. Werlings statement not misleading. Mr. Conn and
Mr. Turnbull relied on Mr. Werlings statements, invested in Papa Murphys franchise, and
9
10
projection were realistic was a FIPA violation in that Mr. Werling omitted the material
11
fact that either 1) Mr. Pyatts projected sales were well above typical new average sales in
12
Mr. Pyatts region or 2) Mr. Werling has no knowledge of the average new store sales in
13
Mr. Pyatts region. Either material fact was necessary to make Mr. Werlings statement not
14
misleading. The Braun group accepted Mr. Werlings assessment and invested in Papa
15
Murphys franchise.
16
17
18
490.
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
19
here in full.
20
491.
The acts and omissions of Eric Brown in connection with the offer and sale of a Papa
21
Murphys constitute fraud in that Mr. Brown (1) representations of an existing fact, which was
22
(2) material, and (3) false. Mr. Brown (4) had knowledge of the representations falsity and
23
(5) intended that the Plaintiffs would rely on it. The plaintiffs were (6) ignorant of the falsity
24
of the representation and (7) relied on the representations. Their (8) reliance was reasonable
25
a. The Barnetts-Mr. Brown told Mr. and Mrs. Barnett that if they opened three stores, they
1
2
would make enough in profits and salary to compensate Mr. Barnetts current salary of
$135,000 annually. He also told Mr. and Mrs. Barnett that each store should have average
weekly sales of $12,000 to $14,000 after the first year. As to the first statement Mr. Brown
either knew his statement was false or was ignorant of its truth. As to the second statement,
Mr. Brown either knew that those sales and figures were based on stores that had materially
different characteristics such as age or location from the Barnetts store and did not disclose
those characteristics or Mr. Brown had no knowledge as to whether or not those numbers
were accurate. Mr. Brown had presented himself as an expert on the Papa Murphys model
10
and the Barnetts were relying on his expertise. The Barnetts relied on Mr. Browns
11
statements and invested in a Papa Murphys franchise and suffered damages as a result.
12
b. The Braun Group-Mr. Brown told Mr. Mraz of the Braun group that average annual profits
13
for a Papa Murphys franchise were $50,000. Mr. Brown either knew that profit figure was
14
based on stores that had materially different characteristics such as age or location from the
15
Braun groups store and did not disclose those characteristics or Mr. Brown had no
16
knowledge as to whether or not those numbers were accurate. Mr. Brown had presented
17
himself as an expert on the Papa Murphys model and the Braun group was relying on his
18
expertise. The Braun group relied on Mr. Browns statement and invested in a Papa
19
20
21
22
492.
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
23
here in full.
24
493.
The acts and omissions of Eric Brown in connection with the offering and selling of Papa
25
Murphys franchises to the plaintiffs constituted negligent Misrepresentation. Eric Brown (1)
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 155
supplied false information for the guidance of others in a business transaction; (2) knew or
should have known that the information was supplied to guide the plaintiff in their business
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
a. The Barnetts-As described above, Mr. Brown told Mr. and Mrs. Barnett. Barnett that if they
opened three stores, they would make enough in profits and salary to compensate Mr.
Barnetts current salary of $135,000 annually. He also told Mr. and Mrs. Barnett that each
store should have average weekly sales of $12,000 to $14,000 after the first year. Mr.
10
Brown is an experienced franchise salesman who knew or should have known that Barnetts
11
would rely on his statements when deciding whether or not to purchase the franchise. These
12
statements were false because Mr. Brown had a duty to disclose his statements as to profit
13
and second year sales were based average sales and profits were not representative of new
14
store in the Barnetts region which had sales and profits that were much lower. Mr. Brown
15
had a duty to speak under the FTC rule and because the Barnetts were relying on his
16
superior knowledge and franchise experience and the sales and profit information was not
17
easily discoverable. Mr. Browns either made these statements with knowledge that they
18
were false or with no reasonable basis for its truth. The Barnetts reasonably relied on Mr.
19
20
b. The Braun Group-Mr. Brown told Mr. Mraz of the Braun group that average annual profits
21
for a Papa Murphys franchise were $50,000. Mr. Brown is an experienced franchise
22
salesman who knew or should have known that the Braun group would rely on his
23
statements when deciding whether or not to purchase the franchise. These statements were
24
false because Mr. Brown had a duty to disclose his statements as to profit and second year
25
sales were based average sales and profits were not representative of new store in the
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 156
Braun groups region which had sales and profits that were much lower. Mr. Brown had a
duty to speak under the FTC rule and because the Braun group was relying on his superior
knowledge and franchise experience and the sales and profit information was not easily
discoverable. Mr. Browns either made the statement with knowledge that it was false or
with no reasonable basis for its truth. The Braun group reasonably relied on Mr. Browns
7
8
9
10
here in full.
11
12
The Plaintiffs restate and reallege each and every allegation set forth above as though set forth
495.
The acts and omissions of Eric Brown in offering and selling Papa Murphys franchises to the
13
plaintiffs as described herein constituted a violation of RCW 19.100.170(2) in that Eric Brown
14
omitted to state a material fact necessary in order to make the statements made not misleading.
15
a. The Barnetts- As described above, Mr. Brown told Mr. and Mrs. Barnett. Barnett that if they
16
opened three stores, they would make enough in profits and salary to compensate Mr.
17
Barnetts current salary of $135,000 annually. He also told Mr. and Mrs. Barnett that each
18
store should have average weekly sales of $12,000 to $14,000 after the first year. Each of
19
these statements was a FIPA violation in that Mr. Brown omitted the material fact that his
20
statements were based on information from stores with materially different characteristics
21
from the Barnetts store, that actual sales and profits in new stores in the Barnetts region
22
were much lower or that he had no reasonable basis for his statement. The Barnetts relied
23
on Mr. Browns statement invested in a Papa Murphys franchise and suffered damages as a
24
result.
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 157
b. The Braun Group- Mr. Brown told Mr. Mraz of the Braun group that average annual profits
1
2
for a Papa Murphys franchise were $50,000. This statement was a FIPA violation in that
Mr. Brown either omitted the material fact that his statement was based on information from
stores with materially different characteristics from the Braun groups store and that actual
sales and profits for new stores in the Braun groups region were much lower or that he had
no reasonable basis for his statement. The Braun group relied on Mr. Browns statement
9
10
496.
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
11
here in full.
12
497.
The acts and omissions of Billy Rose, Jr. in connection with the offer and sale of a Papa
13
Murphys constitute fraud in that Mr. Rose made (1) representations of an existing fact, which
14
was (2) material, and (3) false. Mr. Rose (4) had knowledge of the representations falsity and
15
(5) intended that the Plaintiffs would rely on it. The plaintiffs were (6) ignorant of the falsity
16
of the representation and (7) relied on the representations. Their (8) reliance was reasonable
17
a. The Callegans -Mr. Rose told Mr. and Mrs. Callegan that they would make enough in
19
profits to pay off their investment in two to five years; that they could expect sales increase
20
by ten percent each year and that take home profits were 20% of net sales. As to the first
21
statement and second statement Mr. Rose either knew his statements were false or was
22
ignorant of their truth. As to the third statement, Mr. Rose either knew that those profits
23
were based on stores that had materially different characteristics such as age or location and
24
did not disclose those characteristics or Mr. Rose had no knowledge as to whether or not
25
those numbers were accurate. Mr. Rose presented himself as an expert on the Papa
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 158
Murphys model and the Callegans were relying on his expertise. The Callegans relied on
Mr. Roses statements and invested in a Papa Murphys franchise and suffered damages as a
result.
b. The Olsons-Mr. Rose told Harry Olson that the Johnson City store was performing poorly
4
5
because the then owner had not done much to promote the business and that with proper
marketing, he would see average weekly sales of at least $8,500 a week. Mr. Rose either
knew that that estimate was based on stores that had materially different characteristics such
as age or location and did not disclose those characteristics or Mr. Rose had no knowledge
as to whether or not those statements were accurate. Mr. Rose presented himself as an
10
expert on the Papa Murphys model and the Olsons were relying on his expertise. The
11
Olsons relied on Mr. Roses statements and invested in a Papa Murphys franchise and
12
13
14
Murphys store was $60,000 in annual profits. This statement was either literally false or
15
Mr. Rose knew or reasonably should have known that his statement was based on stores
16
which had materially different characteristics from the Brinks store and did not disclose
17
those differences or Mr. Rose had no knows as to where or not his statement was true. The
18
Brinks relied on Mr. Roses statement, invested in a Papa Murphys franchise and suffered
19
damages as a result.
20
21
22
498.
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
23
here in full.
24
499.
The acts and omissions of Billy Rose, Jr. in connection with the offering and selling of Papa
25
Murphys franchises to the Plaintiffs constituted negligent Misrepresentation. Mr. Rose (1)
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 159
supplied false information for the guidance of others in a business transaction; (2) knew or
should have known that the information was supplied to guide the plaintiff in their business
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
a. The Callegans-Mr. Rose told Mr. and Mrs. Callegan that they would make enough in profits
to pay off their investment in two to five years; that they could expect sales increase by ten
percent each year and that take home profits were 20% of net sales. Mr. Rose is an
experienced franchise salesman who knew or should have known that the Callegans would
10
rely on his statements when deciding whether or not to purchase the franchise. These
11
statements were false because Mr. Rose had a duty to disclose that his statements as to
12
profits and sales were based average sales and profits of stores that were not
13
representative of new stores in the Callegans region which had sales and profits that were
14
much lower. Mr. Rose had a duty to speak under the FTC rule and because the Callegans
15
were relying on his superior knowledge and franchise experience and the sales and profit
16
information was not easily discoverable. Mr. Rose either made these statements with
17
knowledge that they were false or with no reasonable basis for its truth. The Callegans
18
reasonably relied on Mr. Roses statements and invested in a Papa Murphys franchise.
19
b. The Olsons- Mr. Rose told Harry Olson that the Johnson City store was performing poorly
20
because the then owner had not done much to promote the business and that with proper
21
marketing, he would see average weekly sales of at least $8,500 a week. Mr. Rose is an
22
experienced franchise salesman who knew or should have known that the Olson would rely
23
on his statements when deciding whether or not to purchase the franchise. These statements
24
were false because Mr. Rose had a duty to disclose that his statement was were based
25
average sales and profits were not representative of new stores in the Olsons region
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 160
which had sales and profits that were much lower. Mr. Rose had a duty to speak under the
FTC rule and because the Olsons were relying on his superior knowledge and franchise
experience and the sales and profit information was not easily discoverable. Mr. Rose either
made these statements with knowledge that they were false or with no reasonable basis for
its truth. The Olsons reasonably relied on Mr. Roses statements and invested in a Papa
Murphys franchise.
c. The Brinks- Mr. Rose told Mr. and Mrs. Brink that the worst case scenario for a Papa
7
8
Murphys store was $60,000 in annual profits. Mr. Rose is an experienced franchise
salesman who knew or should have known that the Brinks would rely on his statements
10
when deciding whether or not to purchase the franchise. This statement was either literally
11
false or false because Mr. Rose had a duty to disclose that his statement was were based
12
average sales or profits were not representative of new stores in the Brinks region which
13
had sales and profits that were much lower. Mr. Rose had a duty to speak under the FTC
14
rule and because the Brinks were relying on his superior knowledge and franchise
15
experience and the sales and profit information was not easily discoverable. Mr. Rose either
16
made these statements with knowledge that they were false or with no reasonable basis for
17
its truth. The Brinks reasonably relied on Mr. Roses statements, invested in a Papa
18
19
20
21
500.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
22
here in full.
23
501.
The acts and omissions of Jim Perkins in connection with the offer and sale of a Papa
24
Murphys constitute fraud in that Mr. Perkins made (1) representations of an existing fact,
25
which was (2) material, and (3) false. Mr. Perkins (4) had knowledge of the representations
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 161
falsity and (5) intended that the Plaintiffs would rely on it. The plaintiffs were (6) ignorant of
the falsity of the representation and (7) relied on the representations. Their (8) reliance was
4
5
sale projections of $9,600 in average weekly sales were too conservative and should be
more aggressive. Mr. Perkins helped Mr. Pyatt develop a business plan in which he
estimated good, better and best average weekly sales at $7,577, $9,019 and $12,000. Mr.
Perkins either knew his statements were false or was ignorant of their truth. Mr. Perkins
presented himself as an expert on the Papa Murphys model and the Braun group was
10
relying on his expertise. The Braun group relied on Mr. Perkins statements and invested in
11
12
13
14
502.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
15
here in full.
16
503.
The acts and omissions of Jim Perkins in connection with the offering and selling of Papa
17
Murphys franchises to the plaintiffs constituted negligent misrepresentation. Mr. Perkins (1)
18
supplied false information for the guidance of others in a business transaction; (2) knew or
19
should have known that the information was supplied to guide the plaintiff in their business
20
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
21
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
22
a. The Braun Group- Mr. Perkins told Steven Pyatt of the Braun Group that his sale projections
24
of $9,600 in average weekly sales were too conservative and should be more
25
aggressive. Mr. Perkins helped Mr. Pyatt develop a business plan in which he estimated
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 162
good, better and best average weekly sales at $7,577, $9,019 and $12,000. Mr. Perkins is
an experienced franchise salesman who knew or should have known that the Braun group
would rely on his statements when deciding whether or not to purchase the franchise. These
statements were false because Mr. Perkins had a duty to disclose his statements were based
average sales and profits that were not representative of new stores in the Braun groups
region which had sales and profits that were much lower. Mr. Perkins had a duty to speak
under the FTC rule and because the Braun group was relying on his superior knowledge and
franchise experience and the sales and profit information was not easily discoverable. Mr.
Perkins either made these statements with knowledge that they were false or with no
10
reasonable basis for its truth. The Braun reasonably relied on Mr. Perkins statements and
11
12
13
14
15
here in full.
16
17
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
505.
The acts and omissions of Mr. Perkins in offering and selling Papa Murphys franchises to the
18
plaintiffs as described herein constituted a violation of RCW 19.100.170(2) in that Mr. Perkins
19
omitted to state a material fact necessary in order to make the statements made not misleading.
20
a. The Braun Group- Mr. Perkins told Steven Pyatt of the Braun Group that his sale
21
projections of $9,600 in average weekly sales were too conservative and should be more
22
aggressive. Mr. Perkins acts in helping Mr. Pyatt develop a business plan in which he
23
estimated good, better and best average weekly sales at $7,577, $9,019 and $12,000 were
24
FIPA violations in that Mr. Perkins either omitted the material fact that his statements were
25
based on information from stores with materially different characteristics from the Braun
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 163
groups store, that actual sales and profits in new stores in their region were much lower or
that he had no reasonable basis for his statement. The Braun group relied on Mr. Perkins
5
6
506.
The Plaintiff restate and reallege each and every allegation set forth above as though set for
here in full.
8
507.
The acts and omissions of Steve Millard in connection with the offer and sale of a Papa
Murphys constitute fraud in that Mr. Millard made (1) representations of an existing fact,
10
which was (2) material, and (3) false. Mr. Millard (4) had knowledge of the representations
11
falsity and (5) intended that the Plaintiffs would rely on it. The plaintiffs were (6) ignorant of
12
the falsity of the representation and (7) relied on the representations. Their (8) reliance was
13
a. The Northwinds Partners- In March of 2010, Mr. Millard told Mrs. Rubin that 1) the stores
15
doing $8,000 in average weekly store sales did nothing but open their doors; that the stores
16
doing $9,000-10,000 did sampling and local events; that the stores doing $13,000 and more
17
in average weekly sales were well known and had acquired school contracts; 2) the stores in
18
the lowest tier of sales performance did no local store marketing and they were still making
19
money; and 3) that stores doing more than $10,000 a week in average weekly sales were
20
very common and with advertising, school contracts and community involvement, their
21
stores could reach $13,000 a week in average weekly sales. Mr. Millard either knew that
22
these statements were false, were based on stores had materially different characteristics
23
such as age or location and did not disclose those characteristics, or Mr. Millard had no
24
knowledge as to whether or not those numbers were accurate. Mr. Millard presented
25
himself as an expert on the Papa Murphys model and the Rubin Group was relying on his
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 164
expertise. The Rubin group relied on Mr. Millards statements and invested in a Papa
4
5
508.
The Plaintiffs restate and reallege each and every allegation set forth above as though set for
here in full.
7
509.
The acts and omissions of Mr. Millard in connection with the offering and selling of Papa
Murphys franchises to the Plaintiffs constituted negligent Misrepresentation. Mr. Millard (1)
9
supplied false information for the guidance of others in a business transaction; (2) knew or
10
should have known that the information was supplied to guide the plaintiff in their business
11
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
12
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
13
510.
The Northwinds Group- Mr. Millard told Mrs. Rubin that 1) the stores doing $8,000 in
15
average weekly store sales did nothing but open their doors; that the stores doing $9,00016
10,000 did sampling and local events; that the stores doing $13,000 and more in average
17
weekly sales were well known and had acquired school contracts; 2) the stores in the lowest
18
tier of sales performance did no local store marketing and they were still making money; and
19
3) that stores doing more than $10,000 a week in average weekly sales were very common and
20
with advertising, school contracts and community involvement, their stores could reach
21
$13,000 a week in average weekly sales. Mr. Rubin is an experienced franchise salesman who
22
knew or should have known that the Rubin group would rely on his statements when deciding
23
whether or not to purchase the franchise. These statements were false because Mr. Millard
24
had a duty to disclose his statements were based average sales and profits that were not
25
representative of new stores in the Rubin groups region which had sales and profits that were
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 165
much lower. Mr. Millard had a duty to speak under the FTC rule and because the Rubin group
was relying on his superior knowledge and franchise experience and the sales and profit
information was not easily discoverable. Mr. Millard either made these statements with
knowledge that they were false or with no reasonable basis for its truth. The Northwind
Partners reasonably relied on Mr. Millards statements, invested in a Papa Murphys franchise,
8
9
511.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
10
here in full.
