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Dec. judge's ruling against Shakey's Chin-Yong bodes negatively for beleaguered pizza chain

Last month's court ruling against Shakey's chairman leaves the chain's franchisees confident they'll win their March fraud and negligence trial against the pizza franchisor.

January 8, 2004

A Dec. 12 judge's ruling against the chairman of Shakey's, Inc., has left franchisees of the 61-store chain confident they'll win an upcoming fraud and negligence trial against the Garden Grove, Calif.-based pizza franchisor.

Chairman Chin-Yong Wongand Shakey's Inc. are defendants in a class-action suit filed by franchisees on Dec. 30, 2002. Chin-Yong is charged with fraud and negligent misrepresentation, whileShakey's Inc. is charged with breach of contract, accounting fraud, negligent misrepresentation and breach of the covenant of good faith and fair dealing.

Franchisees are seeking $20 million in damages (about $ 1 million per restaurant represented) in the March 21 trial.

According to representatives of the franchisee plaintiffs, the judge's denial of the request is a strong sign that Chin-Yong, also the managing director of Inno-Pacific Holdings, Shakey's Inc.'s Singapore-based owner, will lose his case.

"For the judge to grant the motion, he would have had to rule that Chin-Yong had a reasonable chance to succeed in defending against the fraud claim," said John McNulty, president of the Shakey's Franchised Dealers Association (SFDA). "But what the judge said, basically, is that the litigants have a likely chance to succeed in the fraud claim. That was really, really huge for them."

Chin-Yong's attorney, Jayesh Patel, was disappointed by the ruling, but said he respected the decision.

"We understood the basis of the judge's determination, and while we may disagree with his views on the issue, we respect his analysis and conclusion," Patel said in an e-mail.

According to Chuck Wilburn, a one-unit Shakey's franchisee, and spokesperson for the 39 co-litigants in the suit, Chin-Yong is being sued in addition to Shakey's because he misled the group during attempts to renegotiate multiple franchisee contracts in 2002. Chin-Yong, he said, attempted to talk to individual franchisees rather than negotiate contract renewals through the SFDA, which is a violation of Shakey's standard practices.

"He wanted us to believe he was negotiating in good faith, but he had no intention to negotiate with us at all," said Wilburn.

When franchisees refused to sign the contracts proposed by Chin-Yong, Shakey's threatened to terminate their franchise licenses.

Three weeks later, the franchisees filed the current class-action lawsuit.

What's to be gained?

According to Wilburn, legal maneuvers by Chin-Yong's and Shakey's lawyers only are attempts to divert attention from the merits of the case.

"They're just throwing the office furniture at us at this point," said Wilburn. "The facts speak for themselves, and I honestly feel 100-percent confident we'll prevail in this lawsuit."

But even if franchisees win, Wilburn said he's not certain Shakey's "is able to satisfy a judgment" in the suit.

Since its 1989 sale to Inno-Pacific, the Shakey's system has crumbled to a fraction of a company that was 450-units strong in the late 1970s.

The Singapore firm has appointed and fired 13 presidents at Shakey's; Sonja Barajas-Najera, its current chief operating officer and executive vice president, has no previous experience running a restaurant chain.

Services to franchisees are virtually non-existent, McNulty said, and Shakey's office and field management teams have been reduced to a handful of people over the past year. Additionally, its Uniform Franchise Offering Circular (UFOC) has not been renewed since 2001.

Shakey's Inc. owns only one corporate store, and other than franchise royalties, the company generates no revenue. Royalties from its largest franchisee, Jacmar Co., will likely evaporate in 2005 when the company allows franchise agreements on its 19 units to expire. Jacmar's departure alone, McNulty said, could devastate the Shakey's system.

Should Shakey's lose the March trial, McNulty predicts the company's ability to compensate franchisees is limited. Regardless, Wilburn said, the franchisees have a point to prove.

"We're on our way to a trial in March; this is long overdue," he said.

See related Shakey's stories ...
* Judge rules for Shakey's Pizza franchisees in bond hearing
* Barajas-Najera appointed EVP, COO at embattled Shakey's
* Shakey's Singapore parent selling stock to fund operations
* Money woes, legal battles signal crisis for parent of Shakey's pizza chain
* Franchisees of Shakey's pizza chain sue corporation for $20 million
* Shakey's pizza franchisees cry foul over 'sign or cease' deadline