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Pizza Express stores changing name amid court battle: New Hot Box Pizza poised to expand into Fishers

August 28, 2006

Locked in a court battle with its Bloomington affiliate, the company that runs Pizza Express stores locally is renaming them and expanding into Fishers.

Indianapolis-based Pizza Head LLC has renamed Pizza Express stores downtown and in Broad Ripple as Hot Box Pizza.

Menu boards and store interiors have been revamped. Meanwhile, Pizza Head is negotiating a lease for a Fishers location, said Gabe Connell, one of three partners in the firm.

Exterior sign changes at existing stores were almost complete.

"I believe the [downtown] store will be changed this week," David Klinestiver of Lewis & Kappes, the law firm representing Pizza Head, said on Aug. 22.

"We realized that the relationship [with Pizza Express Inc.] at this point is irretrievably broken."

Broken-and bitter.

"Despite the fact that they've changed their name, though we're pleased that it doesn't continue to degrade our marks, there are still a lot of issues," said Jeff Mease, CEO of Pizza Express Inc., or PEI, which is based in Bloomington and licensed Pizza Head to open stores here.

Mease did not cite problems with the local stores, per se. But in an Aug. 15 press release, he blasted Pizza Head and its partners for opening a West Lafayette store last year without signing a license agreement.

Mease alleges that Pizza Head has not paid sales-based royalties since last September amounting to "tens of thousands" of dollars. The licensing agreement for the Indianapolis stores calls for Pizza Express Inc. to receive 5 percent of sales revenue.

In spite of the steam coming from Pizza Express, it was Pizza Head that fired the first shot in court, last September. It wants U.S. District Court in Indianapolis to rule that Pizza Head did not infringe on PEI's business or engage in unfair competition involving the West Lafayette store.

The suit also seeks a ruling that PEI "engaged in the unlawful offer and sale of franchises" by not registering with the Indiana Securities Division.

Under state law, franchised firms must prepare a uniform franchise offering circular that provides detailed information about a franchise.

Connell said concerns that PEI was acting as a franchiser came up as his firm contemplated signing an agreement for the West Lafayette store.

"Pizza Head entered into these franchise relationships without the benefit of material information and disclosures to which it was entitled by law prior to making these significant investment decisions," lawyers for the Indianapolis firm argued in court.

Pizza Express CEO Mease said the firm stands behind its contention that "what we have is a trademark licensing agreement." He said a franchise agreement would have involved more restrictive covenants about store operation.

"This is a pretty common argument, over whether something is or is not a franchise. If the court determines you are, the court affords [the franchisee] extra protection," said Philip A. Whistler, a partner at Indianapolis law firm Ice Miller.

Whistler said the law generally finds that a franchise has three basic ingredients. Every franchise agreement has some sort of licensing agreement. A franchise also proscribes in some detail the methods of doing business and, of course, assesses a franchise fee.

The fee is almost always a source of friction.

For example, from the franchisee, "the argument will be, 'What are you doing for me to earn that 5 percent?'" franchise fee.

That dispute tends to occur less often with big franchises that provide sophisticated assistance to franchisees than it does with smaller, startup franchise firms, Whistler added.

Although it's hard to say how many store licensing agreements exist in the metro area, there are about 2,630 franchise establishments in the 7th congressional district comprising mostly Marion County, according to "Economic Impact of Franchised Businesses" by PricewaterhouseCoopers.

They employ about 50,840 people, provide $1.3 billion in wages, and result in a total economic output in the district of nearly $5 billion, according to the study for the International Franchise Association.

Perhaps fortuitously, the dispute with PEI actually "allowed us to have a [new] brand we could grow," Connell said.

For his part, PEI head Mease said the dispute has "really given us pause" about working with other operators. But, he added, "Oh yeah, we're going to grow. We'd certainly like to come back to Indianapolis at some point."
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