11
512.
The acts and omissions of Stephen Maeker in connection with the offer and sale of a Papa
12
Murphys constitute fraud in that Mr. Maeker made (1) representations of an existing fact,
13
which was (2) material, and (3) false. Mr. Maeker (4) had knowledge of the representations
14
falsity and (5) intended that the plaintiffs would rely on it. The plaintiffs were (6) ignorant of
15
the falsity of the representation and (7) relied on the representations. Their (8) reliance was
16
a. The Braun Group- -Mr. Maeker attended a dinner meeting between Papa Murphys
18
International and the Northwinds Partners. During that meeting, Mr. Patcha made a
19
comprehensive presentation in which he said that their estimated annual sales would be
20
$550,000 a store and that each store would make an annual profit of $80,000. Mr. Maeker
21
praised their plan. Mr. Maeker had a duty to speak because the Northwinds Partners were
22
relying on his superior knowledge and franchise experience and the sales and profit
23
information was not easily discoverable. Mr. Maeker is an experienced franchise salesman
24
who knew or should have known that the Northwinds partners would rely on his assessment
25
of their business plan when deciding whether or not to purchase the franchise. Mr. Maeker
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 166
either knew that their sales projections were not realistic or had no basis to determine
whether they were or not. The Northwinds partners reasonably relied on Mr. Maekers
5
6
513.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
here in full.
8
514.
The acts and omissions of Mark Levis in connection with the offer and sale of a Papa
Murphys constitute fraud in that Mr. Levis made (1) representations of an existing fact, which
10
was (2) material, and (3) false. Mr. Levis (4) had knowledge of the representations falsity
11
and (5) intended that the plaintiffs would rely on it. The plaintiffs were (6) ignorant of the
12
falsity of the representation and (7) relied on the representations. Their (8) reliance was
13
a. The Worthingtons- Mr. Levis told the Worthingtons that they could expect above average
15
sales in their Fort Myers store because of the high snowbird population. Mr. Levis either
16
knew his statements were false or was ignorant of their truth. Mr. Levis presented himself
17
as an expert on the Papa Murphys model and the Worthingtons relying on his expertise.
18
The Worthingtons relied on Mr. Levis statements and invested in a Papa Murphys
19
b. The Brinks- Mr. Levis told Mr. and Mrs. Brink that their estimated sales of $430,820
21
annually, with a $60,000 managers salary for Mr. Brink and $33,430 in net profits was
22
very conservative and that they would have no problem hitting them in six month of
23
opening. Mr. Levis either knew his statements were false or was ignorant of their truth. Mr.
24
Levis presented himself as an expert on the Papa Murphys model and the Brinks were
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 167
relying on his expertise. The Brinks relied on Mr. Levis statements and invested in a Papa
4
5
515.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
here in full.
7
516.
The acts and omissions of Mark Levis in connection with the offering and selling of Papa
Murphys franchises to the plaintiffs constituted negligent misrepresentation. Mr. Levis (1)
9
supplied false information for the guidance of others in a business transaction; he (2) knew or
10
should have known that the information was supplied to guide the plaintiff in their business
11
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
12
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
13
a. The Worthington Group- Mr. Levis told the Worthingtons that they could expect above
15
average sales in their Fort Myers store because of the high snowbird population. Mr.
16
Levis is an experienced franchise salesman who knew or should have known that the
17
Worthingtons would rely on his statements when deciding whether or not to purchase the
18
franchise. This statement was false because Mr. Levis had a duty to disclose his statement
19
were based average sales and profits that were not representative of new stores in their
20
region which had sales and profits that were much lower. Mr. Levis had a duty to speak
21
under the FTC rule and because the Worthingtons were relying on his superior knowledge
22
and franchise experience and the sales and profit information was not easily discoverable.
23
Mr. Levis either made this statement with knowledge that it was false or with no reasonable
24
basis for its truth. The Worthingtons reasonably relied on Mr. Levis statement, invested in
25
b. The Brinks- Mr. Levis told Mr. and Mrs. Brink that their estimated sales of $430,820
1
2
annually, with a $60,000 managers salary for Mr. Brink and $33,430 in net profits was
very conservative and that they would have no problem hitting them in six month of
opening. Mr. Levis is an experienced franchise salesman who knew or should have known
that the Brinks would rely on his statements when deciding whether or not to purchase the
franchise. These statements were false because Mr. Levis had a duty to disclose his
statements were based average sales and profits that were not representative of new stores
in the Brinks region which had sales and profits that were much lower. Mr. Levis had a
duty to speak under the FTC rule and because the Brinks were relying on his superior
10
knowledge and franchise experience and the sales and profit information was not easily
11
discoverable. Mr. Levis either made these statements with knowledge that they were false
12
or with no reasonable basis for its truth. The Brinks reasonably relied on Mr. Levis
13
statements and invested in a Papa Murphys franchise and suffered resulting damages.
14
15
16
17
18
here in full.
19
20
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
518.
The acts and omissions of Mr. Levis in offering and selling Papa Murphys franchises to the
21
plaintiffs as described herein constituted a violation of RCW 19.100.170(2) in that Mr. Levis
22
omitted to state a material fact necessary in order to make the statements made not misleading.
23
a. The Worthingtons- Mr. Levis told the Worthingtons that they could expect above average
24
sales in their Fort Myers store because of the high snowbird population. His statement was
25
a FIPA violation in that Mr. Levis either omitted the material fact that his statement was
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 169
based on information from stores with materially different characteristics from the
Worthingtons store, that actual sales and profits in new stores in their region were much
lower or that he had no reasonable basis for his statement. The Worthingtons relied on Mr.
6
7
519.
The plaintiffs restate and reallege each and every allegation set forth above as though set for
here in full.
9
520.
The acts and omissions of Mike Norcup in connection with the offer and sale of a Papa
10
Murphys constitute fraud in that Mr. Norcup made (1) representations of an existing fact,
11
which was (2) material, and (3) false. Mr. Norcup (4) had knowledge of the representations
12
falsity and (5) intended that the plaintiffs would rely on it. The plaintiffs were (6) ignorant of
13
the falsity of the representation and (7) relied on the representations. Their (8) reliance was
14
a. The Overcash Group- In February of 2012, Mr. Norcup told Mr. Angelo and Mr. Overcash
16
that their estimated average weekly sales of $8,500 or $442,000 annually and their estimate
17
sales growth of four to five percent annually was too conservative and that they could
18
expect to make much more. Mr. Norcup either knew his statements were false or was
19
ignorant of their truth. Mr. Norcup presented himself as an expert on the Papa Murphys
20
model and the Overcash group was relying on his expertise. The Overcash group relied on
21
Mr. Norcups statements and invested in a Papa Murphys franchise and suffered damages
22
as a result.
23
24
25
521.
here in full.
2
3
The plaintiffs restate and reallege each and every allegation set forth above as though set for
522.
The acts and omissions of Mike Norcup in connection with the offering and selling of Papa
Murphys franchises to the plaintiffs constituted negligent misrepresentation. Mr. Norcup (1)
supplied false information for the guidance of others in a business transaction; (2) knew or
should have known that the information was supplied to guide the plaintiff in their business
transactions; (3) was negligent in in obtaining or communicating the false information; (4) the
plaintiffs relied on this information; (5) the plaintiffs reliance was reasonable and (5) the false
10
a. The Overcash Group- In February of 2012, Mr. Norcup told Mr. Angelo and Mr. Overcash
11
that their estimated average weekly sales of $8,500 or $442,000 annually and their estimate
12
sales growth of four to five percent annually was too conservative and that they could
13
expect to make much more. Mr. Norcup is an experienced franchise salesman who knew or
14
should have known that the Overcash group would rely on his statements when deciding
15
whether or not to purchase the franchise. These statements were false because Mr. Norcup
16
had a duty to disclose his statements were based average sales and profits that were not
17
representative of new stores in the Overcash groups region which had sales and profits that
18
were much lower. Mr. Norcup had a duty to speak under the FTC rule and because the
19
Overcash group was relying on his superior knowledge and franchise experience and the
20
sales and profit information was not easily discoverable. Mr. Norcup either made these
21
statements with knowledge that they were false or with no reasonable basis for its truth. The
22
Overcash group reasonably relied on Mr. Norcups statements and invested in a Papa
23
Murphys franchise.
24
25
523.
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
here in full.
3
524.
The acts and omissions of Mr. Norcup in offering and selling Papa Murphys franchises to the
plaintiffs as described herein constituted a violation of RCW 19.100.170(2) in that Mr. Norcup
5
omitted to state a material fact necessary in order to make the statements made not misleading.
6
a. The Overcash Group- In February of 2012, Mr. Norcup told Mr. Angelo and Mr. Overcash
7
that their estimated average weekly sales of $8,500 or $442,000 annually and their estimate
8
sales growth of four to five percent annually was too conservative and that they could
9
expect to make much more. Mr. Norcups statements were FIPA violations in that Mr.
10
Norcup either omitted the material fact that his statements were based on information from
11
stores with materially different characteristics from the Overcash groups store, that actual
12
sales and profits in new stores in their region were much lower or that he had no reasonable
13
basis for his statement. The Overcash group relied on Mr. Norcups statement, invested in
14
17
18
525.
full.
19
20
The plaintiffs restate and reallege each and every allegation set forth above as set forth here in
526.
Defendant Papa Murphys International is liable for the acts and omissions of each Defendant
21
or other person whose acts and omissions were committed during the time they were an
22
employee, principal or agent of Defendant Papa Murphys International and for the benefit of
23
24
25
527.
Defendant Papa Murphys Company stores is liable for the acts and omissions of Defendant
Papa Murphys International, its wholly owned subsidiary, sharing some or all of the same
directors and officers. In its relevant actions and omissions, Defendant Papa Murphys
International acted as agent for Defendant Papa Murphys Company Stores. Defendant Papa
Murphys Company Store was, at relevant times, a person in act of control of Defendant Papa
Murphys International.
528.
Defendant PMI Holdings is liable for the acts and omissions of Defendant Papa Murphys
Company Stores, its wholly owned subsidiary, sharing some or all of the same directors and
officers. In its relevant actions and omissions, Defendant Papa Murphys Company Stores
acted as agent for Defendant PMI Holdings. Defendant PMI Holdings was, at relevant times,
a person in act of control of Defendant Papa Murphys Company Stores and through
Defendant Papa Murphys Company Stores, of Defendant Papa Murphys International.
10
11
529.
Defendant Papa Murphys Intermediate is liable for the acts and omissions of Defendant PMI
12
Holdings, its wholly owned subsidiary, sharing some or all of the same directors and officers.
13
In its relevant actions and omissions, Defendant PMI Holdings acted as agent for Defendant
14
Papa Murphys Intermediate. Defendant Papa Murphys Intermediate was, at relevant times, a
15
person in act of control of Defendant PMI Holdings and through Defendants PMI Holdings
16
17
530.
Defendant Papa Murphys Holdings is liable for the acts and omissions of Defendant Papa
18
Murphys Intermediate, its wholly owned subsidiary, sharing some or all of the same directors
19
and officers. In its relevant actions and omissions, Defendant Papa Murphys Intermediate
20
acted as agent for Defendant Papa Murphys Holdings. Defendant Papa Murphys holdings
21
was, at relevant times, a person in act of control of Defendant Papa Murphys Intermediate
22
and through Defendants Papa Murphys Intermediate, PMI Holdings and Papa Murphys
23
24
25
531.
Defendant Lee Equity is liable for the acts and omissions of Defendant Papa Murphys
Holdings, of which it is majority owner and which it controls and with which it shares some or
all of the same directors and officers. In its relevant actions and omissions, Defendant Papa
Murphys Holdings acted as agent for Defendant Lee Equity. Defendant Lee Equity was, at
relevant times, a person in act of control of Defendant Papa Murphys Holdings and through
Defendants Papa Murphys Holdings, Papa Murphys Intermediate, PMI Holdings and Papa
11
THIRTY FOURTH CAUSE OF ACTION (All Papa Murphys International Directors and
Officers)
PERSONAL LIABILITY
PLAINTIFFS: Hills (Count One), Billings (Count Two), Barnett (Count Three), Conn-Turnbull
(Count Four) DeMattia (Count Five), Liles (Count Six), Overcash Group (Count Seven),
Dickerson (Count Eight), Callegan (Count Nine), Braun Group (Count Ten) Northwind
Partners (Count Eleven), Meads (Count Twelve), Nychyks (Count Thirteen), Bennetts (Count
Fourteen), Worthingtons (Count Fifteen), Olsons (Count Sixteen) Wilsons (Count Seventeen),
Forester-Buchanan Group (Count Eighteen), Brinks (Count Nineteen)
12
532.
8
9
10
here in full.
13
14
The plaintiffs restate and reallege each and every allegation set forth above as though set forth
533.
All Papa Murphys International Directors and Officers are persons as defined by FIPA and,
15
because of their actions and positions each has personal liability for all actions and omissions
16
17
534.
Each Papa Murphys International Director was at relevant times in a position where they had
18
the position, power, authority and responsibility to oversee the activities of Papa Murphys
19
International and its employees and to assure that their actions complied with applicable laws,
20
including, but not limited to all franchise laws and regulations and including to not commit
21
22
Corporations and other entities can only act through people. The Director Defendants are the
23
people whose responsibility it was to control and oversee the acts of the entities and their
24
employees and agents. On information and belief, the Director Defendants specifically
25
approved plans and actions by the companies that led to the company engaging in fraud and
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 174
information and belief, the Director Defendants failed in their duty of oversight and failed to
maintain policies that prevented fraud and negligent misrepresentation in connection with the
offer and sale of franchises. They are liable under the doctrine of Respondeat Superior and
535.
Each Papa Murphys International Officer was at relevant times a person with the position,
power, authority and responsibility to oversee the activities of papa Murphys International
and its lower level managers and employees. Although the Officers were answerable to the
Directors and owners, they were in a position where they had the power, which they exercised
10
to carry out the business of Papa Murphys International. In acting on behalf of the entities,
11
they committed fraud and negligent misrepresentation and directed or permitted lower level
12
employees to carry out fraud and negligent misrepresentation in connection with the offer and
13
sale of franchises. They chose to pursue profits for the benefit of the Directors and owners
14
instead of causing the company to act honestly in its dealings with the Plaintiffs and other
15
franchisees. On information and belief the Officer Defendants were active participants in the
16
17
information and belief, the Officer Defendants failed in their duty of oversight and failed to
18
maintain policies that prevented fraud and negligent misrepresentation in connection with the
19
offer and sale of franchises by and on behalf of Papa Murphys International. They are liable
20
under the doctrine of Respondeat Superior and directly based on their direct involvement.
E.
21
22
23
Damages
536.
But for the Defendants wrongful acts and omissions described herein, the Plaintiffs would not
24
have invested in Papa Murphys franchises, paid the initial franchise fees, royalties,
25
advertising fees and Advertising Cooperative contributions, the required local marketing
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 175
expenditure, purchased equipment, signed leases, and incurred debt to cover operational
losses; and, Plaintiffs would not have foregone, in whole or part, compensation and return on
537.
Had the Defendants representations been truthful, the Plaintiffs would have had the benefit of
the bargain they made in purchasing a Papa Murphys franchise.
5
6
538.
Defendants wrongful actions described herein have caused damages to the Plaintiffs in an
amount not yet fully known but which is estimated to exceed twenty million dollars to return
them to the condition they would have been in but for the Defendants wrongful conduct.
9
10
11
WHEREFORE, the plaintiffs respectfully ask the Court for relief as follows:
12
13
1.
14
Protection Act (FIPA) by offering and selling franchises to Plaintiffs using a Franchise
15
Disclosure Document that did not comply with FIPA and which contained false
16
17
18
2.
For a declaration that Defendant PMIs claimed exemption from registration under the
19
Washington Franchise Investment Protection Act was invalid and void because of
20
Defendant PMIs failure to comply with the Acts conditions precedent to claiming the
21
exemption;
22
23
3.
For a declaration that Defendants violations of the disclosure requirements of the FIPA
were willful;
24
25
SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 176
4.
For a declaration that any agreements executed by the parties as a result of Defendants
violations of FIPA are unlawful, illegal, void and unenforceable in their entirety by
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Defendants;
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For an injunction directing Defendant PMI, its parents, officers, directors, agents and
employees to immediately and permanently cease and desist the offer or sale of any new
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Papa Murphys franchise to any Plaintiffs through the use of an FDD which contains
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For a declaration that the Defendants are liable for fraud and negligent
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misrepresentation;
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For a declaration that all waivers of FIPA rights contained in the franchise agreements
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8.
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of FIPA in the amount of approximately twenty million dollars or such other amount to
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be proven at trial;
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9.
For an award of Plaintiffs damages caused by or resulting from Defendants fraud and
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10.
For a declaration that all Defendants are jointly and severally liable to Plaintiffs;
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In the alternative, for an order confirming and defining rescission of any agreements
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damages suffered by Plaintiffs to the extent not duplicative of the remedy of rescission
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12.
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13.
For an award of Plaintiffs costs and reasonable attorneys fees herein as permitted by
FIPA (RCW 19.100.190) and as provided by the franchise agreements herein; and
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For such other and further relief as the Court may deem necessary or appropriate under
the circumstances.
