If you’re a franchisee, then you should be able to expect the franchisor’s pricing to have some rhyme or reason. You undoubtedly expect there to be some sensible formula, and you certainly don’t expect the franchisor’s mark-up on goods to be so unreasonably high that buying them puts you out of business.
That is the claim against a coffee company in Denver. Three former franchisees have sued Dazbog Coffee Co., claiming the franchisor unfairly profited through “systematic and fraudulent overcharging” of franchisees. The lawsuit went so far as to accuse the franchisor of civil theft and racketeering.
One of the franchisees — JavaGen LLC — presented its case to an arbitrator, who found that the claims of civil theft, racketeering and fraud couldn’t be substantiated, but that an implied covenant of fair dealing and good faith had been breached by the franchisor.
According to the arbitrator, Dazbog’s unreasonable, arbitrary and random pricing of goods sold to franchisees “significantly contributed to the numerous failures” of the businesses. It was noted that franchisees could have purchased goods directly from suppliers at much lower prices.
To illustrate the randomness of pricing, the arbitrator noted Dazbog’s sale of tea filters, marked up 41 percent, and cold cups, marked up 68 percent.
While no damages were awarded to either party, the franchise agreement was declared null and void; the franchisee was allowed to keep the leased premises; and the franchisor was told to buy back its branded property at the location.
After the arbitrator’s decision, the other two franchisees reached settlements with Dazbog.
However, a fourth franchisee has brought a similar suit against the company.
For more on combating fraud, misrepresentation and breach of agreements in franchising, please see Garner, Ginsburg & Johnsen’s breach of contract overview. If you want to reach out to our team of expert franchise lawyers, contact us today!