PRstore faces fraud claims from some franchisees

Thirteen current and former PRstore Inc. franchisees have accused the company’s partners of fraud and racketeering in a federal lawsuit. And they’ll likely seek more than $6 million in damages…“engaged in a pattern of racketeering activities.” And it contends they made false statements by mail and telephone, involving fraud in interstate commerce.

Charlotte Business Journal
April 3, 2009

PRstore faces fraud claims from some franchisees
John Downey

Thirteen current and former PRstore Inc. franchisees have accused the company’s partners of fraud and racketeering in a federal lawsuit. And they’ll likely seek more than $6 million in damages.

The PRstore is a marketing-services business Mike and Kathy Butler founded here in 2001. It targets small companies as clients, offering to provide them with marketing materials and public-relations services. It has franchise locations in 22 cities.

The suit names the Butlers and Daniel Fragen, PRstore chief executive, as defendants. The three are partners in PRS Franchise Systems, also a defendant and the franchising agent for PRstore.

The suit contends they used PRS Franchise Systems to fleece franchisees.

It claims the franchise agreement falsely promised that fees would be used for national advertising and would support franchise operations.

Mike Butler referred questions to attorney Mike Weaver. Weaver, who represents all the defendants, dismisses the allegations as unfounded. He says disgruntled former franchise owners have filed the suit to hide their own failures to live up to contracts.

Weaver contends all of PRstore’s representations to franchisees were complete and truthful. He says the franchise agreements specifically warned franchisees that results weren’t guaranteed.

Most of those involved in the litigation had their franchises taken from them before the suit was filed in early March, he says.

Some franchise owners have opened other businesses.

But attorney Scott Batey, representing the franchisees, says some of his clients still own and operate their PRstore franchises. “They are trying to make a go of it,” he says.

The owners of the Hawaii PRstore were the only plaintiffs still listed as franchisees on the PRstore Web site as of Wednesday. A handful of others were still included on the site a few days earlier.

One who has left PRstore is Carissa Roman, who owned the Lake Norman store. She recently launched Damselfly Marketing in Huntersville.

A week ago, Mike Butler sent an e-mail to Roman’s customers saying he was terminating her franchise. The e-mail says she violated the noncompete clause in her franchise agreement by starting Damselfly. It also says PRstore plans legal action against her.

Roman says Butler and the PRstore have made similar statements to clients of three other former PRstore franchise owners.

The company has been trying to get those customers to do business with it rather than the former franchisees. Roman, a marketing professional before joining the PRstore, says the concept appealed to her. PRstore was originally aimed at serving startups and very small businesses that needed basic marketing services.

The company offered franchises for $60,000. It told franchisees it was possible to generate that much in revenue each month. And it charged them 2.5% of each store’s monthly gross receipts to pay for support and advertising.

Roman opened her franchise in January 2007, working from her home. But she and other owners say they had trouble making the revenue projections PRstore had touted.

She says franchisees were shown financial information from the Charlotte and Santa Barbara, Calif., stores the Butlers owned as representative of how the business worked. That financial information is a key part of what the suit contends was false and misleading.

Roman says in 2007, PRstore hired Concentric Marketing of Charlotte to review its model, and Concentric found the model wouldn’t work. It recommended targeting PRstore’s services at larger, better-established businesses.

But problems developed with the back-office and production work done by PRstore’s Charlotte headquarters, Roman says. She says she lost clients because the work took too long, was often unsatisfactory and was too expensive.

Also, the national advertising campaign never materialized. She claims the promises made in the franchise agreement were not being kept.

Batey says some owners have lost as much as $500,000. Overall, they’ve suffered about $2.2 million in damages to date, he says. Under the racketeering statute, his clients are seeking triple damages.

Roman says she continued to operate her store through 2008. In January, she started Damselfly, targeting companies larger than those served by PRstore.

Initially, she operated both businesses. But she says the Butlers told her they considered that a breach of PRstore’s noncompete clause. By early March, they revoked her franchise.

The suit contends some of the money that was to go to advertising and other support went instead to the Butlers and Fragen. Some of the money was invested.

The suit provides few details about how the alleged fraud was accomplished. It says the Butlers and Fragen “engaged in a pattern of racketeering activities.” And it contends they made false statements by mail and telephone, involving fraud in interstate commerce.

Weaver says the complaint is too vague to stand up in court. He says the fraud and racketeering statutes require allegations with “particularity and specificity.” He says the 10-page lawsuit fails to do that.

The suit was filed in U.S. District Court in Michigan. None of the PRstore owners who have filed suit ever operated in Michigan.

But filing in that state allows the plaintiffs to invoke a Michigan franchise law that specifies the responsibilities of franchisers to make full disclosure to potential franchisees.

Two plaintiffs, Alvin and Rita Jackson, who owned the PRstore in Atlanta’s Buckhead area, lived in Michigan when they bought that franchise. The suit cites their residency as justification for filing the case in Michigan.

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