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By:
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By:
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SECOND AMENDED COMPLAINT FOR
VIOLATION OF WASHINGTON FRANCHISE
INVESTMENT PROTECTION ACT, FRAUD AND
NEGLIGENT MISREPRESENTATION - 178
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Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
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14
vs.
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Defendants
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)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF EUGENE HILL
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)
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Pursuant to the penalties for perjury in the State of Washington, I, Eugene Hill, hereby
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declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto.
2. Before we invested in our Papa Murphys franchise, my wife, Joy and I lived in
Redding, California with our two teenage boys. We were loyal Papa Murphys
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customers and ordered a family sized pepperoni and a family sized pepperoni and
olive pizza every Thursday night. I developed and sold commercial radio stations and
Declaration of Gene Hill
Exhibit 1 Hill
Joy taught in the local school. Nice house, nice cars, and family vacationswe did
very well.
3. After the boys left home, Joy and I started exploring the possibility of moving to
Tyler, Texas and starting a new business venture. When we found out that Papa
4. We sent an email to an email address on the Papa Murphys website and received a
link to a qualification report which asked for extensive financial information and
included an authorization for Papa Murphys to perform a credit check. The email
instructed us to print the form and either mail or fax the completed qualification report
5. In our qualification report, we stated that we had a net worth of $807,500 including
our home and personal property. We stated that our liquid assets including all of our
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savings were $310,000. We sent the qualification report back to Papa Murphys and
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7. At the meeting, Mr. Werling told Joy and I that the average sales for Papa Murphys
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weekly. He told us that Papa Murphys franchisees annual profit of 12% to 20% of
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net sales. Based on the information Mr. Werling provided us, we were very interested
in purchasing a franchise.
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8. After the meeting, Mr. Werling gave us a copy of a business plan template and asked
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business plan. In our business plan we estimated that we would have $302,500
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($5,817 weekly) in sales during our first year and that we would spend 6.75% of our
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weekly sales on local store marketing. In our second year, we estimated that we
would have $473,000 ($9,579 weekly) in sales and that we would spend 5.8% of our
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Declaration of Gene Hill
Exhibit 1 Hill
9.
We provided our business plan to Mr. Werling by email in April 2005. He did not tell
us that either our marketing costs or our estimated weekly sales were unrealistic and
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should be revised.
10. Based on information Papa Murphys provided, Mr. Werlings statements and the
business plan which he approved, we decided to invest in a Papa Murphys franchise.
We signed our franchise agreement on June 14th, 2005.
11. Joy and I used money from our retirement accounts to purchase our franchise. We
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open our first store in Longview, Texas in July of 2006 After our grand opening our
sales settled at an average of $4,500 a week. We were losing $10,000 a month.
12. We contacted Papa Murphys for assistance and were given the company mantra that
the best way to increase sales was to increase our advertising and reduce our prices.
After losing tens of the thousands of dollars over the first 18 months our store was
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open we adjusted our menu prices upward and finally reached break even on our
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Longview store. Our sales were up 50% and we won a regional award for having the
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largest increase in annual sales. Unfortunately we could only sustain our high sales by
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spending enormous amounts on local marketing and promotions. We were just buying
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customers.
13. After almost three years of operation, we were making a profit of $10,000 a year
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which didnt even cover debt service our business loans. Additionally, despite
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working many hours every week in my store I had been unable to take a cent in salary
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or compensation.
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14. In 2009, based on several suggestion from Papa Murphys employees including Jerry
Defoe about the advantages of multi-store ownership we purchased an existing Papa
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Murphys store in Nacogdoches, Texas. During the purchase process for that store
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and another franchise in Lufkin, Texas, Papa Murphys International provided Joy and
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I with a copy of the March 2009 FDD. We used the average sales information and the
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second franchise. The strong average sales numbers in the FDD were also reassuring
in regards to our Longview stores. Clearly, the Papa Murphys model was working
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and we believed that if we continued to work the model our sales would eventually be
profitable.
Declaration of Gene Hill
Exhibit 1 Hill
15. After a few years of spending enormous amounts on advertising and promotions, we
realized that we could not afford to spend such a large amount on our advertising
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budget. It was no longer getting results in the form of increased sales. It wasnt even
paying for itself.
16. The Nacogdoches store struggled and was a huge drain on our resources. We closed
that store in 2014.
17. When we told employees at Papa Murphys International we were struggling, they
responded with the corporate manta of more advertising, lower prices and higher
discounts. None of these suggestions were sustainable because the only way to
18. My remaining Longview store is struggling to reach average sales of around $6,000 a
week, a little more than half the average sales we were given when we purchased the
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franchise almost 10 years ago. Every cost control we can make we made. I do payroll
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and accounting at no cost (since I am paid nothing) and I prepare local marketing
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19. When we moved to Texas in 2005 we had substantial liquid assets, over than half a
million dollars in cash and other easily convertible assets. It was our retirement
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savings that we had built up over the years. I was confident that we would be able to
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keep most of our assets, borrow and repay much of what was needed to construct the
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Papa Murphys store and that the store would be able to provide a salary and a nice
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continue to survive financially. All of the cash we had when we arrived in Texas is
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gone. Joy went back to work as a teacher several years ago to support the family. We
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are now planning our retirement on a shoe string. This size of a loss, at this stage in
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21. For several years I was greatly troubled with my personal inability to get the store to
make money. I am an intelligent and successful businessman and a hard working
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individual. To constantly beat your head against the wall, and be fed the same
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Declaration of Gene Hill
Exhibit 1 Hill
insincere canned responses from PMI, putting the blame entirely on the franchisee's
shoulders, is humiliating.
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22. This spring, when I read the complaint filed by the other franchisees in this lawsuit I
finally heard I wasn't the only one having difficulties and now after seeing the
experiences of perhaps hundreds of others; I have personally been able to validate that
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Executed at
\rv\h.-n
~L
\ tt
,January
12,2015.
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Eugene Hill
II
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Declaration
of Gene Hill
Exhibit 1 Hill
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Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
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)
)
)
) Case No.: 14-2-00904-0
)
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) DECLARATION OF DOUGLAS BILLING
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)
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Pursuant to the penalties for perjury in the State of Washington, I, Douglas Billing, hereby
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declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am an officer of DDB Enterprises, INC.
with my wife, Lesia.
2. My wife, Lesia and I married in college. After college, I went to work for
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Dynasystems, a regional canon copier dealership. A few years later, two co-workers
and I purchased 100% of Dynasystems operations. Over the next 12 years, we
Declaration of Douglas Billing
Exhibit 2 Billing
four million dollars. In June of 2000 I sold my interest in Dynasystems and took some
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time off to enjoy life with Lesia and our children, Michelle and Brandon.
3. In late 2000 we started our search for a franchise to operate and turn into a saleable
investment. We looked at several businesses but nothing seemed like a good fit.
4. In the summer of 2002 Lesia, I and the kids visited Lesias parents in Muncie, Indiana.
Her dad had been bragging on the Papa Murphys pizza and we tried it. Being pizza
connoisseurs, we were instantly hooked on the pizza and thought we had found our
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franchise.
5. On September 16, 2002 I sent an email to Papa Murphys requesting franchising
information for possible locations in Texas. We received a reply by email from
Rhonda McGrew that Papa Murphys was not seeking expansion into Texas at that
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time.
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6. In October 2004 we were on the brink of going with Chick-Fil-La even if it meant
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relocating our family. After heavy thought and prayer we reached out to Papa
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Murphys one last time and requested additional information in October 2004 and on
October 19, 2004 we were mailed a cover letter and blank Qualification Report to
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complete.
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7. In our qualification report, we stated that we had a net worth of just over one million
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dollars including our home and personal property. We stated that our liquid assets
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including all of our savings were $543,772. On October 27, 2004 I faxed my
Qualification Report to the Franchise Dept. of Papa Murphys International.
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8.
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On November 11, 2004 Jim Werling, Franchise Sales Manager for Papa Murphys
called me and we spoke at length about Papa Murphys future growth and what it
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would entail to move forward with a franchise in Wichita Falls. We were basically
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approved on our financial position at the time and they needed growth in Texas.
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9. We met with Jim Werling on November 30, 2004 at the Wichita Falls Country Club
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for lunch. We told him of our goal was to eventually open 5 stores. During our
discussion he mentioned that we could expect to make $100,000 per store and pay off
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our stores easily within 5 years. We discussed sales figures and expense percentages
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Declaration of Douglas Billing
Exhibit 2 Billing
for the average Papa Murphys store with Jim Werling at length. It was during this
discussion that Jim mentioned the average store had sales in the $500,000 range.
10. One of my questions to Jim Werling at our luncheon was the amount PMI required
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store and $500,000 average sales figures per store that we heavily relied upon in
preparing our business plans.
11. After the meeting, Mr. Werling gave us a copy of a business plan but told us that
because of our financial position we did not need to develop a business plan. We did
however develop pro formas based on the sales information Mr. Werling gave us. In
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our pro formas we presented three different sales scenarios with low, medium and
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high net sales. Our estimated net sales were $400,000, $500,000 and $700,000. We
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12. At the meeting, I asked Mr. Werling Papa Murphy stores opened within the last year
with populations similar to Wichita Falls and contact information. Mr. Werling gave
us the names and phone numbers of four people to contact.
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13. Lesia and I investigated the franchise. We contacted four franchisees. With the
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exception of one new franchisee whose store had not been open for long, the
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franchisees we contacted said that their sales were similar to the average sales Jim
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TX007. We named our company DDB Enterprises, Inc. d/b/a Papa Murphys Pizza.
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The initial $25,000 for the franchise fee was borrowed from Douglas and Lesia
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Billing. Our company borrowed $215,000 from my parents, Darrell and Jean Billing
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for the build out, purchase of equipment and other opening expenses. We agreed that
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the company would pay interest only on the note up to December 31, 2006 and start
making monthly installments of $4200 starting in February 2007. We made those
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payments until April 1, 2008 at which time the balance of the note was approximately
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Declaration of Douglas Billing
Exhibit 2 Billing
$170,000. Lesia and I loaned the company $214,000 from our savings on April 1,
2008 in order to pay off the note to Darrell and Jean Billing.
15. Our first store TX007 opened to the public on June 21, 2006. My personal income at
the time was derived from trading stocks day to day and I made $69K in 2005 and
$84K in 2006. I would never see that type of income again and have not to this day.
Lesia and I put in 70 hours a piece the first couple of years mainly because we could
not afford a manager and the store required our presence to operate efficiently
16. Our Net Sales for the Grand Opening week were $9,841. They immediately dropped
by 20% within several months after this week. We never hit those Grand Opening
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pursue a second store. Lesia and I had only been in the system for a little over a year
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and a half and still believed in the product and felt we could achieve our dreams and
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goals with the Papa Murphys brand. How wrong that decision would turn out to be.
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18. Before we purchased our second store, Papa Murphys International gave us a copy of
the April 2007 FDD. In Item 19 of the FDD, Papa Murphys International stated that
the average annual sales for high, medium and low tiers stores were $726,666
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respectively and that the system average was $503,233 ($9,677 weekly). We relied
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extensively on the $503,233 System Store Average presented in the FDD sent to us by
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Papa Murphys in our decision to go forward with another store. Clearly the Papa
Murphys model was working and we just needed to stick with it.
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19. Our second store, TX066, opened on February 11, 2009. Once again we spent
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$10,000 on the grand opening marketing. TX066 opened with net sales of $10,150
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during our grand opening week. However as soon as we stopped the grand opening
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spending our average sales dropped to less than $5,300 a week and never really
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recovered.
20. By the summer of 2009, we knew that we were in trouble and that the business model
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wasnt working for our store. We contacted Papa Murphys International for
assistance and they told us that if we would spend more on advertising and more local
Declaration of Douglas Billing
Exhibit 2 Billing
store marketing, our numbers would increase. They never told us that our low sales
were typical for a new store outside the pacific northwest, that it might take 5-7 years
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to get to the system average and that we would need to spend significantly more
than the disclosed amount on local store marketing to get there.
21. We were advertising in TV and print media. We also had advertisements in the local
high school football programs. We gave away hundreds of free cookie dough
containers to elementary schools. We gave away free pizza to teachers and other local
struggling.
22. . We were hemorrhaging cash on a monthly basis in our TX066 store but felt Papa
Murphys did not care about us because they knew we were not going anywhere. PMI
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highly recommends that you sign a 5 year lease for your locations and you are in
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effect contractually bound to your landlord for that length of time even is your store is
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losing money. Papa Murphys gets their 5% royalty and 2% ad fund fee off the net
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sales dollar so they are profiting even if your store is losing money on the bottom line.
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23. In December of 2012 Lesia and I made the decision to close TX066. This was a
difficult decision to make as we had tried to sell the store to existing franchisees to no
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avail. Our landlords obtained an attorney and were willing to sue us for the balance of
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our lease agreement (15 months) plus attorneys cost. We negotiated a buy out of our
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existing lease with our landlord in the amount of $17,241.25 which included forfeiture
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of our deposit of $2,341.25 and an additional check for $15,000. We were lucky to
find another franchisee to purchase our 3 year old equipment and used that money to
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pay towards our loan with my parents Darrell and Jean Billing.
24. We are still in our remaining store, TX 007 daily. We do all the hiring, training,
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our store. About half of that is administrative work and the other half is spent working
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along side our employees doing prep work and selling pizzas.
25. In the fall of 2013 I had several phone calls with Jana Liles, a fellow franchisee and
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board member of the PMFA (Papa Murphys Franchise Association). She relayed that
the PMFA directors were finally getting financial information from PMI as to sales
Declaration of Douglas Billing
Exhibit 2 Billing
numbers by region. She put me in touch with Brian Watson, another fellow franchisee
and Director of the PMFA. It was my discussions with Brian that we learned that
stores in our region were being required to spend more than 5% on local marketing in
order to achieve sales that were at least 30% below the national average. I also learned
that the average sales in the FDD were at least 30% higher than in our region.
26. The information that the PMFA had obtained indicated that last year there were
approximately 430 stores that averaged under $8,000 AWS. In the Eastern Division
241 of their 387 stores (63%) averaged under $8,000 AWS. The Southwest Division
had 114 of their 462 stores (25%) under $8,000. The 52 new stores in the Eastern
Division averaged just $6,300. Of the 430 stores below $8,000 AWS 83% of them
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knowing what we now know we would never have invested one dime or invested one
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minute in the Papa Murphys concept. We were materially mislead and lied to from
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the beginning of our journey with Papa Murphys. We were constantly told that if we
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would just open one more store, spend more on advertising, do more local store
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marketing (ie. Give more pizzas, cookie dough, and Mini Murph pizzas away) that our
sales figures would increase.
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28. As of September of 20014, Lesia and I are operating TX007 with outstanding debt
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is owed to us personally. Our operating losses for our company DDB Enterprises, Inc.
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for the last three years amount to $107,907. Our average sales for the entire time
TX007 has been open are $8,205 a week
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29. Lesia has not drawn a paycheck from Papa Murphys since day one yet she continues
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to work in excess of 40 hours a week. I have been able to take small salary averaging
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30. Our lives changed drastically on that August 21st day back in 2005 when we first
signed our UFOC with Papa Murphys. The stress in the early days was expected,
having experienced it before with trying to get a business off the ground. The stress
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toll this business has taken on my life and that of my family the last five years cannot
be expressed in mere words. My kids are now in their twenties and have graduated
Declaration of Douglas Billing
Exhibit 2 Billing
Exhibit B
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Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033 -7351
Telephone: 425 -822-7 888
Fax:206-770-6130
bundy@bundylarvfi rm. com
fi chter@bund)'lawfi rm. com
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Plaintiffs,
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VS.
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Defendants
al.,
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DECLARATION OF ALAN BARNETT
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Pursuant to the penalties for perjury in the State of Washington, I, Alan Barnett, hereby
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2t
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto.
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2.
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AD
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Denise and I first tried Papa Murphy's ptzzawhile we were living in Colorado. We
soon became regular customers and when we moved to Texas tn2003, we were
disappointed that there were no Papa Murphy's in the area. Because we believed in
Declaration of Alan Bamett
BUNDYLAwFIRM PLLC
5400 Carillon Point
Exhibit B
the product we often discussed that if Papa Murphy's ever came to Texas we should
investigate a franchise opportunity. We both have a long history in management and
consider ourselves cautious investors.
-).
Around 2005, we observed that aPapa Murphy's store opened close to our home and
Denise went in to talk with the owner, who had not been open very long. She asked
how it had been to work with Papa Murphy's. The owner said it had been a good
experience and that business was off to a good start.
4.
We contacted Papa Murphy's through their website and were contacted by Eric
qualification report. After our report was approved, Eric Brown set up a meeting with
us in Irving Texas. At the meeting, we asked how many stores we would have to open
to replace my current salary at Canon. Mr. Brown told us that if we opened 3 stores it
r0
would more than cover Alan's current income of $135,000. He told us each store
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should have average weekly sales of $12,000 to $14,000 after the first year.
5.
When we were investigating the franchise, we also meet with ConnieMetzler, a Papa
Murphy's franchise at her North Richland Hills store. She had nothing but positive
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6.
l5
During that time, we received a copy of the April2007 FDD (it was called a UFOC
back then). In Item six of the FDD, Papa Murphy's International stated that stated that
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we would be required to spend either five percent of net sales or $500 a month,
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whichever was greater on local store marketing. In Item 19, Papa Murphy's
International stated that the average annual sales for high, medium and low tiers stores
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weekly), respectively and that the system average was $503,233 ($9,677 weekly). In
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Item 19, there was a company store chart which stated that the high, medium and low
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tiers stores respectively spent five, six or seven percent on local store marketing.
