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Tuesday, May 30, 2023

Palmdale Pizza Chain Finds Franchise Woes

NOTE: Corrections to this story appear at the end. RedBrick Pizza Worldwide Inc., a casual dining concept offering pizza, salads and other fare, is facing about eight different lawsuits from franchisees who are charging the company with fraud, breach of contract and other infractions, according to documents filed with the state’s Department of Corporations. At least some of the lawsuits charge that the Palmdale-based company did not tell its franchisees about litigation it was involved in, disclosure that is required by law. But some of the franchisees are also accusing RedBrick of not providing the services that the company promised. RedBrick officials say it is the franchisees who did not live up to their agreements. It is not uncommon for franchisors and franchisees to tangle in court. But experts in franchise law note that the sheer number of lawsuits pending against RedBrick is unusually high for a small franchisor with about 65 locations. RedBrick, a relatively new franchise concept that opened in 2001, started to become ensnared in disputes with its franchisees almost from its beginning. One of the earliest lawsuits in 2001 charging the company with fraud, breach of contract and other infractions resulted in a $6 million jury award to the plaintiffs. That decision was later overturned and an appeal is pending. Since then, individual franchisees as well as area franchisees have come forward with similar charges. Most of those cases have since been referred to arbitration as required by the franchise agreement and are still awaiting resolutions. Last week, after waiting for several years, the franchisees for Los Angeles, Ventura and Orange counties demanded that the Superior Court of Los Angeles set a date for arbitration to begin. “They’ve kept us in limbo instead of agreeing to have the arbitration take place,” said James W. Denison, a Woodland Hills attorney who represents Jay Bharat Investment Inc., one of the franchisees suing RedBrick. “So we were in court trying to get a definitive date. It’s supposed to happen by November.” For the franchisees, the wait to resolve the cases has been particularly burdensome. Franchise agreements typically call for an initial investment and the payment of royalties by franchisees in exchange for the rights to open a business in a predetermined location in addition to a number of services, ranging from blueprints for a restaurant’s design, to equipment and training. RedBrick’s business model calls for the establishment of area franchisees, master developers who buy larger territories with the rights to resell franchises within those territories to individual franchisees. Those types of franchises are far more expensive. The cost, for instance, to Jay Bharat Developers Inc., master developers for the Los Angeles, Ventura and other Southern California counties, to secure its franchise rights was $600,000 and closer to $1 million when the full expense of setting up the business is considered, according to Denison. Bharat sold about 16 franchises, but when the company filed its lawsuit against RedBrick, the franchisor terminated its agreement, keeping the company from trying to recoup its investment by selling more franchises, Denison said. And because Bharat has had to wait several years without a resolution to its claims, it has not been able to sell as many franchises as it had expected to sell. Bharat’s lawsuit charges RedBrick with fraud and contends that the company did not reveal the litigation against it as required by franchise rules. The master developers “specifically asked Minidis, did you have any legal exposure?” Denison said. “And he said there’s none. It turns out there was a lot of litigation out there. From our perspective it wouldn’t have mattered if the allegations were false. He didn’t let us know about these problems.” RedBrick says that the franchisees did not live up to their agreements, and it has terminated the franchise agreements with several as a result. “We tried working with them and their ongoing violations continued,” said Lynn Minidis, who with husband Jim Minidis founded the RedBrick chain. “We went in front of a judge and he heard the preliminary injunction and in two of the master developers out of the four where the preliminary injunction (request) was heard, we prevailed,” she said. “The judge ruled that they were terminated and the territory can be resold.” Denison counters that the move by RedBrick to terminate the franchise agreements is a fairly common one. “After the fraud claim was filed, he came up with anything to say (my client) was in default,” Denison said. “That’s not the most uncommon thing for a franchisor to do.” RedBrick officials say that the lawsuits have not kept them from selling more franchises, both to individuals and to master developers. The company expects to add about 45 more locations in addition to the 66 currently operating in the next 12 months. And it has added master franchisees as well. “We currently have 15 master developers, and at the time they filed the lawsuit there were 16, so we’ve signed several more since then,” said Lynne Minidis. But the legal wrangling has kept Bharat from selling the number of franchises it initially expected to sell, according to Denison. “They were supposed to be selling more, but they were prevented from doing that,” Denison said. _________________________________________________________ CORRECTION The original story above, about RedBrick Pizza Worldwide Inc. (“Palmdale Pizza Chain Finds Franchise Woes,” April 30, 2007), contained several errors. There are currently four master developers that have filed lawsuits against RedBrick Pizza, not eight lawsuits as the earlier story reported. The other lawsuits referred to in the previous story were either previously settled or were never filed against the RedBrick organization. In particular, one lawsuit discussed in the story was brought by investors in a company called Caf & #233; Concepts, which was partly owned by James D. Minidis and Lynn Minidis. James Minidis and Lynn Minidis are now owners of RedBrick, but the lawsuit had nothing to do with the RedBrick franchise system. The story also referred to the plaintiffs in these lawsuits as area franchisees. They are master developers who buy larger territories and then resell individual franchises within those territories. RedBrick has asked the court for and received preliminary injunctions against two of the master developers. At the time of this writing, the company has not requested preliminary injunctions in the other two cases. The story did not reflect RedBrick’s point of view concerning the termination of the Jay Bharat master development contract. Leo A. Bautista, attorney at Lewis Brisbois Bisgaard & Smith LLP, who represents RedBrick, said Bharat was given one year to correct compliance problems and did not do so. A quote attributed to James W. Denison, attorney for one of the plaintiffs, Jay Bharat Development Inc., incorrectly described the reason the company has not sold as many franchises as it expected. Denison said RedBrick’s disclosure problems caused Bharat to wait one- and one-half years to be able to start selling franchises and now it is having to wait to resolve its claims.

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