Pizza Pizza told to pay $2.7 million

It all came down to the contract, the Pizza Pizza franchise agreement. According to the arbitration documents, one of Pizza Pizza’s own witnesses called it one of “the most tightly controlled franchise agreements that I’ve ever come across.” Many of the issues that franchisees complained about were allowed by the contract. End of story.

The Toronto Star
December 17, 1994

Pizza Pizza told to pay $2.7 million
Kevin Donovan


A group of 49 Pizza Pizza franchisees have won $2.7 million in damages, interest and legal costs in their battle with the pepperoni-and-cheese giant.

That amount will be whittled down to as little as $821,495 after the franchisees pay accumulated debts owed Pizza Pizza, their lawyers and accountants.

But in a precedent-setting ruling, an arbitrator has defined as “trust funds” the million of dollars Pizza Pizza collects from franchisees for share expenses like rent and the famous 967-11-11 delivery system.

Those monies are to be managed by Pizza Pizza, not used at its discretion, wrote Richard Holland, a retired Ontario judge appointed by the courts to arbitrate the case after the franchisees sued the firm.

Holland’s ruling may be a beacon of hope for franchisees of other Canadian companies struggling with similar issues in a $90-billion-a-year marketplace with virtually no laws. Until now, there has been no ruling establishing a trust relationship between franchisor and franchisee.

As a result of Holland’s aware, some Pizza Pizza franchisees will be awarded as much as $80,000. But the costs of the battle have been so high many will receive nothing after paying lawyers and forensic accountants.

Holland found no evidence of fraud on Pizza Pizza’s part, which the franchisees alleged in a February 1993, lawsuit. He penalized the franchisees $500,000 for making the allegation.

Pizza Pizza is appealing the financial award, but not the trust decision. In response, the franchisees have launched a counter-appeal.

Until last week, these rulings were in a sealed court file. The arbitration was held behind closed doors at Pizza Pizza’s request, but on consent of the franchisees.

But on Wednesday, Mr. Justice James Farley of the Commercial Court refused Pizza Pizza’s bid to continue the secrecy, saying the “court system is generally open.”

The emotion-charged Pizza Pizza case is being watched closely by players on both sides of the franchise industry, a world likened to the Wild West by franchisees and legislators.

‘Take no prisoners’ pizza fight continues
Holland wrote that both parties “owe to each other a duty to conduct themselves in good faith and in a spirit of fair dealing, the one with the other.”

Similar language is being considered in Ontario as the foundation of a proposed series of regulation to govern franchising.

Ontario consumer Minister Marilyn Churley, who has a committee studying various proposals, has said the Pizza Pizza case prompted her to take action.

On Wednesday, Mr. Justice Farley’s courtroom was alive with a historical lecture on the costs and futility of war.

Specifically, the Battle of Blenheim in 1704, in which 12,000 English and Austrian troops died killing 18,000 Franco-Bavarian soldiers.

Farley recited the famous poem on the battle, in which an old man tells a child of thousands of bodies rotting in the sun. The old man remarks he knows not what good came of it, “but ‘twas a famous victory.”

This was an exasperated judge dealing with the fractious Pizza Pizza case.

For Farley, the judge in charge now that the case is under appeal, comparing the Pizza Pizza dispute to a bloody battle is a sound metaphor.

Both sides collided viciously two years ago when franchisees launched a multi-million dollar lawsuit.

Since then million of dollars in legal and accounting fees have been racked up at the rate of about $250 an hour per lawyer for thousands of hours on both sides.

Allegations of dirty tricks fly back and forth.

Franchisees are accused of covertly selling pizzas to escape paying royalties, or of defacing company brochures for a new chicken promotion called “More cluck for Your Buck.”

Pizza Pizza is accused of arbitrarily cutting off the telephone lifeline to business, or of terminating stores at a cost of a family’s life savings.

Pizza Pizza lawyer Peter Griffin calls it a “take-no-prisoners fight.”

Franchisee lawyer Tim Mitchell says Pizza Pizza’s actions are “strangling” his clients.

Farley, after a day of motions from both sides, said dealing with the Pizza Pizza case is like “meandering through chaos.”

“If we don’t hurry and get (these motions) finished today it will go on forever and ever,” he said. “I now realize, I think, why the costs of this litigation are so high.”

With Pizza Pizza appealing Holland’s “final award,” Farley raised the spectre of the case wending its way to the Supreme Court of Canada.

“Finally, we can look forward to pizzas being delivered to that magnificent building on the banks of the Ottawa River,” he told the lawyers assembled for the hearing.

Only one franchisee showed up Wednesday. The other 48 were too busy making pizzas.

With costs taking such a big chunk out of the award to the franchisees, Farley says he, like the child in the poem, wonders what it was all for.

The total award to franchisees, including costs and interest, was estimated in court by the franchisees’ lawyers at $2.7 million. But with money that the franchisees owe Pizza Pizza for outstanding balances and other adjustments, plus money Pizza Pizza must pay the franchisees lawyers, that figure ends up at about $821, 495. Of that, the franchisees will likely have to pay additional legal expenses.

“Here we have a number of people who end up after all the fight with not very much money,” Farley said.

It seemed so simple on Feb. 23, 1993.