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7.
which we estimated that our average weekly sales for the first year would be $10,000.
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As our store became established we expected our sales would increase to $12,000 to
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$14,000 a week as our store and Papa Murphy's brand became well known in Texas.
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BUNDYLAwFIRM PLLC
5400 Carillon Point
Kirkland, WA 98033-7357
Exhibit B
Our first store, the Fort Worth/Saginaw store, opened in December of 2008 and had a
good soft and grand opening. After the grand opening sales dropped off dramatically
and continued to drop through the next months. At that point we had put in over
$100,000 which included all our reserve savings as well as taking out a home equity
loan on our home that was paid off and had no mortgage.
9. Throughout
the years we have been open we have continually to put in more of our
the poor sales were due to area brand recognition and we needed to work harder and
do more local store marketing to improve sales. No one from Papa Murphy's told us
l0
that our low sales were typical for new stores outside the Pacihc Northwest and that it
could take us five to seven years to reach the "average" sales we were given when we
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t2
l3
local store marketing and local events. The business started to grow but very slowly.
Papa
T4
store for PMI in 2010. We trained several potential franchisees over the next 3 years.
t5
I2.h20ll,
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t7
18
13. When we looked at the June 2011 FDD, we saw that average sales
in Item 19 had
risen in all categories since we purchased our first store a few years before. We
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14. Our decision to open the second location was based on our belief in what Papa
Murphy's continued to tell us regarding the future and that the Papa Murphy's brand
recognition days were behind us. We believed the second store would immediately
take off. Also we still believed that the conversation we had with Eric Brown 5 years
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earlier regarding replacing Alan's income would hold true especially if we could open
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BuNoyLAwtr'IRM PLLC
5400 Carillon Point
Kirkland, WA 98033-7357
Exhibit B
15. When we were exploring financing options for our second location, we asked our
accountant about the possibility of rolling over our 401(k) to fund a second location.
Our account worked with another Papa Murphy's franchisee who had used Directed
Equity to rollover a 401(k) to fund his second location. Our accountant contacted the
franchisee, who said that Papa Murphy's International had recommended Direct
16. We contacted Directed Equity and ended up working with Mark Challis. Mr. Challis
10
formed a C-Corporation for our second store and funded it with the 401(k) I had built
l1
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13
heavy marketing expenditures and intense local store marketing efforts. We asked
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Papa
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our average weekly sales were roughly $3,000 and could not support the monthly
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operating costs. We were told there were no programs available to help us. We did
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heavy local store marketing, sales Blitz events, shaker boarding and anything we could
l8
t9
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years gone.
Murphy's International for royalty relief and any kind of help we could get
18. We have
as
11 months after
loyally supported the district in Papa Murphy's marketing events, taken the
21
presentations and projections until it started to become apparent around 2013 these the
23
24
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Denise put in approx. 80 hours a week in the first 5 years and continues to put in 40-50
Kirkland, WA 98033-7357
Exhibit B
hours a week today with no salary. I work full time at a new employer in Corporate
America and am our family's only source of income and healthcare coverage.
20.Today we have a closed (failed) 2nd store, no value in our lst store with weekly store
sales
just barely covering our monthly expenses to keep the doors open. Papa
Murphy's intemational continues to ask us to put in more funds and do more to keep
things going. If hard work and more of our personal life savings was the answer both
of our stores would be successful today.
21. We are extremely disillusioned and we see nothing in the future that gives us any hope
that things
sold by Mr. Brown. Our plan from the beginning was to work hard and grow our
store(s) to fund a large part of our retirement but we are now looking at possible
bankruptcy. We wake up every morning now with the knowledge that most of our
10
retirement savings is gone and the reality that we will not be able to retire...ever
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I2
Executed
^,
E* iln//. fr,
January r5,20r5.
l3
14
Alan Bamett
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t7
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Exhibit B
1
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3
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Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
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14
vs.
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16
Defendants
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)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF EDWARD CONN
)
)
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Pursuant to the penalties for perjury in the State of Washington, I, Edward Conn, hereby
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declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am or have been a member of the
Turnbull Restaurant Group, LP, the Turnbull Restaurant Group, GP, and Turnbull
Conn, LLC, along with my friend Edward (Ned) Turnbull.
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2. Ned and I have been friends for over 20 years. In late 2005 or early 2006, Ned and I
started discussing the possibility of investing in a franchise together.
Declaration of Edward Conn
Exhibit 4 Conn
3. I believe my partner, Ned, first contacted Papa Murphys International in either 2005
or early 2006. We were contacted by Jim Werling, who along with Jerry Defeo and
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5. Mr. Werling provided sales information to Ned. He told Ned that the average sales for
a Papa Murphys franchise and the level of profits each store would generate. I believe
Mr. Werling told Ned that the average net sales for Papa Murphys franchise were
between $450,000 and $500,000 annually and that store contribution was between 12
10
and 20 percent of net sales. Ned gave this information to me and I used it to develop a
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that the sales and profit estimates looked correct and conservative and that he would
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send them to operations for review and a second opinion. A few weeks later, Mr.
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Werling told Ned that operations has seen the business plan and that they agreed with
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his evaluation.
8. In the Spring of 2006, Ned signed the franchise agreement with Papa Murphys
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International in Texas and paid them our initial franchise fee of $25,000. After we
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paid our franchise fee and signed the franchise agreement, I attended an owners
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training session. I asked the trainer, Jamie Wilson, about whether or not the weather
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would affect our sales volume since Texas and the southern states were considerably
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warmer than the Pacific Northwest. I dont recall exactly what she said but it was
something to the effect that it may have a relatively small effect but it shouldnt make
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much of a difference. I also asked for regional sales information from other
franchisees. She said she could not get that information for franchisees. I was
Declaration of Edward Conn
Exhibit 4 Conn
Exhibit B
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4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF JOHN DEMATTIA
)
)
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Pursuant to the penalties for perjury in the State of Washington, I, John DeMattia, hereby
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declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of DeMattia, LLC.
2. Prior to my experience with Papa Murphy's, I have worked in the food business for
eight years during my teens and through college.
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25
3. Upon graduating from college, I joined Ross Perot at EDS where I worked as and with
systems and process engineers for 24 years. I then joined a software startup called
Declaration of John DeMattia
Exhibit 5 Demattia
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3
4
5
companies. While there, I assisted in landing contracts with Zig Zigler, Kim Dawson
Agency, and 55 other prominent Dallas area companies.
4. In my private life, I have been married for 38 years, raised three wonderful children
and have been very involved in my community through City and school commissions
and advisory boards, and have worked in service organizations such as Rotary, the
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6. When I was young, my mother owned and operated an Italian restaurant in Florida. I
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loved the smell of the great food served and listening to the happy conversations of the
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many guests. Not being the fantastic chef that my mother was, I thought a franchise
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might be a good way to get back into the food business with proven products.
7. In the summer of 2008, I contacted Papa Murphys International about purchasing a
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franchise. I was asked to fill out a qualification report listing my net worth and liquid
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assets. I completed the qualification report and sent it back to Papa Murphys
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International.
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Murphys stores was $569k and that each store generated $85,0000 or more in profit.
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And I should expect the average to grow to about $585k next year. Mr. Brown did not
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distinguish between the performance of Papa Murphys owned stores and franchisee
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owned stores.
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9. During the sales process, Eric Brown sent me a break even analysis and a business
plan template to use in evaluating the franchise.
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10. I was given a copy of the April 2008 FDD. In Item six of April 2008 FDD, Papa
Murphys International stated that I would be required to spend either five percent of
Declaration of John DeMattia
Exhibit 5 Demattia
net sales or $500 a month, whichever was greater on local store marketing. In Item
19, Papa Murphys International stated that the average annual sales for high, medium
and low tiers stores were $755,787 ($14,534 weekly), $484,320 ($9,313 weekly), and
$316,221 ($6,081 weekly), respectively and that the system average was $518,815
($9,977 weekly). In the company store chart, Papa Murphys International stated that
company stores were spending roughly six to eight percent on local store marketing.
11. Based on the information provided by Mr. Brown, by Papa Murphys International in
the FDD and my own investigation with other Papa Murphys franchisees, I developed
a business plan. In my business plan I estimated that I would spend 5% of my net sales
on local store marketing. I estimated that my first year average weekly sales would be
$6,846 or $356,000 annually. I estimated that my second year average weekly sales
would be $10,750 or $559,000 annually.
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12. I showed my business plan to Jerry Defeo and Jeff Hood, Papa Murphys International
11
employees. The only feedback I got was that my forecasts were possible but not
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guaranteed. No one from Papa Murphys International told me that my forecast were
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14. I opened my store on October 20, 2008. Since opening my store has averaged roughly
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$7,700 a week in average weekly sales, well below the system averages in the FDD
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and what I had projected in my business plan. In order to achieve those below average
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sales I am spending roughly ten percent of my net sales on local store marketing.
This is twice what I estimated in my business plan.
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15. Despite its weak sales and low profitability, I am proud of my store. For the last few
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months, my store has consistently been in the top 10 in increasing sales over last year
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operations scores have consistently since opening been assessed at the highest levels.
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In North Dallas, Farmers Branch, Carrollton, Plano, and Richardson, my store is the
highest ranked pizza store based on customer feedback for over 4 years straight on
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Yelp.com. My store has consistently achieved the highest possible City Health
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Declaration of John DeMattia
Exhibit 5 Demattia
Exhibit B
Exhibit B
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3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
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17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF JANA LILES
)
)
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Pursuant to the penalties for perjury in the State of Washington, I, Jana Liles, hereby declare:
20
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
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along with my husband Randy, my daughter Kimberly and my son in law Ben.
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2. 4LM Enterprises, Inc. began as an endeavor to fulfill the American Dream of being
owners of a successful and profitable business. Our initial goal was to open two to
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three Papa Murphys locations. This would establish security for a more stable
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Declaration of Jana Liles
Exhibit 6 Liles
income than the air line industry offers for Kimberly and Ben and to increase the
retirement fund for Randy and Jana. .
3. Before we invested in a Papa Murphys franchise, I worked for the Texas Dairy Queen
Operators Council. In my last position there I was the director of Meetings and
Special Events and a training coordinator. I left that position in July of 2007 to open
what was supposed to be our first Papa Murphys franchise. Randy works as an air
traffic controller while Ben and Kim both work as airline pilots. Kim also works
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stated that we had $59,127 in liquid assets. My daughter and son in law stated that
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that the average annual sales for high, medium and low tiers stores were $707,673
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($13,609), $462,256 ($8890 weekly), and $293,167 ($5,637 weekly), respectively and
17
that the system average was $487,699 ($9,378 weekly). In Item 19, there was a
18
company store chart which stated that the high, medium and low tiers stores
respectively spent five, six or seven and a half percent on local store marketing. In a
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note the company store chart, Papa Murphys International stated that the advertising
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21
contribution for marketing the Papa Murphys Brand including our two percent
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meeting. At the sales meeting, several Papa Murphys franchisees told us about their
positive experiences with Papa Murphys International. Several years after that
Declaration of Jana Liles
Exhibit 6 Liles
meeting, Michell Anglemyer, one of the franchisees who spoke at the meeting, told
me that Papa Murphys International would pay for them to fly around Texas and
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speak to franchisees. Papa Murphys International had told them that the more stores
that open the better their store would perform.
7. Based on the information provided by Papa Murphys International in the FDD, we
developed a business plan using a template provided by Papa Murphys International.
We estimated that our average weekly sales for the first year would be $7252 for
annual average sales of $377,080. We estimated that during our second year we
would have average weekly sales of $10,000-11,000 for annual sales of $520,000-
572,000. We anticipated that our initial advertising expenses would be eight percent
of net sales (including our national ad fund contribution). We anticipated that our
annual profits for our franchise would be 12-14% of annual sales.
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9. We signed our franchise agreement on March 30, 2007 in Texas. We struggled to find
12
a suitable location and we did not open our Keller, Texas store until May 20, 2008,
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International a $25,000 franchise fee for our Keller store. We invested an additional
$247,000 in the initial build out. Since we opened, we have invested an additional
15
$145,485 in the business. After almost six years of operation our average weekly
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sales are $7,925, just slightly above was we estimated we would make in our first
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year. We have spent almost ten percent of our net sales on local store marketing until
18
roughly the time we filed this lawsuit. Since we opened we have been only been able
to take $21,500 in compensation for our work in the store. We have taken no other
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distributions. In our business plan we estimated our store would have profits of 12-
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14% percent of net sales. In reality, the small amount we have been able to take in
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10. In the early years of our store, we were so busy trying to get a grasp on the business,
dealing with working the grueling hours it take to manage the business, to follow Papa
Murphys Internationals business plan for grassroots marketing, it feel like your life is
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Declaration of Jana Liles
Exhibit 6 Liles
11. We knew shortly after opening that our store sales were not where we had expected
based on the FDD and that we were spending significantly more on local store
12. We asked Papa Murphys for assistance and we were told that we just needed to build
more stores or you just need to work harder. No one from Papa Murphys told us
that our low sales were typical for new stores outside the Pacific Northwest and that it
could take us five to seven years to reach the average sales we were given when we
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driveways and baked pizzas to sample in over 100 degrees heat in Texas. We have
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personally walked neighborhoods and hung coupon door hangers, again on PMI
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recommendation. We have followed the plan and it doesnt work in this part of the
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country. I fully believe that PMI knows that the wheel is broken yet they continue to
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and to believe their statements that higher sales were just around the corner. We were
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compliant. We were trusting. We were very busy operating our store and trying to
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deal with mounting losses; it never occurred to me that I couldnt trust Papa Murphys
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International.
15. In July of 2013, I attend the Papa Murphys Franchisee Association meeting. At that
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meeting, Dave Myers, a long term Papa Murphys franchise gave a presentation. In his
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presentation, Mr. Myers talked about the annual sales for the Pacific Northwest, which
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he called the land of milk and honey and then he talked out the annual sales for the
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Eastern Region (which currently includes Texas) and they were much lower. He called
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the Eastern Region the land of oil and vinegar. The difference in the sales between
the Pacific Northwest was shocking. It was then that I realized my stores low sales
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were part of much bigger problem and that the numbers I saw in the original FDD
were not realistic for my region.
Declaration of Jana Liles
Exhibit 6 Liles
16. In the late summer or early fall of 2013, I went to a meeting of some Dallas Papa
Murphys franchisees at the offices of United Marketing. At that meeting, Brian
Watson, another Papa Murphys franchisee spoke about several things including some
information he had received that showed that the average weekly sales in through the
South and East were and had always been substantially below national averages.
17. We built our business plan on the sales figures Papa Murphys International stated in
the FDD.
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18. We secured our small business loan using the sales figures Papa Murphys
International stated in the FDD.
19. Had Papa Murphys International fully and truthfully disclosed that the sales figures in
Item 19 were not representative of new stores or stores in our part of the country and
provided the actual sales figures for stores in our area, we would never have invested
10
20. Aside from financial devastation, our investment in a Papa Murphys franchise has
12
caused mental and physical stress for all of us. We have poured our hearts, souls and
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21. We are all giving everything we can to keep our heads above water and after a little
over six years are continuing to NOT breakeven. We have had to drain funds from
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savings and with our small business loan and lease agreement there is no way out for
us.
22. We have tried selling the store but were offered such low purchase price by a seasoned
Pacific NW franchisee that we would walk away still owing a significant amount on
our small business loan and lease agreement. That was not an option for us.
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23. We were contacted by a couple of people that were interested in purchasing our
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location but once they saw our accounting books, they ran for the hills, as fast as, they
21
could.
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24. I know of no person on this earth that would want to have to work, as hard as we do
and as long of hours that we work and not be able to be paid one cent for any of it,
plus continue to take money from savings to meet payroll and bills.
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25. Papa Murphys International puts new meaning of Working Your Fingers to the Bone
for NOTHING. Not only is there NO return on investment, there is the devastation
Declaration of Jana Liles
Exhibit 6 Liles
Exhibit B
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3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
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17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF ANGELO CHANTILIS JR.
)
)
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19
Pursuant to the penalties for perjury in the State of Washington, I, Angelo Chantilis Jr.,
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hereby declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Double AA partners,
along with my friend, Alex Overcash.
2. When I was 10 years old, my father and his business partner purchased a local
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hamburger restaurant called Burger House. In 1981 the Burger House was a single
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Declaration of Angelo Chantilis Jr.
Exhibit 7 Chantilis
location. Today there are locations. The company also operates three catering trailers.
I have been employed full time in operations with the Burger House since 1995.
3. In December of 2011, Alex Overcash, a friend who I have known since high school
franchise options. I looked at the options and I told him that I thought Papa Murphys
was an interesting option. He told me then that his plans with Jeff had fallen through
(Jeff was interested in something else). Thats when Alex asked if I had any interest in
joining him in the franchise. After consideration and discussing the fact that I would
have to continue to operate the Burger House, we decided to pursue purchasing a Papa
Murphys franchise.
10
to complete and send in a qualification report. In the reports, Alex stated that his net
11
worth was 1.3 million dollars and I stated that my net worth was $230,550. Alex
12
stated that he had $583,479 in liquid assets and I stated that I had $41,000 in liquid
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assets.
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volume. Alex and I stated that we were interested in purchasing multiple units. I
believe Mr. Norcup also provided us a copy of the June 2011 FDD at that time.
