Franchisees claim South Beach's concept and trade names were part of the "system" they had purchased. But according to the lawsuit, the company didn't develop a system, possess a proprietary line of products or establish trademarks or commercial symbols.
Donald Boroian, founder, CEO and Chief Financial Officer of Francorp Inc., is facing a jury trial set for October 2008. The lawsuit, filed in Florida state court by five franchisees of one of Francorp's clients, South Beach Franchising, accuses Boroian and his firm, plus the franchise company and its owner, of fraud, negligent misrepresentation and concealment of information, conspiracy and breach of contract. In their latest complaint, the franchisees' attorney has added other allegations, including the unauthorized practice of law.
In summarizing the crux of the litigation, Robert Einhorn of Zarco, Einhorn, Salkowski and Brito law firm said, "Don Boroian and his company completely stepped out of the role of being franchise consultants and became his client's partner, her joint venturer and her legal counsel. They actively participated in a scheme to defraud my clients."
Einhorn represents the franchisees who purchased master franchises from South Beach Franchising, granting them the exclusive rights to sell franchises in geographic areas. Francorp, headquartered in Olympia Fields, Illinois, developed the franchise for a friend and business associate of Boroian's who he's known for 30 years. The lawsuit alleges that he and his client induced people to buy into the system based on misrepresentations they gave about the company and its owner's background.
Francorp's history with South Beach
Carol Brothers' relationship with Francorp first started in 1978, when she brought her first concept, Pop-In-Maid Service, to the company to establish a franchise program. But the franchise ended in bankruptcy approximately six years after its formation. Throughout the years, her relationship with Francorp continued on various endeavors, which included her being a commissioned representative who sent the firm clients.
Brothers brought her two South Beach concepts to Francorp in 2003. The "South Beach Naturals" program consisted of the sale of health and lifestyle products, and "South Beach Wellness" concept included spa locations for medically supervised treatments. Brothers signed up for Francorp's full franchise development program in 2005. She had a special arrangement with the firm which outlined 20 items of services they were to provide. The program would "create a comprehensive franchise program, launch a marketing and sales campaign and effectively recruit, train and service franchisees." In addition, they would give an on-site analysis of the business, and provide one-year consulting with Francorp's staff.
Although she had her UFOC drawn up by a reputable, seasoned franchise attorney, the UFOC was considered unacceptable by Boroian and new documents were drafted by his in-house attorney Jill Price, Francorp's vice president and general counsel. After completion of the new documents, Brothers was required to submit the UFOC to her personal attorney for review, and see that the documents were registered as required. The UFOC was never registered.
According to the complaint, although Francorp charged Brothers $90,000 for the franchise program, it did not require her company to make compensation for the services it rendered. Instead her contract stated, "Payments will begin upon sale of master franchises."
Alleged misrepresentations and omissions
Franchisees claim the South Beach's concept and trade names were part of the "system" they had purchased. But according to the lawsuit, the franchise company never developed a system nor possessed any proprietary line of products, and it didn't establish trademarks or commercial symbols. After they had executed their franchise agreements, company officials told them they could no longer use the South Beach name. The company informed them that the new official name was "AdaptoGenetics."
South Beach was obligated by the FTC rule to disclose the business experience of all executive officers. But franchisees allege the information they were given on Brothers' background was false, incomplete and misleading. Although the bankruptcy of her Pop-In-Maid Service did not have to be reported according to UFOC guidelines, the plaintiffs believed they should have been told. Einhorn stated, "Our point is that Don Boroian knew all about Carol Brothers' past. The disclosure that does exist in the UFOC is not accurate in terms of her background for a number of years."
Unauthorized practice of law alleged
In drafting and delivering the legal documents to Brothers and South Beach Franchising which the franchisees relied on to make their decision to purchase a franchise, Francorp engaged in the practice of law, according to the amended complaint. It also claims that Francorp counseled Brothers and her company on various legal matters that related to the legal and corporate structure of the company, its operations, as well as its disclosure documents.
"Neither Francorp nor Boroian is admitted to practice law in any jurisdiction. Francorp and Boroian's engagement in the practice of law is, therefore, unauthorized, illegal, and deceptive," states Einhorn's latest complaint. Since Francorp knew the franchisees would rely on the documents it prepared, their conduct "formed a material part of the scheme to deceive and mislead the plaintiffs," the complaint states.
Boroian testimony
In depositions, Boroian gave testimony under oath regarding allegations in the South Beach lawsuit. In explaining the structure of his franchise consulting business, he said Francorp has 60 employees and is the world's largest franchise consulting firm, doing 120 projects a year.
Although Francorp offers a variety of services or "proposals" to clients wanting to franchise their business, he said the majority only ask them to prepare their "documents," and do not want any type of analysis of their company. He said the analysis is not part of their full development program.
When asked what is necessary to start a franchise system, he answered, "An offering circular," and later added that a d/b/a or assumed name or a registered trademark is also needed. He said companies do not need a "system" in place, although his firm can assist in that process. But when he testified in another case against a franchisor, Oil Express, on the same issue, he testified that their system was flawed. (A lawsuit the Zarco firm handled for the franchisees.) "...they sold the franchise, built the buildings and the franchisees were pretty much left to flounder." Boroian stated that the lack of a system is an underlying problem, but not the basis for a lawsuit. Asked later, he said, "I wouldn't sell franchises unless I had a system in place."
In answer to whether there is any minimum capitalization necessary to start a franchise, Boroian answered, "No." He explained, "Typically, the capital to support the system comes out of the fees that they obtain in selling franchises. It's a self-funding proposition."
At his deposition, Einhorn also showed Boroian an article he had written for Inc. magazine. Boroian wrote: "There are three basic elements to begin a franchise. One, the name, you will allow someone the use of your name or trademark; two, the system, you require them to operate their business using your prescribed system; and three, payment of a fee, in return for the use of the name and system of the operation, they pay you a fee or royalty."
Einhorn asked him if he agrees that those are the three basics of being a franchise. Boroian answered, "I agree that those are the legal requirements that require you to register as a franchisor. But in terms of do you have to have all three of these to be a franchise, no."
Einhorn said in an interview, "Good franchisors do have sufficient resources to support their franchisees. It's improper and probably illegal to start a franchise system with zero dollars, but yet represent to franchisees and the marketplace that you have the ability to support their opening and their operations."
Telephone calls to Carl F. Schoeppl, Schoeppl & Burk, attorney for Boroian, Francorp, South Beach Franchising and Carol Brothers were not returned.