Somewhat in awe of the legal system, a ragtag band of franchisees pooled enough cash to hire a lawyer and sue Pizza Pizza, a $250-million-a-year, 250-store corporation started by reclusive businessman Michael Overs in 1967, and run on a day-to-day basis by Lorn Austin, a convicted American racketeer with a string of bankruptcies to his name.

In his ruling, Holland noted Overs has “developed a very sophisticated franchise arrangement.” He also said he was “most impressed” with evidence provided by Austin and various other executives.

Of the franchisees, Holland said nothing in his ruling, despite days of tearful, angry testimony in which franchisees complained of continual hardship and harassment.

A hard-working, jean-and-sweatshirt crowd, the franchisees had two things in common: Their life savings were tied up in a Pizza Pizza franchise, and they believed their company engaged in grossly unfair business practices.

To begin with, they demanded an accounting, something their contracts with Pizza Pizza allowed but the company routinely denied.

They wanted to know how the company was managing the money all franchisees “pooled” to pay for rent, advertising, telephone orders and delivery. To them, these were trust monies. Pizza Pizza said they were not.

As part of the arbitration, Pizza Pizza eventually allowed the franchisees to bring in a forensic accounting firm, Lindquist Avey, to check the books. In Holland’s ruling, he pointed out that, “Pizza Pizza put itself in breach of its obligations under the franchise agreements” by its earlier refusal.

Lindquist found an accounting system in shambles, and was often not able to inspect original documentation. For example, in the case of nearly $1 million of complimentary pizza cards handed out by company brass, and charged to a trust account, the control logs had been shredded before the franchisees launched their lawsuit.

Lindquist’s report estimated that as much as $8.5 million was owing to the franchisees.

But when the dust of the arbitration settled earlier this year, only nine of the franchisees’ 33 claims went in their favor.

It all came down to the contract, the Pizza Pizza franchise agreement. According to the arbitration documents, one of Pizza Pizza’s own witnesses called it one of “the most tightly controlled franchise agreements that I’ve ever come across.”

Many of the issues that franchisees complained about were allowed by the contract. End of story.

The franchisees won their cash award based on instances where Pizza Pizza breached its own contract.

For example, deducting 10 per cent of a franchisee’s bank account to pay for rent when the contract allowed only 5.5 per cent. That cost Pizza Pizza $1.3 million.

In another example, Pizza Pizza was ordered to pay $106,634 to the franchisees for marking up the price of soft drinks that Pizza Pizza had purchased at a reduced rate.

Pizza Pizza was also ordered to repay to the trust accounts money used for social events at conventions or at a 20th anniversary celebration for the company.

Pizza Pizza’s total liability could be much higher if other franchisees try to make good on a written promise from owner Overs. Last year, in trying to dissuade those stores from joining the lawsuit, he vowed to pay them whatever benefits the litigant franchisees won in court.

More than a dozen other lawsuits are pending.

One potentially large issue the franchisees lost related to Pizza Pizza’s sale of its telephone technology to Swiss Chalet and other companies. The franchisees alleged that some of the profits belonged to them; the arbitrator ruled against them.

With the Pizza Pizza appeal gathering steam for its Feb. 20 hearing, it is likely the case will be around for some time.

As Mr. Justice Farley remarked in another wry historical reference: “Napoleon may come back from Elba.”

Pizza Pizza case public judge rules


The once-secret Pizza Pizza case will now be fought in open court, a judge has ruled.

In reaffirming the principle of open courtrooms in Ontario, Mr. Justice James Farley of the Ontario Commercial Court denied Pizza Pizza’s application last week to seal all documentation related to the protracted case.

Pizza Pizza lawyer Peter Griffin had argued that, since the arbitration process was held in private, elements of that privacy should be maintained throughout the upcoming appeal.

“This entire process went forward on the basis of confidentiality,” said Griffin. He noted the “damaging publicity” caused his client after a confidential forensic accounting report was published in The Star.

But Tim Mitchell, lawyer for the 49 franchisees in the case, argued that openness was the best way to protect the integrity of the court system.

“If the public is to understand the court process they should have access to the documents” filed in the case, Mitchell said.

Toronto Star lawyer Bert Bruser also argued against Pizza Pizza’s secrecy motion.

“This motion is an attempt to trample one of the most basic principles of our law, that courts belong to the public and except in the most extreme cases proceedings must be open to the public,” Bruser said. “What Pizza Pizza is trying to do is to hijack the public courts for some private purpose.”

Farley, in making his ruling, said the Pizza Pizza case began in the public courtroom in early 1993.

While it went into private arbitration, by consent of both parties, “it seems to me you are back in court and the court system is generally open.”

Farley noted there are not “secret ingredients” or trade secrets being reveled in the case.

“From what I have read the Pizza Pizza method of operation would not take an MBA, C-minus student long to analyze. Just walking along the street you can figure it out.”

Risks: Lorn Austin, Lorne Austin, Lawrence Austin, Raining litigation, Ministry of Consumer and Commercial Services, Ministry of Consumer and Business Services, Ministry of Government and Consumer Services, Ministry of Government Services, Ontario, Forensic accounting, Bankruptcies, several, Termination, single, Veil of secrecy, Futility of taking legal action, Justice only for the rich, Convicted fraud artist, Masterpieces of deceptive wording and artful omission, Settlement just covers legals, Pooled money, Arbitration, Wild West of the business world, Courts misunderstand relationship, Settlement just covers fees, Canada, 19941217 Pizza Pizza

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