6. In Item Six of the June 2011FDD, Papa Murphys International stated that we would
be required to spend either five percent of net sales or $1,5000 a month, whichever
was greater on local store marketing In Item 19 of the June 2011 FDD, Papa Murphys
19
International stated that the average annual sales for high, medium and low tiers stores
20
were $792,515 ($15,241 weekly), $492,327 ($9,469 weekly), and $330,636 ($6358
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weekly), respectively and that the system average was $503,233 ($9,677 weekly). In
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the Company store chart of Item 19, Papa Murphys International stated that company
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business plan. In the business plan template there was a table which listed the historic
average sales for high, medium and low tiers.
Declaration of Angelo Chantilis Jr.
Exhibit 7 Chantilis
8. We used the sales information Papa Murphys International provided in the business
plan template and any other documents he had provided to us and the sales numbers
we had obtained from several other franchisees, including Brian Watson, to develop
our business plan. We estimated that our first year net sales would be $8,500 or
$442,000 annually, that our break even average sales were $7,000. We estimated that
local store marketing would be two percent of net sales every month in addition to a
six percent advertising cooperative contribution. We estimated that our store sales
9. In February of 2012, we showed our business plan to Mr. Norcup. He said that our
numbers were too conservative and that we could expect to do high numbers than
that. Using his advice we revised the yearly sales in our business plan upward in table
four of our business plan.
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10. We sent our final business plan to Papa Murphys International in late March of 2012.
11
11. We had at least two more meetings with Papa Murphys employees during the sales
12
process. On March 29, 2012, we met with Kevin King and Mr. Norcup. Before the
13
meeting, we exchanged several emails with Mr. Norcup regarding our qualification
14
reports and our business plan. We were told that both had to be at the corporate office
for Mr. King to review before we met him. We had a meeting with Kevin King and
15
Mike Norcup at Houstons restaurant which lasted about three hours. At no point in
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the meeting did Mr. King tell us that our sales estimates were too high for a new store
17
in our region or that our marketing estimates were too low. In fact, he expressed no
18
concerns about our business plan or our capitalization. We spent most of the time
talking about football and Mr. Kings vacation home.
19
12. On April 2, 2012, Mr. Norcup sent us a link to the April 2012 FDD. When I was
20
reviewing the FDD I looked at Item Six and Item 19. Item six listed the various fees
21
and expenses for a franchise and Item 19 listed the average sales for Papa Murphys
22
franchises nation-wide. In Item Six of the FDD, it stated that I would be required to
23
spend either five percent of net sales or $1,5000 a month, whichever was greater on
local store marketing. In Item 19, PMI stated that the average annual sales for high,
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25
medium and low tiers stores were $818,955 ($15,749 weekly), $517,871 ($9,950
weekly), and $343,806 ($6,611 weekly), respectively and that the system average was
Declaration of Angelo Chantilis Jr.
Exhibit 7 Chantilis
$560,171 ($10,772 weekly). In Item 19, there was a company store chart which stated
that the high, medium and low tiers stores respectively spent seven, eight or twelve
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4
5
6
7
8
9
Murphys International.
14. On May 25, 2012, in Texas, we signed an Area Development Agreement with Papa
Murphys International to open eight stores in the Dallas Forth Worth area. We signed
the Area Developer Agreement and paid Papa Murphys International $60,000 in
franchise fees including $25,000 for our first store and $5,000 deposit on the
10
remaining stores. We signed the franchise agreement for our first store, TX 184 on the
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12
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14
same day.
15. Our first store, TX 184, opened on April 22, 2013. During the time the store was
open, TX 184 had post grand opening sales of $5,931 roughly $2,569 below what we
estimated in our Papa Murphys International approved business plan. We paid an
initial franchise fee of $25,000 and invested an additional $159,355 to open the store.
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As of September 2014, we spent $57,982 in local store marketing and paid Papa
Murphys International $21,809 in royalties.
16. Our second store, TX 137, opened on September 10, 2013. We purchased that store
from another Papa Murphys franchisee. As of September 2014, TX 137 had had post
re-grand opening sales of $5,320 roughly $3,180 below what we estimated in our Papa
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$168,849. As of September 2014, we spent $27,005 in local store marketing and paid
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17. Our third store TX 219 opened in October 14, 2013. As of September 2014, TX 219
had post grand opening average weekly sales of $5,532, roughly $3,114 below what
we estimated in our Papa Murphys International approved business plan. We paid an
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initial franchise fee of $15,000 and invested an additional $150,984.66 to open the
25
Declaration of Angelo Chantilis Jr.
Exhibit 7 Chantilis
store. As of September 2014, we spent $ $34,687 in local store marketing and paid
Papa Murphys International $ $13,188.73 in royalties.
18. Two years later I have found it all to be what I would call a Vicious Cycle.
Franchisees are led to believe that by looking at national sales averages that money is
out there to be made without actually knowing what is going on in their particular
region. When we spoke with franchisees to develop a plan, I came to a point where
depending upon your rent structure, $8000 a week net sales could be a sustainable
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break-even point. The problem is, is that none of these people were actually doing
that.
19. We market our stores to schools, businesses and send direct mailings to surrounding
neighborhoods proximal to each store. We work school functions and other events
with community organizations. This usually entails heavy discounted product in order
10
20. With each of our stores, we would have strong grand opening sales and then they
would plummet as soon as we stopped the grand opening advertising.
21. Had we known the actual average sales in our region or the amount of marketing or
the length of time necessary to get to those sales, we would have never purchased our
franchise. Had any Papa Murphys employee told us that our business plan was
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unrealistic based on our region, we would have never purchased the franchise.
22. We contacted Dan Harmon and Rob DeBrooke about our poor sales. Their response
was that we should work harder and not give up.
23. Overall I hoped things would have been going better by now. We were looking to
make an investment for our families and our future. I have 2 young children (6 and 4
19
years old). Over the last 2 years off and on Ive missed times with them at work and
20
spent long hours in the beginning away from home. As of now, not to have made any
21
money the past 3 years, at this point, Im not looking to make money. I just want to get
22
23
24. My partner, Alex was forced to sell his home to help with debt servicing and to keep
the doors open. This whole experience has been a complete nightmare. It has put
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overwhelming pressure on my personal and home life. Its been like a horrible
nightmare. Alex and I have put roughly a million dollars into this business which lost
Declaration of Angelo Chantilis Jr.
Exhibit 7 Chantilis
Exhibit B
Howard E. Bundy
1
Caroline B. Fichter
2
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
Attorneys for Plaintiffs
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11
)
)
Plaintiffs,
)
13
vs.
) Case No.: 14-2-00904-0
14
15
16
)
)
) DECLARATION OF ROBERT DICKERSON
Pursuant to the penalties for perjury in the State of Washington, I, Robert Dickerson, hereby
declare:
17
Declaration of Robert Dickerson
18
Exhibit B
1.I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Rob & Buds Pizza,
LLC. I am also the representative of the Robert J. Dickerson Trust UA DTD 2-1898
succeed. I began working in our familys businesses when I was 12 and that is
where I obtained my informal business education In terms of formal education, I
received my bachelors in Business Administration from Drury University and my
by Papa Murphys because we were able to secure a DMA of our own and due to the
lack of cooking aspect of the franchise. Relative to other franchises, it also appeared
10
to have a low investment. My partner was to be the operator of the stores and I was
to be the money source as well as take care of the financial aspects of the operation.
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12
Neither of us had any experience in franchising nor food service. As often happens,
the business partnership failed and I ended up owning the business on my own.
4. I purchased my first five Papa Murphys stores between March of 2003 and October
13
of 2005.
5.During the time-period that I was building my first five stores, I was concerned by the
14
15
low sales but when I questioned Papa Murphys International employees about my
sales, they told me that my sales would increase if I built more stores and spent more
on local store marketing. Their position was that I needed to spend more on local
16
store marketing and open more stores to achieve economies of scale. I purchased the
17
Declaration of Robert Dickerson
18
Exhibit B
ADA to follow the direction that I needed to build out my markets in order to reach
the sales levels needed in order to enjoy success for my business.
6.I had always intended to purchase multiple franchises and eventually build my own
Designated Marketing Area. Papa Murphys International made it clear that I
7.In 2005, I started pursuing an Area Developer Agreement with Papa Murphys
International. I was interested in buying an area developer agreement for the Joplin,
Missouri and the Fort Smith, Arkansas Markets.
assets. Peter Fowler reported to me that Papa Murphys CFO was concerned that I
would not have the assets to build out my markets. Mr. Fowler convinced her that I
could always access my retirement accounts to obtain additional funds, and then she
10
Like the previous FDDs the April 2006 FDD stated that I would be required to spend
five percent on net sales on local store marketing.
11
12
10. However unlike the previous FDDs Papa Murphys had provided, in the April 2006
FDD Papa Murphys International disclosed average sales information. In Item 19,
Papa Murphys International stated that the average annual sales for high, medium
13
and low tiers stores were $707,673 ($13,609 weekly), $462,256 ($293,167 weekly),
and $293,167 ($5,637 weekly), respectively and that the system average was
14
15
$487,699 ($9,378 weekly). Also in Item 19, Papa Murphys International included a
chart of company stores which stated that the average sales for Papa Murphys
company stores was $466,572 and that Papa Murphys International reached those
16
sales by spending the equivalent of eight percent of net sales on local store
marketing. This included a two percent contribution to the national ad fund with the
17
Declaration of Robert Dickerson
18
Exhibit B
remaining six percent and two percent. Nowhere in the FDD did Papa Murphys
International disclose that the average sale information was not representative of
new stores outside the Pacific Northwest, that it would take 5-7 years to reach those
averages and require spending nearly double the disclosed amount on local store
marketing.
11. On April 20, 2006, I flew to Vancouver, Washington to present my business plan to
12. At the time that I signed the Area Development Agreement, I paid Papa Murphys
International $65,000. This payment included the franchisee fee for my first store to
be developed under the agreement and a $5,000 deposit for each additional store. I
opened my remaining seven stores under the terms of the Area Development
Agreement.
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12
13
14
15
16
17
Declaration of Robert Dickerson
18
Exhibit B
weekly sales of roughly $5,212. In addition to the $5,000 I paid when I signed
the Area Development Agreement in Vancouver, I paid an additional franchise
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11
12
13
made in prior FDDs, in the November 2012 and March 2013 FDDs Papa Murphys
International made representations regarding the benchmark store which showed
14
15
that the benchmark stores were earning profits of between three and eighteen percent
of their net sales. When I saw those numbers I felt that the model must be working
for some franchisees and I believed I could stick with it.
16
14. It is worth noting that all of my store locations were approved by PMI
representatives. In fact, my most recent closure was a location that was spotted and
17
Declaration of Robert Dickerson
18
Exhibit B
approved by Kevin King. Kevin is the Vice President of Development for Papa
Murphys. I followed Papa Murphys suggested advertising and local marketing
promotions for a new store opening. Their representatives constantly said brand
awareness and product trial would generate sales. Despite a heavy advertising
budget, giving away lots of product and opening stores as quickly as was feasible,
the sales never materialized in a sustained fashion.
15. I contacted Papa Murphys International for assistance and ideas for ways to
improve my store sales. Their consistent response was that I needed to spend more
on local store marketing and sample more pizzas and the sales would come. No one
at Papa Murphys International ever told me that my low sales were typical for
stores outside of the Pacific Northwest.
16. Since store opened we have spent seven to ten percent on local store marketing. I do
regular TV advertising. I also utilize print and local store marketing for advertising
and promotion. So, I continued to spend a percentage between 7 and 10% of net
sales on local store marketing with the belief that sales would improve. For
example, in 2012 at the direction of Papa Murphys representatives I started an
10
additional push into local store marketing. During that year we gave away over
10,000 certificates to vacation bible school participants. Each certificate entitled the
11
12
holder to receive a free Mini Murph pizza. Sadly, none of Papas suggestions
generated the sales or profitability.
17. During a conference call of the Papa Murphys Franchisee Association Board of
13
Directors in 2013, it was brought to my attention that franchisees were paying far
more for advertising than what was the maximum set forth in the franchise
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15
agreement. To make this matter worse, the franchisees in the lower volume regions
are spending a significantly higher percentage of sales on advertising than the high
volume regions. It was also during interactions with other PMFA Board members in
16
2012 and 2013, that I realized how similar my sales experiences were to other
17
Declaration of Robert Dickerson
18
Exhibit B
owners outside of the Pacific Northwest. It is now obvious that the Papa Murphys
model does not work once you travel to areas outside of the Northwest.
18. My experience with Papa Murphys has had a drastic effect on my personal life.
There is no doubt that had I not invested in the franchise, my personal net worth
would be significantly higher. This net worth hit can be determined by comparing
my returns on other assets with what I actually lost during my time as a Papa
Murphys owner. In addition to the lack of return on invested assets, the time I have
spent dealing with my stores has reduced my personal earnings. I have had to
greatly reduce the time spent doing other things that are proven to generate personal
earnings. My quality of life has also drastically suffered. Prior to Papa Murphys, I
was able to travel frequently. Due to financial and time obligations, I am not able to
enjoy life as I had prior to opening my stores. I easily devote 50 hours a week to
Papa Murphys obligations, which contribute nothing to my income. The lack of
personal time has hurt and likely obliterated some personal relationships. I still
spend some time on insurance sales and service, which is what pays my financial
obligations. Had I not entered the Papa Murphys system, I could be spending much
10
more time enjoying life and would be in a financial position where I could retire if I
so chose. Instead of enjoying life, as I was well on the way of doing, I am now tied
11
12
13
14
15
16
amounts on advertising, I was one of the first owners to install point-of-sale systems
in my stores and so on. None of my efforts paid off and I have consequently lost
17
Declaration of Robert Dickerson
18
Exhibit B
worth as a result of my other activities. So, my efforts and abilities are not the
reason for the lack of success. The business model of Papa Murphys simply does
not succeed in our region. Had the realistic sales amounts been properly disclosed, I
would have never become a franchisee.
Robert J. Dickerson
9
10
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12
13
14
15
16
17
Declaration of Robert Dickerson
18
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF HARVEY CALLEGAN
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Harvey Callegan, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Just for Fun, LLC along
with my wife, Ann.
2. Before we invested in our Papa Murphys franchise, I worked for 31 years as an
24
25
Exhibit 9 Callegan
came from high school jobs. I worked at a burger joint in high school and Ann
worked for two and half years for McDonalds. Her store was one of the first stores to
3. In 2006, we were living in Baton Rouge, Louisiana. A Papa Murphys franchise had
just opened and, of course, we fell in love with the product. We were planning to
move from Baton Rouge to Alabama and had begun to talk about opening a business
together. We both love great service and great food and we felt like there was a need
6
7
8
9
10
meeting hosted by the Franchise Sales Department at the Hilton Garden Inn Mobile
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12
13
14
15
6. We filled out our qualification report and sent it back to Papa Murphys. In our report
16
we stated that we had a net worth of 2.3 million dollars, including our home and
17
retirement funds and that we had $133,000 in liquid assets. Papa Murphys told us
18
19
20
21
22
23
Beach. He sat down at our dining room table and went through the March 2009 FDD
with me and Ann.
8. Mr. Rose spent a lot of time going over the sales information in Item 19 with us. As I
looked at the high, medium and low tiers of stores, I asked where he though our store
would be. He said he thought our store would be in the low tier in the beginning but
that in two to five years we would make enough in sales to make our investment back.
24
I asked him was the take home profit was on sales and Mr. Rose said that the take
25
Declaration of Harvey Callegan
Exhibit 9 Callegan
home profit was about 20% of net sales. Mr. Rose also told us to expect a ten percent
annual increase in sales.
9. I noticed that that some of what Mr. Rose was saying did not appear to match the
statistics in the company store chart of the FDD but Mr. Rose said that those were
company run stores and they dont make money. Mr. Rose said the company stores
were an example of dont do as we do, do as we say and that they spent too much on
advertising and were always trying crazy things that cost too much to the bottom line.
10. When I was reviewing the FDD with Mr. Rose and later on my own I looked at Item
six and Item 19. Item six listed the various fees and expenses for a franchise and Item
19 listed the average sales for Papa Murphys franchises. In Item Six of the FDD, it
stated that I would be required to spend either five percent of net sales or $500 a
month, whichever was greater on local store marketing. In Item 19, PMI stated that
10
the average annual sales for high, medium and low tiers stores. In Item 19, there was
11
a company store chart which stated that the high, medium and low tiers company
12
stores respectively spent eight, ten and a half or thirteen and a half percent on local
13
store marketing.
14
11. Based on the information in the FDD and what Mr. Rose had said we figured that a
take home profit on low tier store sales would be $60,000. I was ok with that for a
15
start. With both Ann and I working in the store and doing local store marketing, I
16
figured we could save some money on labor and increase our profits. We estimated
17
that our first year average net sales would be $350,000 and that they would increase
18
by ten percent each year. We estimated that after five years we would have average
sales of roughly $10,000 a week or $520,000 annually. Had I known that those
19
20
numbers would never come to fruition after almost five years, we NEVER would have
invested in a Papa Murphys franchise.
21
12. We signed our franchise agreement on June 5, 2009. We paid for our franchise using
22
our savings and the profits from the sale of Anns advertising business. Mr. Rose and
23
other Papa Murphys employees repeatedly recommended companies that would help
get us money. Our store opened in December of 2009.
24
25
13. As required by our franchising agreement, we spent $25,000 on advertising for our
grand opening. Our average sales for our grand opening (the first three months the
Declaration of Harvey Callegan
Exhibit 9 Callegan
store was open) were roughly $5,500. Since that time our sales averaged roughly
$7,170 a week.
