Franchisees of Shakey's pizza chain sue corporation for $20 million

Sept. 23, 2003

Seventeen franchisees of the 61-store Shakey's pizza chain filed a lawsuit against its Garden Grove, Calif. parent company, Shakey's Inc., in Los Angeles Superior Court on Dec. 30.

Among the most serious charges in the seven-count complaint, franchisees accuse Shakey's Inc. of breach of contract, accounting fraud, negligent misrepresentation and breach of the covenant of good faith and fair dealing.

When contacted via e-mail on Dec. 30, Chin-Yong Wong, interim chairman and chief operating officer for Shakey's Inc., said he was unaware of the lawsuit but wrote simply, "The proper forum for any lawsuit is the Court."

Mike Grace, an attorney representing the franchisees said on Dec. 31 no one was available at Shakey's headquarters to receive the suit.

Additionally, a Shakey's lawyer has not responded to Grace's written inquiry about receiving the suit.

"The franchise dealers have contacted Shakey's Inc. to see if there are any people to receive service of process there, and all they have gotten is phones that keep on ringing," said Grace, an attorney with Grace & Grace, LLP, a Los Angeles intellectual property and franchise law firm. "We'll proceed to service the summons in the way provided by the code of civil procedure. ... The bottom line, as far as Shakey's goes, is that it looks like there's nobody home."

Plaintiffs are seeking estimated damages of $20 million -- about $1 million per restaurant per plaintiff. They also are seeking unspecified punitive damages against a company they claim has sent their royalty payments to its foundering parent corporation, Inno-Pacific Holdings, in Singapore.

"We know that the majority of our royalties are being shipped out of the country to shore up a struggling company," said Chuck Wilburn, a one-store franchisee in Redlands, Calif. "Inno-Pac has stripped Shakey's like an old junk car until nothing is left but the frame, and now they're going to ship it out for scrap."

No reply at all

In August, as the Shakey's Franchised Dealers Association (SFDA) prepared to renegotiate its franchise contract with Shakey's Inc., Wilburn was appointed lead representative for the franchisees.

He said negotiations were proceeding favorably until the SFDA learned Chin-Yong was attempting to negotiate new contracts individually with franchisees. By not negotiating through the SFDA, said Wilburn, Chin-Yong was in violation of Shakey's contract.

Discussions broke off and attempts by the SFDA to resume talks were ignored for weeks.

"They flat refused to answer our letters, e-mails or calls," said Wilburn. "That's typical of how they handle things."

Though the two groups did agree to resume talks on Nov. 4, just days before, Shakey's Inc. cancelled the meeting without explanation. Wilburn, SFDA president John McNulty and Grace all said they attempted to contact Chin-Yong, his U.S. advisor Bruce Thompsen and Sonia Barajas-Najera (a Shakey's official) on multiple occasions, but received no replies.

On Dec. 6, Wilburn said 17 Shakey's franchisees, whose contracts currently are up for renewal, were shocked when they received a one-page letter informing them to sign a 20-year renewal by Dec. 16 or cease operations.

"We've nicknamed that 'The Saturday Night Massacre,' " Wilburn said. "The letter was dated Nov. 23, and they were telling us that we had less than a month to sign or drop dead."

According to McNulty and Wilburn, not only did Shakey's violate its contract by not providing franchisees a 180-day signing period, the document the company wanted franchisees to sign was not the approved and current contract.

A key franchisee provision missing from the document was a 1993 amendment called the Beldo Agreement. The amendment provided franchisees equal voting power with the corporation on the use of its advertising funds. The amendment was added to the contract following a court battle between Shakey's and the SFDA.

According to Wilburn, an emergency meeting of franchisees was called for Dec. 20 in Baldwin Park, Calif. There the group committed to proceed with a class action suit against Shakey's Inc., and to build a collective legal fund. (Wilburn declined to share the size of the fund.)

"That meeting was the largest group of franchisees I've seen since our 2001 convention," Wilburn said. "The resolve of the group to see this through -- to see that the abuse by this company comes to an end -- is tremendous. We want a jury trial and we'll settle for nothing less."

Through the system

Grace is no stranger to Shakey's lawsuits, having negotiated the Beldo Agreement for the SFDA and representing McNulty and Mick Clark (a five-store Shakey's franchisee) in a separate breach of contract suit against Shakey's in June. That case went to trial and ended in a sealed settlement, which McNulty said currently is not being fully honored by Shakey's Inc. (Though both men and their businesses are not part of this most recent action, their settlements do not restrict them from further action against Shakey's Inc.)

"We know that the majority of our royalties are being shipped out of the country to shore up a struggling company. Inno-Pac has stripped Shakey's like an old junk car until nothing is left but the frame, and now they're going to ship it out for scrap."

Chuck Wilburn
Shakey's franchisee

Grace blamed Shakey's current state of decline on an "egregious case of franchisor abandonment of a system." He said he has rarely seen the company deliver on its promises to reinvest in the system, and that franchisee numbers have dwindled as a result.

When he first represented the SFDA in 1992, there were about 130 franchisees in the system; 68 of those participated in the lawsuit that led to the Beldo Agreement.

"Today, they have fewer franchisees than the number of litigating franchisees there were 10 years ago," he said. "It still had the trappings of a national system back in those days. But now they really just have a stump of a system with all those restaurants being located in California." (A handful of Shakey's stores are located outside of California.)

Grace said the remaining franchisees want to save the system and the company, but they believe Shakey's Inc. won't help toward that end. In fact, he said they don't believe it's able to help itself, much less its franchisees.

"As far as the financial condition of Shakey's, we don't know. All we know for certain is that financial disclosures that have been made in past to dealers have been false and misleading," Grace said. "We've asked them to provide us with their current financial statements, but they've refused to do that. We've asked where the money is going, but we're not getting any answers."

The case will first go to court for what Grace called a "status conference" in 90 to 120 days. At that time a trial date will likely be assigned for November or December of 2003.

The court will meet franchisee demands for a jury trial, Grace said, which, Wilburn added, is what the group truly longs for.

"I know that Shakey's is going to come out like they're going to kill us in court, but the resolve of this group is so incredible that I know that's not going to happen," said Wilburn. "The group is determined to see this thing to the end regardless of the financial implications."

Topics: Financial Management , Shakey's

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