Papa Murphy's sued by franchisees

Local company accused of failing to disclose accurate information

By Cami Joner, Columbian retail & real estate reporter

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A group of Papa Murphy's take-and-bake pizza franchise owners this month filed a lawsuit against the Vancouver-based parent company in Clark County Superior Court.

In the 11-count complaint, more than 20 franchisees accuse Papa Murphy's International of failing to disclose accurate information about the financial performance of stores located in Southern and Southeastern states and of collecting more than the contracted amount for advertising. The franchise owners, who together represent more than 60 of the company's 1,400 stores, also said they were not told that they would need to spend more on advertising in order to achieve sales comparable to stores located in the Pacific Northwest and other parts of the country, said Howard Bundy, a Kirkland attorney representing the franchisees.

When contacted via e-mail on Tuesday, a spokeswoman for Papa Murphy's International, said the company has not seen the lawsuit.

"At this point, the company has not received or seen a copy of the lawsuit filing and, therefore, cannot comment on its contents at this time," said the written statement issued by Jessica Liddell, a senior vice president with the Norwalk, Conn.-based public relations firm, ICR.

Papa Murphy's International, which is headquartered near Westfield Vancouver mall, last month filed an initial public stock offering with the U.S. Securities and Exchange Commission to raise up to $70 million. The company is still in its "quiet period"and is limited as to the amount of information it or related parties can release to the public.

The number of shares to be offered and the price range for the proposed offering have not yet been determined. The company has applied for the ticker symbol "FRSH" on the NASDAQ, according to the filing.

Bundy called the lawsuit's timing, less than one month after the company's SEC filing, coincidental. The plaintiffs are seeking estimated damages of $23 million — about $1 million per plaintiff.

"The whole purpose is to try to get these investors made whole. They invested their life savings, and in many cases their retirement funds, in something that has not worked out for them," Bundy said. "Our goal is to make them whole."

At least nine of the plaintiffs are listed as Texas-based companies. Others are based in Missouri, Georgia, Florida, Louisiana and Tennessee, warm climates where the company's bake-at-home pizza concept can be a tougher sell.

The lawsuit claims Papa Murphy's "misrepresented and omitted material facts related to the financial performance of its franchises and required advertising 'contributions'?" in disclosure documents, a violation of federal law under the Federal Trade Commission. It also would violate Washington's Franchise Investment Protection Act, Bundy said. Under the law, franchisors cannot make any untrue statement of fact about the franchise.

"If you tell me something about the franchise, then you have to tell me the whole truth about whatever it is," Bundy said.

He said he first notified the company of the group's plan to sue in January, originally with a group representing 29 stores. The group has since grown to more than 20 plaintiffs representing more than 60 stores, Bundy said. He filed the lawsuit on April 4, and expects a formal response within the next 30 to 60 days.

Suit names individuals

The legal action names Papa Murphy's International and various other entities, including majority owner Lee Equity LLC. Company officers and employees are also named in the suit, specifically those who were directly involved in the franchise sales process, including the creation and approval of the relevant franchise disclosure documents and agreements.

The lawsuit asserts that the officers and employees involved in Papa Murphy's franchise sales and development knew the financial performance represented in the Franchise Disclosure Document did not typify those of the franchisees' regions. It also claimed company officials knew they were mischaracterizing store performance in those regions.

Some of the Papa Murphy's franchisees also alleged that although their agreement requires store owners to contribute a minimum of 5 percent of gross revenue to an advertising pool, franchisees were in reality required to pay sometimes up to twice as much to support additional marketing.

"It varied anywhere from 5 to 6 percent all the way up to (between) 9 and 10 percent over time," Bundy said.

Losing money

Among the top pizza chains, Papa Murphy's ranks in fifth place in both sales and number of outlets, according to its SEC filing. The company's filing also reveals that while Papa Murphy's was adding new cost-competitive products and franchisees over the last three years, it was losing money. As it fought for market share in the highly competitive fast-food industry, Papa Murphy's lost $2.6 million on total revenues of $80.5 million in 2013. It lost $2.1 million in 2012 and $606,000 in 2011.

The company's challenges include a lack of national recognition and unsettled relations with some franchisees, as outlined by a Sept. 20 letter to the company from franchisees representing 820 stores.

The letter, obtained by The Columbian, raised issues ranging from poor communication between management and franchisees to faltering profitability at franchise stores; a sense that Papa Murphy's was shifting its focus from quality to low-cost offerings; and questions about the company's strategy to pull off a successful public offering. The tactics, the letter asserted, included buying some of its most profitable franchises for conversion into company-owned stores.

As of Dec. 30, the chain had 1,418 stores systemwide — 1,349 franchise stores and 69 stores owned by the company. According to Papa Murphy's SEC filing, Lee Equity Partners owns 65 percent of the outstanding capital stock in the company. The New York-based company purchased those shares from majority owner Charlesbank Capital Partners for an undisclosed price in 2010.