14. We have done so much to market our store. Give away pizzas to schools every
Halloween and Valentines Day to help bring awareness. We have done radio
remotes. We have done TV spots and are still doing them; the cooking shows are a
great way to reach potential customers. We have run Customer Appreciation Days.
We have done fundraising with spirit nights to schools. We have had presold pizzas at
Halloween and given back money to the schools to help raise money. Recently we
handed out pens to all the school teachers and faculty with a coupon attached to
redeem at our store. All the local schools have Great Student awards to get free
cookie dough. We teamed up with the YMCA and have given away pizzas many
weeks for special events, mini marathons, and snow bird events. We have done local
10
Food events where we feed over 200 people and give away free pizzas. Harvey baked
11
and grilled at Home Depot 2 summers to promote our pizzas. I have done Ladies
12
night baking for Home Depot over the last 2 years. Lastly my biggest LSM was
13
baking for businesses. I did that for over 2 years and baked for over 60 businesses in
14
the area for free and gave away free pizzas. Last month we raised money for our local
fire department. Im sure there are more, seems like we are always at the schools and
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shaker boarding and trying to build awareness even after almost 5 years.
15. We spend between 15 and 20 percent on local store marketing and we still have not
seen sales anywhere close the averages in the FDD or what Mr. Rose told us to
expect. One week we actually had our highest ever sales of $11,000 for the week. We
sold a lot of pizzas, we were exhausted and when it was done I said where is the
19
20
16. As soon as we opened, we knew that our sales were below average and below what we
21
had estimated. Papa Murphys kept telling us that if we continued to spend on local
22
marketing, it would happen. No one from Papa Murphys ever told us that our sales
23
were typical for the region and the averages disclosed in the FDD were skewed by
older stores in the North.
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25
17. In late 2012 or early 2013, I started to speak with other franchisees in the South. We
also started to receive reports from our Market Leader. We noticed that sales in our
Declaration of Harvey Callegan
Exhibit 9 Callegan
Exhibit B
Exhibit B
Exhibit B
Exhibit B
Exhibit B
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF CHANTAL RUBIN
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Chantal Rubin, hereby
20
21
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23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Northwinds Partners,
together with my husband, Ilya, our friends Glenn and Joanna Patcha, Ian Hasinoff
and his wife Susan Lorimer and Cole Kilen.
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25
2. My husband Ilya and I had been devoted Papa Murphys customers in the Midwest.
When we moved to Charlotte, North Carolina, we became regulars at our local Papa
Declaration of Chantal Rubin
Exhibit 11 Rubin
Murphys store. Ilya works long hours as an anesthesiologist and I stay at home with
our two young children. Papa Murphys take and bake pizzas were a convenient
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3
4
5
Ballantyne hotel. After the meeting, he put us in contact with Steve Millard. I also
believe it was Mr. Rose who gave us a blank qualification report and asked us to fill it
out.
5. In our qualification report, we stated that we had a net worth of $2.2 million including
10
our home and personal property. We stated that our liquid assets including all of our
11
savings were $745,000. We sent the qualification report back to Papa Murphys and
12
13
14
6. In March of 2011, I along with Cole Kilen and Glenn Patcha met with Papa Murphys
representative, Steve Millard in a hotel lobby in Pineville, North Carolina to discuss
investing in an area development agreement. Mr. Millard discussed the Papa
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16
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18
Murphys business model and gave us a copy of the FDD. Mr. Millard also showed us
a large binder with sales numbers for Papa Murphys stores.
7. Mr. Millard went over the average store sales in Item 19 of the FDD. Mr. Millard said
that the stores doing $8,000 in average weekly net sales did nothing but open their
doors, that the stores doing $9,000-10,000 in average weekly net sales did sampling
19
and local events and that the stores doing $13,000 and above in average weekly net
20
sales were well known and had acquired school contracts. I pointed to the low tiered
21
store column in Item 19 and he said that all the stores in the low tier were people who
22
did no local store marketing and that those stores were still making money.
23
8. I looked at several pages in the binder and saw that there were pages and pages of
stores which made more that ten thousand dollars a week in average weekly sales. Mr.
24
Millard said that those sales levels were very common and that with advertising,
25
Declaration of Chantal Rubin
Exhibit 11 Rubin
school contracts and community involvement we could easily find ourselves reaching
thirteen thousand dollars a week in average sales.
9. Mr. Milllard told us that it would be easy to obtain school contract for pizza and that
under the new federal guidelines for school meals, it would cost less to make pizzas
for schools than for our store because the school pizzas have less cheese and sauce.
10. I noticed a small list of stores with average weekly sales of $5,000 a week and under.
I asked Mr. Millard about the list and he said that the people who owned those stores
were still making a profit. He pointed to one store on the list and said it was owned by
an Asian franchisee in California who had been in the system since the beginning. He
said that she owned the building where her store was located and paid no rent and did
no advertising. He said she just liked to come into her store and serve her regular
customers the pizza they love.
10
11. After that meeting Mr. Millard provided us with templates and asked us to develop a
11
business plan and break even analysis to present to Papa Murphys sales staff before
12
13
14
12. Glenn asked Steve Maeker, another Papa Murphys salesman if he could call
franchisees to ask about their experiences. Mr. Millard suggested that we call Dave
Myers, and two other franchisees, one was in Colorado and one was in Minnesota.
15
Glenn called both Mr. Myers and the Colorado franchisee. Both of them said that
16
their stores were doing well, that the Papa Murphys business model was successful
17
and that local store marketing was important. I called the Minnesota franchisee who
18
Mr. Millard described as being a former truck or bus driver but who now owned six or
more stores. I called the Minnesota franchise but he did not have time to talk.
19
13. After meeting with me, Mr. Millard went to the hospital where Ilya and Ian Hasinoff,
20
a friend and business partner were working. Ilya told me that Mr. Millard told him
21
that the Papa Murphys business model was universally successful. He also told Ilya
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23
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Exhibit 11 Rubin
Glenn Patcha presented a power point. In our power point we stated our goal was to
open 10-15 stores in our area with each store averaging at least $550,000 in net sales
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3
4
5
($10,576 in average weekly sales) and each store would make an operating profit of
$80,000 annually.
15. After listening to our presentation, Mr. Millard told us that after we opened our first
two stores we would be generating enough income to own real estate and open our
stores in locations that we owned. Mr. Millard and Mr. Maeker praised our plan. At
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7
8
9
no point in the meeting did they suggest that our sales or profit estimates were
unrealistic.
16. After that meeting, Glenn developed a business plan using the information provided
by Mr. Millard, the FDD and the templates for the breakeven plan and the breakeven
analysis. In our business plan we estimated that our stores would start at $7,110 a
10
week in average weekly sales or $370,000 annually and our same store sales would
11
increase four percent each year. Based on the information provided by PMI we
12
determined that we would need to have average sales above roughly $7,500 to break
13
even. We very conservative in our business plan and deliberately used the lowest
14
15
estimates for local store marketing, cost of goods, rent and discount percentage. We
16
provided a copy of our business plan to Steve Millard on April 27, 2011. At no point
17
did Mr. Millard tell us than any our estimates in the business plan needed to be
18
adjusted.
18. We decided to invest in an area development agreement for 13 Papa Murphys stores
19
located in the Tampa, Florida area. We signed our area developer agreement and the
20
franchise agreement on our first store, FL022, on June 27th, 2011. We paid an $80,000
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23
19. We ultimately opened two additional franchises FL035 and FL037. We signed
franchise agreements for those two stores in January of 2013 and on November 1,
2013.
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20. Our first store (FL022), opened in November 10, 2011. Our average weekly sales for
that store were $6,816 in 2011, $7,900 in 2012, $7,073 in 2013 and $6,783 in 2014 (as
Declaration of Chantal Rubin
Exhibit 11 Rubin
of July 2014). We paid an initial franchise fee of $25,000 and invested an additional
$199,726 to open the store. During the time the store was open, we invested an
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3
4
5
additional $200,000 in the store. During the time the store was open we spent roughly
ten percent of our net sales on local store marketing.
21. Our second store, (FL034), opened in February 8, 2013. Our average weekly sales for
that store were $7,167 in 2013 and $6,748 in 2014 (as of July 2014).We paid an initial
franchise fee of $10,000 and invested an additional $188,000 to build the store.
During the time the store was open, we invested an additional $150,000 in the store.
During the time the store was open we spent roughly 15% percent of our net sales in
22. Our third store (FL 037) opened in January of 2014. Our average weekly sales for that
store were $6,200 or $5,987 not including the grand opening sales. We paid an initial
10
franchise fee of $10,000 and invested an additional $190,531 to build the store.
11
During the time the store was open, we invested an additional $50,000 in the store.
12
We also spent more than 18% of our net sales on local store marketing.
13
14
23. Our stores never performed as well as we expected. Even more challenging was the
fact we were spending significantly more than we had planned on local store
marketing to achieve significantly lower store sales. We spent roughly 15% percent of
15
our average net sales on local store marketing. Our food and rent costs were also
16
significantly higher than in our business plan or our break even analysis. In our
17
business plan, which we provided to Papa Murphys, we estimated that our discount
18
rate would be 17%; in reality it was roughly 22%. Given our stores low sales and
higher costs across the board, our estimated annual profits never materialized.
19
24. We contacted both Papa Murphys employees and Dave Myers for assistance in
20
boosting our sales and making our stores profitable. Both Papa Murphys and Mr.
21
Myers consistently suggested more local store marketing and sampling to boost sales.
22
No one told us that the low sales were experiencing were typical for our region.
23
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25
Declaration of Chantal Rubin
Exhibit 11 Rubin
26. When ever we worked with Ruth Picha, she consistently led us to believe that our low
sales were anomaly, that we were doing a great job with local store marketing and that
2
3
4
5
28. Cole Kilen managed all three of our stores and did an excellent job. Papa Murphys
gave him several awards for marketing and as a result of his in store performance one
of our stores was selected as a Papa Murphys training store. Papa Murphys
managers and representative consistently told us that we had a good operating team.
Yet we could never make the Papa Murphys model work for our stores or raise our
10
29. In 2013, we switch from the Papa Murphys International recommended accountant to
12
an accounting in Tampa, Florida. She had worked with franchisees for almost 30
13
years. Immediately after she started reviewing our books, she said these franchises
14
are not making money and will not make money. You need to draw a line in the sand
and stop throwing good money after bad.
15
30. In March of 2013, Steve Daniels, a DFO for Papa Murphys International, came to
16
Florida for the grand opening of our third store. We told him how concerned we were
17
about our stores low sales and profitability. He told us that he absolutely agreed with
18
our statement. He said that he had told people at Papa Murphys International that he
could not keep getting off a plane and seeing the faces of doom and gloom where
19
these people are losing everything they had. He stated that he did not know how to
20
make the business model work in the Southeast and that he did not believe that Papa
21
Murphys Internationals corporate office knew either. He said the right hand doesnt
22
23
31. We started becoming suspicious of the sales information Papa Murphys provided to
us around that time. We couldnt understand why we couldnt make the model work.
24
We didnt realize we had been lied to until early 2014 when another franchisee told us
25
Declaration of Chantal Rubin
Exhibit 11 Rubin
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF STEVEN MEAD
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Steven Mead, hereby
20
21
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23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of PMG Tampa, LLC
along with my wife Holly and my father in law, Thomas Lance
2. I have spent the majority of my career in the management in the hospitality industry.
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25
My wife Holly, is a culinary school graduate who has worked in the food and
beverage industry since her first job working at Arbys in high school.
Exhibit B
3. In 2011, we were living in the United States Virgin Islands and working at a high end
restaurant at a Westin resort there. We had bought a piece of land there and we hoped
to one day be able to build a small retirement home there. We had decided we want to
return home the States and my father in law, Thomas Lance, offered to help us finance
a business of our own. Before he retired, Tom was a successful Arbys franchisee
Tom sent us an email with a link to the Papa Murphys website and a story about a
new store that had opened in Naples, Florida. We had both heard of the concept, but
Once we returned to the States we visited the Naples store and spoke one of the
owners at length along with purchasing a few different pizzas to take home and share
10
with family and friends. The group consensus that the product was quite good and the
11
12
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us for our interest and letting us know that the area we were interested in was only
17
open for multi-unit franchisees who can open three or more stores. The email had an
18
19
20
we completed and returned. In our qualification report we stated that we had a net
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23
7. On January 26, 2012, we received an email with a link to download a copy of the June
2011 FDD. Tom, Holly and I carefully reviewed the FDD. In Item six of the FDD,
Papa Murphys International stated that stated that I would be required to spend either
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five percent of net sales or $1,5000 a month, whichever was greater on local store
marketing. In Item 19, Papa Murphys International stated that the average annual
Exhibit B
sales for high, medium and low tiers stores were $792,515 ($15,241 weekly),
$494,327 ($9,506 weekly), and $330,636 ($6,358 weekly), respectively and that the
system average was $538,493 ($10,355 weekly). In Item 19, there was a company
store chart which stated that the high, medium and low tiers stores respectively spent
8. We continued our research on the concept including in store visits with a number of
sites between Florida and Michigan and studied the FDD. Based on the average sales
AWS we had no reason to believe that we could not have an Average store in the
9. At Mr. Roses request we prepared a break even analysis and a business plan using
templates provided to us by Papa Murphys International. In our business plan we
10
estimated that our first year average weekly net sales would be $6,162. We projected
11
that we would need average weekly net sales of $7,020 to break even. I provided a
12
copy of the business plan to Mr. Rose for his review and he told me that the plan was
13
great. He did not tell that our estimated weekly sales were overly optimistic or not
14
15
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17
$55,000 which included the franchise fee for our first store as well as the two other
18
19
in October but were unable to because the construction manager hired by Papa
20
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dismal with only $3,619 in net sales during our first week.
22
23
12. During our grand opening week, we spent tens of thousands of dollars to promote the
store. During that time we had one week in which we made just over $9,000 in
average weekly sales. As soon as we pulled back from the grand opening expenses
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25
Exhibit B
13. We started to invest in local marketing from day one including participating in the
PMI recommended sales building program. We also advertised in a number of local
print pieces, supported local schools and churches both financially and with free
product and did regular sampling events. All told in the 18 months that we were open
14. We were never able to take any type of salary from the business over the 18 months
and actually operated at a loss during the entire time. Not having any income for this
period forced us to default on a mortgage we had for a lot in the US Virgin Islands and
taking fewer than 2 days off in the first 12 months of operation and working a
combined 120 140 hours a week. Our costs were all in line with PMI standards and
our rent was actually on the low end and we still could not turn a profit and as state
10
15. We regularly asked PMI why they thought the store was underperforming and what
12
else we could possibly do to change that and we never got any type of reasonable
13
answer. The suggestions that we did receive included shaker boarding, sampling and
14
selling pizza slices in a dangerous part of town after the clubs got out. Despite
requiring us to purchase a minimum of 3 stores because it was supposedly aggressive
15
growth was critical we saw nothing that suggested PMI was doing anything to help
16
that growth. While we were asking for assistance, no one from Papa Murphys told us
17
that our low average weekly sales were typical for our region.
18
16. We had worked very closely with the other group of owners in the Tampa area and
knew that they also were not having AWS anywhere near the system average listed in
19
the FDD and for the first 12 months of operation we were supplied with the AWS for
20
all of the Florida stores and they all appeared to be in the same position. Around
21
December 2013, I spoke with a couple other owners and literally you could have
22
written each of our experiences down and just changed names because they were
23
identical.
17. In January of 2014 Papa Murphys International held a regional meeting in
24
25
Jacksonville, Florida which we attended and that was when we really started to see the
red flags go up as we finally had the opportunity to talk to many other owners and
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF GARY NYCHYK
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Gary Nychyk, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto.
2. For my wife Heather and me, the idea of opening our own Papa Murphys franchise
was truly exhilarating. It was a chance to take more direct control over our lives by
24
25
stepping away from the land use and development realm that I had known for the past
ten years and into the world of business ownership.
Exhibit B
3. At the time, we were living in The Dalles, Oregon. Our town had a Papa Murphys
store and it became our familys exclusive pizza destination. We started considering a
Papa Murphys franchise while we were visiting the local store. As we waited for our
pizza, we observed the volume of patrons entering and leaving the property. We noted
that there werent any ovens, there werent any tables, and there werent any delivery
drivers, just a very simple business model centered on excellent food. I decided to
investigate the company itself.
headquarter in Vancouver, WA. At the Discovery Day, I learned that PMI was not
looking to sell to franchises to new franchisees in the Pacific Northwest. With that in
10
5. At the Discovery Day I met Billy Rose, a Papa Murphys International salesperson.
11
12
that I did not have the financial resources to open multiple stores. I had read on the
13
PMI website that they were only selling franchises in Florida to people who could
14
open multiple stores. Mr. Rose said he would see if PMI was open to selling a single
unit franchise in Fort Meyers to me. On August 29, 2011, Mr. Rose told me that PMI
15
16
17
18
19
20
21
I read it cover to cover. That delivery initiated research into financing the new
22
franchise, developing a business plan, and discussing the franchise with other existing
23
owners. Because I was developing a business plan I looked closely at Item Six, which
listed the fees and costs I would be responsible for and Item 19, which listed the
24
average sales of existing Papa Murphys franchises. In Item 19, I saw that the average
25
Exhibit B
annual sales for high, medium and low tiered stores were $792,515 ($15,240 weekly),
$492,327 ($9,468 weekly), and $330,636 ($6,358 weekly).
