RedBrick saga shows perils of franchising

June 13, 2007
If the road to success is paved with good intentions, then the road to a successful franchise operation is paved with legal filings.
Palmdale, Calif.-based RedBrick Pizza Worldwide Inc. is walking down such a road. Redbrick and its founder Jim Minidis are the subject of four lawsuits filed by disgruntled franchisees. Unfortunately, court battles between parent companies and franchisees are a common part of the business.
"If you look at a franchisor's Uniform Franchise Offering Circular and you don't see litigation, you are probably looking at a franchisor that is doing something wrong," said Chris Bright, founder of Fransmart, a Newport Beach, Calif.-based franchise-development company.
"The point being that sometimes you are likely to have challenging relationships," he said.
The UFOC is a legal document that franchisors must furnish to potential franchisees. The UFOC outlines details of the transaction and provides information about the history of the franchisor.
Ironically, failing to disclose previous litigation is the basis of pending litigation against Redbrick. According to James Denison, the attorney for former RedBrick master developer Jay Bharat Investment Inc., the company failed to disclose in its UFOC pending litigation against Minidis over a previous venture that could have bankrupted the company.
RedBrick's growth model involves selling territorial rights to master developers, who in turn recruit franchisees within those territories. According to Denison, RedBrick's failure to disclose the litigation delayed the company's certification by the California Department of Corporations, in turn hampering Bharat's ability to sell franchises.
"The production schedule had (Bharat) opening about 60 by now, and it didn't end up being anywhere near that," Denison said. "They were able to sell some franchises but not nearly as many as they would have wanted to."
Bharat is out the $600,000 fee it paid for the rights to sell RedBrick franchises in the Los Angeles and Ventura County, Calif., area, Denison said, along with about $400,000 it invested in its own RedBrick location.
An attorney representing RedBrick disputed Denison's version of events, saying that much of the delay with the California DOC was due to an overzealous state employee who was later terminated for her actions. Bharat faced only minimal delays in selling franchises, he said.
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"They were still marketing franchises during the time some of the registrations were being held up and as soon as it was done they sold a bunch of them" said RedBrick attorney Leo Bautista. "I don't believe there was any delay."
Company accused of stalling arbitration
Jim Minidis, a former 10-unit Little Caesars franchisee, founded RedBrick Pizza in 2000. The company offered gourmet pizzas baked in gas-fired, brick ovens — in three minutes — sold for $7 to $9.
Stores also sell 12 flavors of gelato made fresh daily in-house.
RedBrick's dining rooms include TVs at every booth and counter seats where guests can watch the preparation of their food in an open kitchen. Today, there more than 60 RedBrick Pizza restaurants in markets including Florida, Texas and Arizona.
Minidis has set a goal of growing RedBrick to 12,000 units by 2016.
According to Bautista, the suit filed by Bharat and others were part of an effort to wrestle control of the company from Minidiz.
"It became a power struggle between these three master developers from California and the RedBrick system on almost every issue," Bautista said.
RedBrick last year terminated the master-developer agreements with the four litigants. The suits have been sent to arbitration, according to the terms of the master-developer agreements.
Denison says that RedBrick is stalling efforts to settle the dispute though arbitration, a charge Bautista denies.  
Get it in writing
Unfortunately, lawsuits are likely to be a part of the franchise world.
As in any industry, there are unsavory characters in franchising who make false claims, Bright said.
But, RedBrick could have avoided many of its current problems by disclosing the litigation in its offering circular. Disclosing all pertinent information is key to staying out of litigation or protecting oneself in the event of litigation, Bright said.
"If a franchisee is not doing the right thing and is hurting the brand, then there should be some sort of enforcement associated with your brand that allows the 99 percent of the franchisees to maintain a good quality brand," he said. "You need to make sure that one or two percent isn't damaging the brand for the rest of them."
All of Fransmart's salespeople are given a UFOC test to make sure they understand what they are selling, and everything they communicate has to be disclosed in the UFOC, he said.
Fransmart also requires clients to sign a document certifying that what clients have been told is spelled out in the offering circular.
"We know attorneys love using props and exhibits," Bright said. "If you have a franchisee who comes at you and says he was induced to come into this organization because he was told this, this and this, and it was not part of the UFOC, you are going to see a huge blowup of that questionnaire."
The legal battles have taken their toll on the company, Bautista said. However, RedBrick has continued to recruit master developers and existing master developers have purchased additional territories.
RedBrick plans to reach the 100-store milestone within the next year, according to the company.

Topics: Financial Management , Operations Management

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