Noble Roman's stands to lose more than it's worth in legal action by former franchisees

March 23, 2009
More former franchisees have joined a lawsuit against Noble Roman's Inc., raising the prospect that a courtroom loss could sink the locally based pizza chain.

Fourteen franchisees of the Noble Roman's Pizza and Tuscano's Italian Style Subs chains now are seeking about $8 million — more than the firm's total stock market value. They say the company misled them about the costs and profit potential of operating its standalone restaurants. The former franchise locations have since closed, but the legal action is getting fierce in Hamilton Superior Court.

Noble Roman's is going after the franchisees in a counterclaim and has repeatedly tried to get the plaintiffs' attorney thrown from the case — moves that suggest the chain isn't eager for a hearing on the case, which was filed in June 2008. A trial is tentatively set for early 2010.

The suit poses a serious risk to Noble Roman's in large part because of its small size, said Donald F. Woodley, a principal in locally based investment firm Woodley Farra Manion Portfolio Management Inc. The company's stock recently traded at 38 cents, giving it a market value of only $7.3 million. The company has $7.5 million in debt.

"If they get a big settlement against them, it could definitely take them into insolvency," Woodley said. "They need to beat this lawsuit or get a really, really favorable settlement."

On the other hand, the former franchisees also would be well-served to consider a settlement offer, Woodley said, since they'd likely get nothing if the company was forced into bankruptcy.

Battle gets nasty

Noble Roman's is striking back against the plaintiffs with a counterclaim that says the franchisees actually owe the company between $84,000 and $447,000 each. The company is seeking three times the actual damages, along with legal fees.

The chain last year won an injunction demanding nine of the former franchisees return to the company "proprietary materials" ranging from branded napkins and posters to business cards and charts showing how to make the chain's signature sandwiches and pizzas.

And the company also has repeatedly asked Judge Steven R. Nation to deny the plaintiffs' attorney, David M. Duree of Illinois, the right to try the case in Indiana. In filings peppered with sneering adjectives, the chain attacks Duree as shady and unethical.

"His reputation for frivolous litigation [is] well known amongst his peers, and his propensity for contemptuous conduct prior to and during litigation [is] clearly seen through his disdainful work as an attorney not only in his home state of Illinois but also Missouri and Kansas," the chain said.

Duree, who gained fame by taking on Subway parent Doctors Associates Inc., said the Noble Roman's courtroom maneuvers are in "bad faith" and "supported by false statements."

"These are hardball litigation tactics that we think are inappropriate," he said in an interview.

The judge most recently sided with Duree, overturning an earlier decision to kick him off the case.

Noble Roman's is just trying to avoid a court fight with an attorney known for taking on franchises, said John R. Price of locally based Price Owen Law, who is acting as local counsel for the former franchisees.

"They obviously are trying to shoot the messenger," Price said. "To use a famous George W. Bush word, it's an obvious strategery. It's fair to say he's feared."

At Duree's direction, the former franchisees returned dozens of boxes of materials to Noble Roman's last year and accounted for other items the chain claimed they failed to return. Some items were destroyed when they closed their restaurants, and, in some cases, signs and other items are tied up in bankruptcy proceedings.

Noble Roman's claims the franchisees are still holding on to proprietary materials, and the chain even has challenged the affidavits as "improperly notarized."

Duree has asked the judge to slap the Noble Roman's executives and their attorneys with fines for wasting his-and the court's-time.

Strategy shift

Noble Roman's officials declined to discuss the case, but company President A. Scott Mobley said in an e-mail that the action in court supports the chain's contention that "the lawsuit is without merit."

The chain has claimed in court that the franchisees were entirely at fault for their own failures, despite acknowledging that the chain's effort to quickly open hundreds of stand-alone, dual-branded Noble Roman's and Tuscano's locations has not worked out as hoped.

"The plaintiffs are a small group of disgruntled franchisees who seek to blame Noble Roman's for the losses they incurred due to their own mismanagement and incompetence," the chain said in a court filing.

The chain has admitted only that it did a poor job of choosing franchisees. The chain sold about 90 dual-format franchises between 2006 and 2008 and 55 of them opened. About half have since closed.

The company lately has been shifting its focus back toward adding nontraditional locations with lower startup costs and overhead such as convenience stores, bowling alleys and hospitals.

Noble Roman's has reinvented itself several times over the years since launching in the 1970s as a chain of dine-in restaurants. In 1997, after intense competition and rising costs made stand-alone pizza joints difficult to operate profitably, Noble Roman's turned to franchising and opened about 800 nontraditional outlets in 44 states.

The return to that strategy could help the dual-brand franchisees prove their contention they were guinea pigs for an untested and unproven foray into stand-alone locations.

"We're arguing they didn't do the investigation to determine that this was a viable concept before they started selling them," Duree said.

Steep losses

Gene Harrington's restaurant in Kentucky closed in August 2007 after falling far short of the chain's $100,000-per-year profit estimate, the lawsuit claims. His startup costs, on the other hand, exceeded the chain's estimates by about $100,000.

Harrington is seeking $130,000 from Noble Roman's. After returning more than 20 boxes of materials from his store, the chain continues to accuse him of "acting in bad faith" for failing to return a series of documents including "improved lasagna procedures" and a "Hawaiian pizza 14-inch pie chart."

Thirteen of the plaintiffs actually opened a Noble Roman's store before running into trouble; the final franchisee paid the chain a fee but couldn't get a loan to open her store.

The franchisee seeking the highest damages is Kim Neal, whose store in San Bernardino, Calif., sustained more than $450,000 in operating losses from October 2007 to June 2008.

She claims her startup cost was $720,000, more than three times the chain's estimate of $236,000. Neal is seeking more than $1 million.

The court filings include an e-mail from franchisee Mike Ellis. He lost his $200,000 life savings and remains $219,000 in the hole from his short-lived Noble Roman's location in Missouri.

"I wish I never heard of Noble Roman's," Ellis wrote to a food-service creditor in a settlement offer. "They have damn near ruined my life."

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