8. On October 10, 2011, Harold Kermen, another PMI sales person sent me a
Breakeven Analysis template. Using the template I was able to estimate that I
would need average weekly sales of roughly $6,000 to keep the lights on. That
number did not include a salary for me as a manager. I requested breakeven analysis
from other franchises in the southeast Hans King, Greg Jacobson, Brent Christman,
6
7
8
9
Steve Pyatt, Bob Hoersting and their results seemed consistent with the template
provided by Mr. Kermen.
9. The information in the FDD painted a very positive picture. Net System Store
Averages as published were impressive to say the least. We were very skeptical on
moving forward with this investment, but the data presented in the FDD was enough
10
to quell those fears. Instead of assuming that I would have to be a Middle Tier
11
store to survive, I found that I could be well into the Low Tier and still make it
12
work. In fact, the information in the FDD suggested that I could base my business
13
plan on the average of the Low Tier stores. I felt that this was a conservative effort
14
to establish my net sales, and I utilized published numbers in the FDD to calculate my
business plan.
15
10. In my business plan, I conservatively estimated that I would have average weekly
16
sales of roughly $6,000 during my first year and $6,700 and $7,500 during my second
17
and third year. I estimated my annual sales would be $307,500 for year one, $348,500
18
19
investing in a Papa Murphys was a no brainer, or an easy win. I also believe that PMI
20
was capable of presenting accurate and topical information at the regional level
21
because the Franchise requires all franchisees to submit sales information on a weekly
22
or monthly basis. However PMI chose to provide generalized sales data, which
23
supported their aggressive growth plans for the early twenty-teens. Had I know that
sales in my region were well below the system average I would not have invested in a
24
franchise.
25
Exhibit B
12. I signed the franchise agreement on March 19, 2012. After several months of delays
and false starts I finally opened my store on January 27, 2013.
13. I knew immediately after I opened that my sales were not matching my estimates
based on the FDD. I spent $17,000 in local store marketing in seven days for my
grand opening event and I only achieved about $7,000 in net sales. During the time
and more money on local marketing such as Sales Building Program coupons, coupon
booklets, student of the week tickets, and electronic mailings. Whenever we asked for
help of any flavor, whether it was logistics, cleanliness, customer service, or whatever,
the answer was always you gotta do more Just spend more... Buy more. Always
more.
10
15. PMI has no concept of return on investment on local store marketing because their
11
success is based solely on sales. It doesnt matter if it costs the franchisee $56.00 to
12
sell a $14.00 pizza, we are pushed, persuaded, and expected to make that sale
13
14
16. While PMI was encouraging me to spend more on local store marketing and give
away more pizza, no one from PMI ever told me that my average weekly sales were
15
16
17
18
19
numbers for the Region. It quickly became apparent that our weekly average was far
20
below that of other regions. I began suspecting that our region was not meeting
21
22
23
18. Since our store opened, I have completely dedicated myself to its operations. I
typically spend 65 hours a week in the store. From dishes to prep, marketing to taxes,
and pizzas to customer complaints I am there.
24
25
19. I am very proud of my store. During my training I earned over 94% grade on the Food
Safety Managers test and I scored well enough on the owners exam to earn a spot on
Exhibit B
their wall of fame at Headquarters in Vancouver. I have received two AAA scores on
no-notice QSR surveys from PMI area coaches. My customer surveys are typically
well above company average, I have had no issues with the health department, and my
customers know me by name. I believe we are doing a good job at the store, but
clearly not well enough because my numbers are nowhere near average.
20. My wife, Heather has done an amazing job marketing our store. Heather has
developed a terrific ability to build strong contacts with various schools, churches, and
ranging from goodie baskets for donations, and new renter programs, to quaint
cooking events for friends and neighbors. We have also established recurring
contracts with senior centers and schools. We even held giant galas for Taste of the
Town, local schools, and local churches. In all, Heather was able to schedule, plan,
10
and provide pizzas for over 10,000 people from October 2013 till now. And if you ask
11
12
13
14
PMI what we need to do to change our numbers, they will simply say more.
21. With the amount of effort that Heather and I have spent trying to get out store off the
ground its easy to see that sooner or later we would let some facet of our lives fall
short. Certainly we have not had time to spend on ourselves as the idea of taking a
vacation is no more realistic than waking up to a successful, money making business.
15
Physical exercise, dinners, sleeping in, and other little vices are just not in the picture
16
right now. But the most negative part has been the chaos brought to my two school-
17
age boys.
18
22. I have always been a very active father. I coached baseball and soccer, and we would
always throw big birthday parties before I joined Papa Murphys. I always made time
19
to make cool birthday cakes and themed parties to celebrate Nate and Jack. Now I am
20
lucky if I remember their birthdays. I often only see them when Heather brings them
21
to my store while she goes out marketing. They sit in my tiny office and watch videos
22
while I work. There is no baseball, no football, there just isnt time. If these sacrifices
23
were going toward making money for their future, I could justify the efforts. But
when the very efforts that are taking me away from my boys are costing me and them
24
25
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF LORALIE BENNETT
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Loralie Bennett, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Pizza Revolution
of Fort Walton Beach, LLC; Pizza Revolution of Panama City, LLC and Pizza
Revolution at Tyndall, LLC with my husband, Trey Bennett.
24
25
2. Trey and I meet in high school. Our first joint business venture was selling
donuts to raise money for our class. Four years later, we became the youngest
Declaration of Loralie Bennett
Exhibit 14 Bennett
3. In 2007, while living in Colorado, we went into the local Papa Murphys. We
tried the product and loved it. After looking more closely we saw an operation
very similar to Subway. Our next big business venture was going to begin. We
wanted to build out the Florida market and control an entire market DMA, so
we pursued a 4 store deal with Papa Murphys International. We knew that we
would want to hit the ground running and get a few stores open quickly so that
they could support each other in the advertising realm and support us financially.
And we also wanted to teach our oldest son, Taylor, how to be an entrepreneur
10
qualification report we stated that we had 1.3 million dollars in liquid assets and
12
13
14
5. After we sent in our qualification report, we spoke with Mark Levis, Papa
Murphys Internationals Director of Franchise sales. Mark shared an article
from QSC with us titled Papa Murphys ends 2011 with double digit sales
15
16
17
18
growth.
6. Papa Murphys International sent us a link to the June 2011 FDD in February of
2012. We carefully reviewed the entire FDD including Items six and 19 which
addressed the fees we would be required to pay and the average sales figures for
existing Papa Murphys Stores. In Item six of the FDD, Papa Murphys
19
International stated that stated that we would be required to spend either five
20
percent of net sales or $1,500 a month, whichever was greater on local store
21
marketing. In Item 19, Papa Murphys International stated that the average
22
annual sales for high, medium and low tiers stores were $792,515 ($15,241
23
24
25
was a company store chart which stated that the high, medium and low tiers
stores respectively spent seven, nine or eleven percent on local store marketing.
Declaration of Loralie Bennett
Exhibit 14 Bennett
2
3
4
5
the business plan to determine whether or not we had the right stuff to become
franchisees.
8. We used the average sales is in FDD to develop our business plan, break even
analysis and to calculate debt service on our loans. In our business plan we
estimated that minimum first year net sales for each store would be $492,000
($9,4621 weekly) per store with same store sales growth of at least 2-3%. In our
business plan we stated that we created the plan based on the averages
promoted by Papa Murphys. In our plan we estimated that our local store
marketing would be 4-5% of gross sales each month. We submitted our business
plan to Mark in early April of 2012.
10
9. In April of 2012 we travelled to Panama City, Florida to visit the area where our
11
12
13
14
new stores would be located. While we were there, we met with Mark Levis.
10. As we began our due diligence, either Mark or Amy suggested that we contact
David Myers to complete our due diligence. We spoke at length with Mr. Myers
who had many positive things to say about Papa Murphys International and his
stores.
15
11. On April 24, 2012, Mark emailed us to tell us that Papa Murphys International
16
had approved our business plan. At no point did Mark or anyone else at Papa
17
Murphys suggest that our sales estimates were too high, our advertising
18
estimates were too low or that we were underfinanced to open four stores.
12. On April 26, 2012, we signed our multi-store commitment letter in Grand
19
20
21
22
23
13. On May 23, 2012, we signed our franchise agreement for our Panama City and
Callaway Stores. We signed the franchise agreements in Grand Junction,
Colorado.
24
25
14. We moved to Florida in July of 2012 and began scouting for locations for our
first store. While we were looking for locations, we were told that an existing
Declaration of Loralie Bennett
Exhibit 14 Bennett
Papa Murphys store was available for purchase in Fort Walton Beach, Florida.
We were concerned about the existing stores low sales but we were assured that
they were the result of an absentee owners since they lived in Kansas City. After
hearing this from Doug Carroll, our Real Estate Manager, Steve Daniel, our
Market Coach and even the DeJaynes themselves, we felt reassured that we
could meet the goals of our business plan and maybe more.
15. We signed the franchise agreement for the first store on August 22, 2012 in
Florida. We took ownership of the Fort Walton Beach store on October 2, 2010.
Our first store at Fort Walton Beach had average weekly sales of $7,575 roughly
$1,887 a week below what we estimated in our business plan. We paid $192,000
for the store. Since we purchased the store, we invested an additional $82,980 in
the store including loans from credit cards and the other businesses we own. We
10
used money from our personal savings and from a trust account to purchase the
11
12
16. In February of 2013, we began building our Panama City store. We borrowed
13
$200,000 for the development of the Panama City store using the value of our
14
15
roughly $2,470 below what we estimated in our business plan. We paid an initial
16
franchise fee of $25,000 and invested an additional $182,483 to build the store.
17
Since the store opened, we have invested an additional $37,572 in the store.
18
18. By August of 2013, we were very concerned about both our low sales and our
high local marketing expenses. Our Fort Walton Beach Store was making a
19
slight profit but was still below our break even estimates. The Panama City sales
20
were strong but we were concerned that those high sales were based on the grand
21
22
23
19. When we shared our concerns with Papa Murphys International, their response
was that with more stores and marketing, the sales would come.
20. On October 10, 2013, we opened our Callaway store. Even at grand opening the
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25
sales were well below what we had estimated. Our Callaway store has weekly
sales of $5,779 a week, roughly $3,683 below what we estimated in our business
Declaration of Loralie Bennett
Exhibit 14 Bennett
21. For each of our stores we would have reach decent weekly sales during the grand
marketing. As soon as we stopped spending the grand opening budget our sales
would settle to a much lower weekly average.
22. Even more challenging was the extremely high level of advertising necessary to
including our cooperative fees. We have done everything we can to help market
our stores including car washes, kids festivals, chamber events, blood drives,
business of the week promotions, sponsoring bowling, baseballs, volleyball and
10
swimming teams. We bought a pizza man costume and use it to give away
11
12
13
14
15
16
that we all had the same problem. We realized that the sales figures in Item 19
17
didnt reflect the reality of sales in our region. Our business plan was based on
18
those sales figures. Our whole life was based on those sales figures. The reality
is that if we or any other prudent business person looked at the correct sale
19
20
21
22
23
figures for our region, they would not invest. We certainly would not have
invested.
25. Our lives have been turned upside down. We are working in the stores or at
home working on store related issues all the time. Every morning I spend some
time trying to figure out which store to move money from to try and cover the
bills. Treys days start early. He works six days a week in our stores and even if
24
25
Declaration of Loralie Bennett
Exhibit 14 Bennett
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF ALICE WORTHINGTON
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Alice Worthington, hereby
20
declare:
21
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
22
23
24
25
2. I have spent the majority of my career in sales and marketing. I have a Masters degree
in Marketing. My husband, Douglas has a degree in Business Management. My
Declaration of Alice Worthington
Exhibit 15 Worthington
2
3
4
5
Pharmacy stores.
3. In early 2013, we were living in Fort Myers, Florida. My husband was retired and my
brother was looking for a new job opportunity. We investigated several different
franchises, but were familiar with Papa Murphys. We had grown up in Iowa and
Minnesota where Papa Murphys is very well known.
4. We contacted Papa Murphys through their website and Mark Levis, a Papa Murphys
Myers on April 10, 2013. The seminar did not have enough attendees, so we met
directly with Mark Levis. Prior to this date, we requested contacts for other
franchisees and we requested the FDD. I believe the first FDD I received was the
10
5. During our meeting with Mark Levis he discussed the tremendous potential in opening
12
13
support since they were focused on building out this area. He indicated that we would
14
exceed the sales volume indicated in the FDD because we had a strong snowbird
market in Fort Myers. He discussed the marketing expenses and said that we would
15
eventually form a coop with all the new stores that would be coming into the area. He
16
said he had a lot of people interested in opening stores in the area and that would help
17
18
19
store. He suggested that using our 401(k) funds to finance our store would be the best
20
option and suggested that we should used Directed Equity. He said the owner also had
21
a Papa Murphys franchise and was very successful. We were sold on the idea of
22
using our 401K as we didnt have to go into debt to finance the store.
23
7. I carefully reviewed the FDD before we decided to purchase the franchise. In Item six
of the FDD, Papa Murphys International stated that we would be required to spend
24
25
five percent of our net sales or $1,500 a month which ever was greater on local store
marketing. In Item 19 of the March 2013 FDD, Papa Murphys International stated
Declaration of Alice Worthington
Exhibit 15 Worthington
that stated that the average annual sales for high, medium and low tiers stores were
$845,432 ($16,258 weekly), $527,386 ($10,142 weekly), and $351,858
($6,766weekly), respectively and that the system average was $574,858 ($11,054
Benchmark Costs chart which stated that of the benchmark stores the high, medium
and low tiers stores were spending five, six and seven percent on advertising and were
earning profits that were nineteen, twelve and a half and five percent of net store sales.
I believe Papa Murphys International also provided me with an April 2013 FDD and
that the sales numbers were roughly similar. We used the information provided by
Papa Murphys in the FDD to determine whether or not we wanted to invest in the
franchise.
8. We continued our research on the concept including in store visits with a number of
10
sites in Florida. We talked with the Gary Nychek at the Fort Myers store, Steve Pyatt
11
at Naples Store, Cole Kilen at Tampa Area Stores. We also had a former neighbor,
12
Les Pallas that had several Papa Murphys stores in Iowa. He was now retired, but
13
14
9. On April 29, 2013 in Florida, we signed our franchise agreement for our first store to
be located in Fort Myers, Florida. We sent a copy of our agreement to Papa Murphys
15
16
17
18
19
closed by the county. We incurred additional costs to remedy the issues and the
20
contractor was gone with no responses. We later found out he had taken money from
21
several other Papa Murphys franchisees without ever doing any work. He is now in
22
prison for his fraudulent activities. We have received no compensation from Papa
23
24
25
Exhibit 15 Worthington
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF HARRY OLSON
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Harry Olson, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am an officer of Hot Pizza, Inc. along
with my wife Terry Olson.
2. Previous to Papa Murphys I worked for Datacard Group for 23 years mostly as a
24
25
Project Manager. In this role, I managed card personalization projects for major
corporations that included Ford Motor Co, Lucent Technologies, AT&T and Intel
Exhibit B
Corporation. These were all multi-million dollar projects that lasted several years in
duration. As Project Manager, I was ultimately responsible for scope, budget (cost)
and schedule.
3. Unfortunately in 2009, like many other Americans, I was laid off due to the economy.
experience, I would have no problem finding a job. After 1 years of searching for a
job without success, I realized I had to select a different path.
4. After being a Papa Murphys customer for 15 years, I knew it was a great product and
had always seen the lobbies full of customers in Minneapolis. I had recently moved to
northeast Tennessee and was surprised to see that there were very few Papa Murphys
here. I decided that I needed to make things happen for myself and investigated
purchasing a Papa Murphys franchise.
10
5. In the Summer of 2010, I contacted Papa Murphys through their website. Papa
11
12
6. Shortly after I sent back my qualification report, Billy Rose, a Papa Murphys
13
14
franchise but I did not have the capital to start. Thats when Mr. Rose suggested that I
rollover my 401(k) of $256,000, using their partner, Directed Equity. Mr. Rose and
15
16
17
18
every other Papa Murphys employee I worked with during the sales process
practically insisted I use Directed Equity.
7. I had begun my due diligence by contacting owners when the local owner of the
Johnson City, TN location told me his store was for sale. Mr. Rose explained that it
would be more beneficial to purchase an existing store rather than build a new one, as
19
20
21
22
23
the existing store had already started building their customer base. Once I agreed, I
was turned over to Dave Yirkowsky, DFO from PMI.
8. I met with the operating partner of the Johnson City store, and he explained that he
had not done much to promote the business, and Billy Rose , an employee of Papa
Murphys International verified that was the case, and that with the proper marketing,
I would see at least $8500 a week in average weekly sales. Papa Murphys explained
24
25
that the low sales at the Johnson City store were the result of a disengaged owner and
the actual sales figures would be much higher with the right management. In the
Exhibit B
meantime, Billy Rose had me download the May 2010 FDD to see what the potential
revenue and investment would be. We went over the FDD via the phone and he
pointed out the average weekly sale potential and all of the support I would receive.
9. In Item six of the FDD, Papa Murphys International stated that stated that I would be
required to spend either five percent of net sales or $1,500 a month, whichever was
greater on local store marketing. In Item 19, Papa Murphys International stated that
the average annual sales for high, medium and low tiers stores were $818,955
6
7
8
9
10
might take me five to seven years to get to that number or that I would be required to
11
spend substantially more than the disclosed marketing expenditure to reach those
12
sales. In fact, Mr. Rose told me that all I would have to invest in marketing was
13
$1,500 a month. He again told me that I would see at least $8,500 a week in average
14
weekly sales.
