- WHITE PAPERS
On Dec. 6, 2002, 17 franchisees of the Shakey's pizza chain received a one-page letter with simple, frank instructions: Declare your intent to continue operating as a franchisee by signing and returning the enclosed 20-year extension to your contract by Dec. 16. Choosing not to sign will terminate your right to operate as a Shakey's dealer.
According to franchisees, the Garden Grove, Calif.-based corporation's demands are illegal. Not only do they run counter to provisions in its present uniform franchise offering circular (UFOC), but to California law.
The current contract, written in 1980, allows franchisees a 180-day notification period in which to consider signing a contract renewal or extension. California franchise law provides 120 days.
Shakey's December letter provides neither, according to John McNulty, president of the Shakey's Franchised Dealers Association (SFDA).
"They're giving our franchisees as little as seven days to sign an extension -- literally a one-page deal -- or leave the system," said McNulty, a franchisee in El Monte, Calif. "They are in violation of Federal Trade Commission law, California law and the contract itself."
Shakey's Inc., however, views the deadline differently. Many of the franchisees, whose contracts are up for renewal, are operating on one-year extensions -- in some cases multiple one-year extensions. According to a company representative who would not speak on the record, those extensions are proof of Shakey's long-term patience with franchisees. The time has arrived to sign up or sign off, the source said.
Attempts to speak directly with current Shakey's interim chairman and CEO Chin-Yong Wong were unsuccessful, though Chin-Yong did respond through the company's legal counsel.
"My client believes that proper notice has been given to franchisees," said Anthony Marks, an attorney for Jenkens and Gilchrist in Los Angeles.
Shakey's did give franchisees more time when it recently extended -- but without explanation -- the Dec. 16 deadline to Dec. 31. According to McNulty and other franchisees who declined to comment on the record, the two extra weeks did nothing to boost their confidence in a franchisor they claim has established a long history of bad faith dealing.
"The real problem is that this is an un-negotiated contract," said McNulty, referring to an amended UFOC rejected by franchisees on Oct. 22 (See "Shakey's franchisees to reject amended contract"). "And what will likely happen is these franchisees will sign it anyway because they've got their whole lives wrapped up into their businesses. You can't just walk away from something like that even when it's not a good situation."
Too little information
According to franchisees, Shakey's current contract on the table is incomplete. Though requested multiple times by the SFDA, McNulty said Shakey's has refused to provide an updated financial statement since June 11, 2001, though its contract requires the company to do so every six months.
The current offer also is missing changes made in favor of franchisees -- sometimes in court -- over the last 22 years. According to McNulty, provisions such as the SFDA's right to equal decision-making power over the chain's National Advertising Fund have disappeared from the document since contract negotiations broke off last summer.
According to Chuck Wilburn, a one-store Shakey's franchisee in Redlands, Calif., and the SFDA's lead contract negotiator, phone calls, faxes and letters, requests for greater disclosure from the company have been ignored.
"We've asked for more information that our contract allows us to have, but we've gotten no response," Wilburn said in a recent interview. "How can you make a decision to sign with a company like that? We need to know whether we're going to be signing a contract with (a company) that might not be there in a few years, or one that may be in bankruptcy receivership."
Susan Kezios, president of the Chicago-based American Franchisee Association, called Shakey's Inc.'s withholding of information a classic case of a franchisor "hiding the ball."
"Not disclosing to a current franchisee what has already been settled as operational policy in the UFOC is dealing in bad faith," said Kezios, whose organization represents about 30,000 U.S. franchisees. "And what's crazy about this is that franchisors do more of this all the time and even seem to take great pleasure in it."
According to Kezios, Wilburn's doubts about Shakey's future reflect a common scenario endured by franchisees.
"In that situation, your contract is literally a moving target," she said. "You can sign a 20-year contract, go home and go to bed that night, and then wake up the next day and have to change something."
Speaking through its counsel, Shakey's denied it is hiding anything from franchisees by not providing updated information with its UFOC.
"Shakey's is not required to update its offering circular because it's not offering franchises at this time," said attorney Marks, reading from a prepared statement. "The fact is that Shakey's is presently renewing its registration in the State of California."
McNulty said that's hard to understand when Shakey's has claimed continually it wants to build the system.
"The problem with so many contracts is that they say the franchisee shall do this, and the franchisee shall do that. But then they say the franchisor may do this, and may do that. It's a different standard."
"Technically they are right in saying that ... but it doesn't change the fact that they continue to deal in bad faith," he said. "And how can franchisees believe they want to build the company, like they say they want to, when they're not selling franchises?"
Not much leverage
Other than suing franchisors, Kezios said franchisees have little leverage for changing a bad situation. But even if a franchisee wins a lawsuit, the cost of litigation and time away from his business often negate the victory.
"You don't buy a franchise with the expectation you're going to be arguing and litigating with the franchisor," she said. "You buy in with the expectation you're going to be making a living for yourself."
But couldn't franchisees refuse to pay royalties to a franchisor that fails to provide information and essential services promised in the UFOC?
McNulty admits such a move would get the franchisor's attention, but only to the detriment of the franchisee. Paying royalties, he said, is both the "legal thing to do and the right thing to do." Not paying them, he added, is a federal offense not commonly tolerated in the courts.
Kezios called suspension of royalty payments "the kiss of death" because it gives a franchisor permission to terminate a franchisee immediately. Echoing McNulty's remarks, she also said the government typically sides with franchisors in such cases.
"They're reading the contract, and it says you're supposed to pay the franchisor, case closed," she said. "The problem with so many contracts is that they say the franchisee shall do this, and the franchisee shall do that. But then they say the franchisor may do this, and may do that. It's a different standard."
Despite the challenges and court precedence, Wilburn said franchisees have told him they're not beyond taking Shakey's Inc. to court to settle their grievances.
He pointed to last summer's breach of contract settlement won by co-plaintiffs (See "Lawsuits settled between Shakey's and two franchisees") McNulty and Mick Clark (owner of five-store franchisee, Sterling Foods) against Shakey's Inc. Others could follow, he said, if the situation doesn't change soon.
"Just because McNulty and Clark have settled doesn't mean that the same transgressions have gone away for the rest of us," Wilburn said. "Any of us could bring a suit for breach of contract against them or as a group."