Class Action against Shakey's Raises Disclosure Issues. This article in pizzamarketplace.com reports that the December 2002 class action lawsuit against Shakey's has raised claims regarding the pizza shop franchisor's disclosures to its franchisees. According to court documents, in October 2002, a California franchise examiner rejected Shakey's renewal request based on its questionable financials. The examiner required Shakey's to enter into California's impound procedure to place a prospective franchisee's franchise fee in escrow until the franchisor completed its obligations under the franchise agreement. Shakey's asked the examiner to reconsider. The examiner denied the request. After this exchange, Shakey's did not satisfy the impound requirements but continued to negotiate renewal terms with its franchisees.
Shakey's counsel stated that it was not illegal for Shakey's to continue to negotiate the renewals of franchise agreements with an outdated UFOC. The franchisees claim that Shakey's expressly stated that it had applied for renewal in California and that it would soon be granted; this misrepresentation (and Shakey's failure to disclose its financial condition), according to the franchisees, was deliberate and material to the franchisee's decisions to renew their Shakey's franchise agreements. The class action brought by 39 franchisees is pending in state court in California.
Posted by franchiselawblog at February 2, 2004 03:27 PM