11. I signed my franchise agreement on or around September 29, 2010 in Tennessee. I
15
16
17
case). We did not see any increase in sales over the previous year even after spending
18
19
estimated in our business plan. My average weekly sales would be even lower if I had
20
not succeeding in being awarded a contract to supply pizza to the local schools in July
21
201, almost three years after acquiring the business. We spend $1,500 plus in local
22
store marketing per month. We paid an initial franchise fee of $12,500 and invested
23
an additional $62,700 to open the store. Since the store opened, we have invested an
additional $10,000 in the store.
24
25
13. I personally run my store putting in over 60 hours a week. I always receive Triple A
scores on my QSC. My AOS (add on sales) percentage is one of the highest in the
Exhibit B
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF PHILIP WILSON
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Phillip Wilson, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am a member of Papas South, LLC,
together with my wife, Maria Ahn-Wilson.
2. I first learned about Papa Murphys International when I was at franchise trade
24
25
Declaration of Philip Wilson
Exhibit 17 Wilson
partner in a commercial real estate investment company and Marie owns a nonmedical senior care franchise.
3. I contacted Papa Murphys International in or about the spring of 2010. Billy Rose,
a Papa Murphys sales person called me shortly thereafter. It was a fairly simple
call. Mr. Rose discussed the territory and said that Papa Murphys International
was looking for a multi-unit operator that could build out up state South Carolina.
4. Later I received a follow up call from Jim Werling, another Papa Murphys
International sales person. I expressed some concern that I had never owned or
managed a restaurant before but he assured me that it was a simple concept with a
5. I asked Mr. Werling about the profitability of each store on an annual basis and Mr.
Werling told me that the average Papa Murphys store makes an annual return of
10
investment of about 20% so if the cost to open and run a store was $300,000 then I
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15
said nothing negative about the business model or mentioned any regional
16
variances in sales and I asked directly about those issues. Mr. Werling told me that
17
98% of all franchised stores stay open and that the 2% that close are due to people
18
retiring, relocating or just not being cut out for the industry.
7. Mr. Werling and I discussed average store sales extensively. Mr. Werling s told me
19
I needed to develop a break even analysis and business plan before Papa Murphys
20
International would approve my area developer agreement. Mr. Werling stated that
21
the average weekly sales were roughly $10,500 to $11,000 per week. Mr. Werling
22
told me that I could expect my sales to slightly lower than average and to base my
23
analysis on $8,500 to $9,000 in average weekly sales per unit. When I questioned
Mr. Werling about this lower amount in the spreadsheet he assured me that even
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low performing stores would realize a small profit. The pro forma provided by
Papa Murphys actually showed an actual break even of $5,246 per week in average
Declaration of Philip Wilson
Exhibit 17 Wilson
weekly sales and projected a range of sales including sales as high as $18,000
weekly.
Knoxville, Tennessee. At the time Hoersting said that he had two stores open and
he wasnt yet profitable but he expected to be in the near future. Mr. Stalker had
eight stores open and said he had a mixed bag but he had just fired his general
9. Papa Murphys International sent me an FDD. I can not recall the specific date but
I believe it was the May 2010. The May 2010 FDD stated that I would be required
to spend five percent on net sales on local store marketing. In Item 19, Papa
Murphys International stated that the average annual sales for high, medium and
10
low tiers stores were $818,955 ($15749 weekly), $517,871 ($9,959.06 weekly), and
11
$343,806 ($6,611 weekly), respectively and that the system average was $560,171
12
($10,772.52 weekly).
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14
10. Based on the statements made by Mr. Werling, the information in the FDD and the
historical information which was provided in the business plan template Papa
Murphys International provided to me, I developed a business plan. In my business
15
plan, I stated that I expected to achieve annual sales of $475,000 ($9,134 weekly)
16
for each store during year one of operations and that I expected to consistently grow
17
sales between seven and ten percent annual. Later in the business plan I presented a
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19
($6,315 weekly) to break even. I estimated that even at my lowest estimated sales I
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business plan I explicitly stated that I relied on sales information provided by Papa
23
Murphys International.
11. I submitted my business plan to Papa Murphys International on or about
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25
Declaration of Philip Wilson
Exhibit 17 Wilson
development fee which included the $25,000 for our first store and a deposit of
$5,000 for each additional store. I believe I signed the franchise agreement for my
first store, SC013 and possibly my second store SC014 at the same time.
13. We ultimately two additional stores, SC015 and SC016. We signed franchise
14. Every time we opened store we would spend roughly $35,000 in grand opening
advertising. During the grand opening period our average weekly sales were
10
15. Our first store (SC013), has average weekly sales of $5,800 roughly $3,000 a week
11
below what we estimated in our business plan. We paid an initial franchise fee of
12
$25,000 and invested an additional $220,000 to open the store. During the time the
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14
16. Our second store (SC014), had average weekly sales of $7,800 roughly $1,500 a
week below what we estimated in our business plan. We paid an initial franchise
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16
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fee of $25,000 and invested an additional $220,000 to open the store. During the
time the store was open, we invested an additional $74,964.61 in the store.
17. Our third store (SC015), had average weekly sales of $6,000 roughly $3,000 a week
below what we estimated in our business plan. We paid an initial franchise fee of
$25,000 and invested an additional $220,000 to open the store. During the time the
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21
week below what we estimated in our business plan. We paid an initial franchise
22
fee of $25,000 and invested an additional $220,000 to open the store, including the
23
Equipment lease. During the time the store was open, we invested an additional
$77,518.27 in the store
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25
Declaration of Philip Wilson
Exhibit 17 Wilson
19. Our stores never performed as well as we expected either based on our own
business plan and break even analysis or the average sales numbers in the FDD.
2
3
4
5
We certainly never saw the return on investment Mr. Werling told us to expect.
20. Since our stores opened we have spent seven to eight percent on local store
marketing. We followed Papa Murphys marketing plain without deviation and it
never produced any upside in sales. Our store employees have handed out
thousands of have one on us cards. We have sampled our pizzas in the stores and
delivered cooked pizzas to local businesses and sports teams. We have sponsored
trade shows. We joined the chamber of commerce and have attended many
networking events. We have taken our cooked pizzas to apartment complexes and
given the residents store coupons. We have also provided coupons to doctors
offices, daycares, hardware stores, schools and gyms. All of these local marketing
10
21. We had visits in 2013 and 2014 from Papa Murphys Corporate telling us they were
12
going to fix the southeast through their Action Plan and we never saw any
13
increase in sales or marketing dollars from corporate in our market. The only
14
marketing money came from our savings or outside income that was loaned to Papa
South.
15
22. We financed our first two stores using cash from our savings and the next two
16
stores by taking out loans for store equipment and paying the remaining costs with
17
savings. We have invested nearly 1.3 million dollars in opening and maintaining
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enormous stress on my relationship with my son who manages our stores but it also
was a factor in my separation from my wife.
23. I invested in Papa Murphys International based on the financial representations
made in the FDD and the business plan template and the information given to me
by Jim Werling. Had I know that actual average sales for new stores or stores in
our region was dramatically lower than the weekly sales numbers that I was
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Exhibit 17 Wilson
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF STANLEY TIMOTHY
) FORESTER
)
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19
Pursuant to the penalties for perjury in the State of Washington, I, Stanley T. Forester, hereby
20
21
22
23
declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am an officer of Z-Axis, Inc. along with
my friend Angela Buchanan.
2. I am a veteran of the United States Navy. After my military service , I worked for 15
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25
years in the semi-conductor industry. Through my hard work I was able to partially
retire in 2007 and pursue some business ventures. Angela and I have been friends
Declaration of Stanley Timothy Forester
Exhibit 18 Forester
since high school. After college Angela purchased her first subway franchise. She
has gone on to own a total of six subway franchisees as well as a owning and
3. In 2008, I joined Angela Buchanan as Vice President of Operations for her company.
I was responsible for sales, operations, compliance and profitability of all 5 (at the
time) Subway franchises with five manager employees reporting directly to me.
Under my supervision, the company enjoyed sales growth to $3 Million and increased
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7
8
9
profitability
4. In late 2009, Angela and I began to consider expanding our business and possibly
purchasing another franchise. We wanted to grow our business and we felt like our
market was already saturated with Subway. The Papa Murphys concept is very
similar to Subway. We felt like with Angelas 30 years of franchise experience and
10
my business experience and years in food service sales and profitability, we would be
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12
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14
profitable.
5. We contacted Papa Murphys through their website. We were asked to fill out a
qualification report in which we listed our net worth and our liquid assets. Shortly
thereafter we were contacted by Jim Werling, a Papa Murphys salesperson.
6. In the middle of May, we received an email with a link to download a copy of the May
15
2010 FDD. Angela and I carefully reviewed the FDD. In Item six of the FDD, Papa
16
Murphys International stated that I would be required to spend either five percent of
17
net sales or $1,500 a month, whichever was greater on local store marketing. In Item
18
19, Papa Murphys International stated that the average annual sales for high, medium
and low tiers stores were $818,955 ($15,749 weekly), $517,871 ($9,506 weekly), and
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20
$560,171($10,773 weekly). In Item 19, there was a company store chart which stated
21
that the high, medium and low tiers stores respectively spent five, ten or twelve
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7. We meet with Mr. Werling a few times before we decided to purchase our franchise.
At the time we met, Mr. Werling stressed that the average weekly sales in 2009 were
24
over $10,000. Mr. Werling did not state that those averages were affected by region
25
Declaration of Stanley Timothy Forester
Exhibit 18 Forester
or age of the store. Mr. Werling did not inform us that the average weekly sales for
new stores or stores in our region were much lower.
8. On April 22, Mr. Werling sent us several documents to assist us in our decision. One
document was an excel spread sheet called Pro forma. In the pro forma, the
estimated net sales were $650,000 or $12,500 weekly and the estimated net sales for
the second year were $715,000 or $13,750. The pro forma estimated that local store
marketing would be eight percent of net sales each year. The pro forma also estimated
that the store would generate $18,891 (roughly three percent of net sales) in profits the
first year and $67,226 (roughly nine percent of net sales) the second year. Mr.
Werling indicated that we should use these numbers for Papa Murphys to accept our
10
during that presentation, the presenter showed a power point slide which listed the
11
average store sales for early 2010. The slide stated that average weekly sales were
12
$10,365 and the benchmark survey said that that the average profits for stores was
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10. Angela and I funded our investment through a self directed 401k set up through
Directed Equity, which we were told was a Papa Murphys International approved
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Account, moved our money into that account and paid for everything with our own
17
cash. Mr. Werling introduced us to Steve Millard on in the fall of 2010. Mr. Millard
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sent a list of approved vendors for financing. Directed Equity was one and Tom
Anderson was the contact. Steve Millard encouraged us, with his 25+ years of
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believe we signed our franchise agreement at the same time. We paid Papa Murphys
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12. We opened our Papa Murphys store in December of 2010. We spent $185,000 to
build out our store. We had decent sales during our grand opening period but as soon
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as we stopped the grand opening advertising spending, our average weekly sales
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Declaration of Stanley Timothy Forester
Exhibit 18 Forester
Exhibit B
1
2
3
4
5
Howard E. Bundy
Caroline B. Fichter
Bundy Law Firm
5400 Carillon Point
Kirkland, WA 98033-7357
Telephone: 425-822-7888
Fax: 206-770-6130
bundy@bundylawfirm.com
fichter@bundylawfirm.com
6
7
14
vs.
15
16
Defendants
17
)
)
)
) Case No.: 14-2-00904-0
)
)
) DECLARATION OF MITCH BRINK
)
)
18
19
Pursuant to the penalties for perjury in the State of Washington, I, Mitch Brink hereby
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declare:
1. I am one of the Plaintiffs herein. I have personal knowledge of every fact stated
herein and am competent to testify thereto. I am an officer of Brink Holdings, Inc.
along with my wife Kristen.
2. Prior to opening a Papa Murphys store I worked as a network engineer. My wife,
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Kristen, has a degree in industrial engineering and had worked for IBM. Most
recently, she had been homeschooling our children.
Declaration of Mitch Brink
Exhibit 19 Brink
3. In February of 2012, we decided that the time was right for a change. Our children are
approaching college age and we believed that purchasing a franchise would give us
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3
4
5
some flexibility and that would grow over the next few years to provide a career for
Mitch and college funds for our children.
4. We considered a few different franchise options but ultimately decided to investigate
Papa Murphys. We regular customers of our local Papa Murphys franchise when we
lived in Illinois and we strongly believed in the product.
report on February 13, 2012. Shortly after I sent the qualification report in to Ms.
Stevens, I received an email from Billy Rose, a Papa Murphys International salesman.
6. In March of 2012, Kristen and I met with Billy Rose at a local Mooresville hotel. At
10
the meeting, Mr. Rose told me that the worst case scenario for store profits would be
11
$60,000 a year. I was concerned because that figure was lower than my current job. I
12
said so and Mr. Rose assured me that that was only what the worst of the worst
13
would do.
14
7. Shortly after that meeting Mr. Rose left the company and we met Mark Levis, another
Papa Murphys International salesman. When we were considering financing options
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because it was the company that all the franchisees used. We ultimately decided to
17
roll over the entirety of my IRA to fund our investment and Directed Equity helped us.
18
8. On April 3, 2012, Amy Stevens emailed us a link to the April 2012 FDD. We
reviewed the FDD carefully. In Item six of the FDD, Papa Murphys International
19
stated that stated that I would be required to spend either five percent of net sales or
20
$1,500 a month, whichever was greater on local store marketing. In Item 19, Papa
21
Murphys International stated that the average annual sales for high, medium and low
22
tiers stores were $828,296 ($15,929 weekly), $511,241 ($9,831.56 weekly), and
23
$338,829 ($6,515 weekly), respectively and that the system average was $559,495
($10,759 weekly). In Item 19, there was also a chart called Benchmark Costs. In this
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chart, Papa Murphys International disclosed significantly more information about the
financial performance of its franchises. In the Benchmark Costs chart, Kristen and I
Declaration of Mitch Brink
Exhibit 19 Brink
learned that the high, medium and low tier Benchmark stores were spending five, six,
and seven percent of net sales on advertising including a two percent contribution to
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3
4
5
the national Ad Fund. Papa Murphys International also stated that the average profits
for each tier of benchmark stores were 18, 12, and 3 percent of net sales.
9. Papa Murphys International sent us templates for a break even analysis and a business
plan. We used the financial performance representations provided by Papa Murphys
International to develop our business plan. On our business plan we conservatively
estimated that we would have average weekly sales of $8,285 a week ($430,820
annually) during our first year. I estimated that I would be able to pay myself a
$60,000 managers salary and that our store would have an annual net income of
$33,430. I shared this information with Mr. Levis. He told me that our numbers were
very conservative and we should have no problem hitting them.
10
10. During the due diligence process I contacted several Papa Murphys franchisees to
11
learn about their experiences. The owners were located all over the country. Had we
12
been aware that income was largely regional, we would have spoken to many more
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11. I did receive some negative feedback from Ann Callegan, a franchisee in Alabama and
Gordon Butler in Winston-Salem, North Carolina. At this point, Billy Rose had left
15
the company and we worked with Mark Levis, another Papa Murphys salesperson, to
16
complete our sale. I asked Mr. Levis about Mr. Butlers low sales and lack of
17
profitability, he responded that Mr. Butlers low sales were entirely a result of his poor
18
management.
12. On or about May 22, 2012 we signed our franchise agreement with Papa Murphys
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International. We paid the $25,000 franchise with funds from my personal savings
account.
13. In October of 2012, I quit my job with Lowes to go to work in my new store. Our
Mooresville, North Carolina store opened on December 22, 2012. In 2013, our
average weekly sales were $7,566 in 2014 they were $6,838, almost $1,000 lower. In
both years our average weekly sales were well below what we had estimated in our
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business plan.
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Declaration of Mitch Brink
Exhibit 19 Brink
14. Even worse, while our sales were well below what we had been led to expect, our
advertising costs were much higher. Since our store has been open we have spent
$20,612 in local store marketing not including our grand opening expenses. The
situation became even worse in the fall of 2014 when our local advertising cooperative
was created. As of January 2015, we are contributing five percent to our advertising
cooperative and still spending significant amount beyond that contribution on local
store marketing.
15. Despite Mr. Roses statement that $60,000 in annual profits was our worst case
scenario, we have never been able to take any money out of our store. In 2013, I was
able to take a salary of $15,000 for a years worth of work. My salary at Lowes had
10
hit our projected sales. Mr. Levis told us it would take six months. After 7 months,
11
we contacted Papa Murphys for some help. We were given the company mantra that
12
we needed to spend more on local store marketing and sampling. No one from Papa
13
Murphys International informed us that our sales were typical of our region and that
14
the sales figures we had seen in the FDD did not apply to our region.
17. We spend about ten percent of our net sales every month on local store marketing. We
15
do print media advertising, participate in the local welcome wagon, give pizza making
16
demonstrations to day camps and preschools and sponsor the local school sport
17
schedule. Had we been aware during the sales process that we would need to spend
18
more than the required local marketing amount in order to achieve sales which were
well below average, we definitely would not have purchased this franchise.
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18. Our franchise was financed with our PERSONAL retirement account, money we
20
saved over a lifetime. I left a corporate job to run this store, leaving a stable salary for
21
no salary. Rather than make money from owning our own business, we have paid
22
$375,000 to date out of our own pocket for this business. This is our retirement. We
23
have no extra money sitting around. We struggle with the decision about closing our
store each month.
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Declaration of Mitch Brink
Exhibit 19 Brink
Exhibit B