Papa Murphy's hit with another lawsuit that accuses company of misrepresenting the financial results franchisees could expect; company representative calls lawsuit 'frivolous'

Nevin Barich

PORTLAND, Oregon , June 22, 2014 (The Oregonian) – Papa Murphy’s International, the chain of bake-at-home pizza franchises based in Vancouver, Washington, misrepresented the financial results franchisees could expect, according to a second set of 16 franchisees with outlets in Florida, Texas, Alabama, Tennessee, South Carolina and North Carolina.

In a suit filed late Wednesday in Clark County Superior Court, the franchisees say the results they were provided when considering franchise agreements were “heavily skewed by the extremely high sales volumes of their franchised stores in the Pacific Northwest.”

A Papa Murphy’s representative said the new suit “is just another frivolous attempt to make an issue out of claims that have no basis in the law.” The company said it will defend itself against the fran chisees’ allegations.

But the new complaint said prospective franchisees weren’t told Papa Murphy’s stores in Oregon, for example, averaged weekly sales of $16,700 in 2013, while stores in Texas averaged weekly sales of about $7,800.

This week’s complaint is similar to a complaint filed in April, when a group of 12 franchisees representing about 52 outlets in Texas, Missouri, Tennessee, Georgia, Florida, Louisiana, Kansas and Arkansas sued the company on the eve of its initial public offering. They, too, said they were misled about the results they could expect from operating Papa Murphy’s franchises.

Both groups of franchisees also say the company required them to pay more in marketing fees than they had been led to believe.

Both suits were filed by the Bundy Law Firm of Kirkland, Washington. Lawyer Caroline Fichter said “our phones started ringing off the hook” as Papa Murphy’s franchisees called after the first complaint was filed.

In a response in Clark County Superior Court to the first lawsuit, Papa Murphy’s denied the franchisees’ charges.

The claim that “the financials in Papa Murphy’s Franchise Disclosure Documents are misleading or inaccurate, is verifiably false,” the filing states. “Papa Murphy’s adheres to strict legal requirements in preparing its Franchise Disclosure Documents, based on data that is fully disclosed and explained to the prospective franchisee.”

In its prepared statement, Papa Murphy’s said “for over 30 years we have been a strong, reputable franchisor with a history of good franchise relations and very little franchise litigation. Assisting Franchise Owners to grow sales and increase profitability is an ongoing priority for us.” Unrest among Papa Murphy’s franchisees has alarmed a contributor at Seeking Alpha, who wrote last week it exposes “significant distress in the franchisee system.” He cited a May 30 letter from a group of franchisees seeking a six-month moratorium on fees for “31 percent of franchisees who are losing money.”

Agreeing to such a deal would cost the company in the short term, and ignoring franchisees’ pleas could lead to the closure of up to one-third of the outlets, he wrote.

But other analysts parted with Seeking Alpha; Jefferies reissued a “Buy” rating last week, saying the Papa Murphy’s system “is generally healthy” and “we like the brand opportunity and category.” It said critiques of the company’s business model amounted to “misinformation.”

Raymond James noted last week that the stock price had slipped following what it called Internet noise. “We reiterate our Outperform rating and $12 price target,” the analysts said.

Papa Murphy’s went public on the NASDAQ exchange last month above $11 a share, but closed Thursday at $9.53.

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