CABOODLE CARTRIDGE LIABLE FOR $ 90.000.00

[Anonymous]

http://www.bluemaumau.org/9477/caboodle_cartridge_founder_held_liable
CABOODLE CARTRIDGE LIABLE FOR $ 90.000.00
 SANTA
CLARA, Calif. — The Ninth Circuit Court of Appeals upheld the trial
court decision that Daniel Wencel, founder and president of Caboodle
Cartridge, is liable for $90,000 for making numerous false statements
that allured franchisees into entering into a valueless area
directorship.

Wencel claimed that his remanufactured cartridges,
done in house, could beat the competition with its OEM (original
equipment manufacturer) quality, allowing franchisees to sell product at
margins from 50% to 80%.

But that wasn’t so.
Testimony
revealed that the company had a problem with ink cartridge quality, that
customers were returning defective, leaking products to the stores.After
the franchisees purchased their area directorship, they discovered that
Wencel, through his employees, had been fraudulently promoting the sale
of franchises and area development contracts, by way of his own
deceptive marketing scheme. Although Caboodle’s did have a facility to
remanufacture the cartridges, fifty percent were being outsourced to
third-party vendors, according to legal documents. While the franchisor
touted its distribution center could handle delivery to all store, the
court found that was also part of misrepresentations made by Wencel’s
marketing ploy.

Attorney Peter C. Lagarias of Lagarias &
Boulter, representing the franchisees, feels this is an important ruling
for franchise buyers who rely on representations by the franchisor and
its officers. “Unfortunately, some franchise systems do not provide an
effective business model or system, and in this case even the franchisor
went out of business. For this reason, the action included claims
successfully brought against the president of the company.”

Jon
Garliepp, an engineer for United Airlines, and his wife Melody, first
became interested in buying a Caboodle Cartridge franchise after reading
an advertisement in the San Jose Mercury News, It described Caboodle as
a start-up ink cartridge remanufacturing company run by Wencel and his
20-year old son Chris.  According to the ad, Wencel was taking a
different approach than his competitors, who refilled cartridges with
syringes at franchised stores. Instead, Caboodles shipped the used
cartridges to its Santa Clara site, where they were steamed cleaned,
examined for flaws, and then refilled by automated equipment. The ink
containers were then completely tested and placed on racks so clerks
could immediately sell them to customers. Wencel claimed their product
was “done in house,” using specialized machinery that saved customers 65
percent from the price of OEM, “original equipment manufacturer.”

An Offer You Can’t Refuse
When
they received the franchise disclosure document, it included the
promotion in the Mercury News and other outside materials. After making
inquiries, the Garliepps purchased their franchise in August 2004 for
$12,500.  Following several months of successful operations, they
decided to open a second store in Arizona. But when a company vice
president told them, “I have something better for you,” they pursued the
area directorship Caboodle’s offered, granting them the exclusive
rights to sell franchises in a specific territory. Vice
president David Iuppa gave the Garliepps several press releases stating
that the Caboodle’s remanufacturing ink cartridge system gave
franchisees the advantage of selling product at a low cost. One stated
that Caboodle cartridges provided “remanufactured solutions” for Hewlett
Packard, Panasonic, Lexmark, Brother, Samsung, Minolta, Epson and Canon
laser and ink jet cartridges, which “meet or exceed OEM quality and
specifications.” Another said that Caboodle’s could provide enough
product to supply 60 retail stores, and there would be no problem
selling franchises because “plenty of people were already selling them.”

On
June 1, 2005, eight months after buying their franchise, the Garilepps
made their second purchase on June 1, 2005, obligating them to pay
$180,000 for the rights to sell franchises in Arizona, New Mexico, Utah
and El Paso, Texas. Pursuant to their agreement, they made a down
payment of $90,000 and were required to pay the balance from the sale of
franchises. Jon Garliepp understood that, as an area director, he would
receive one-half of the initial franchise fee and a percentage of “any
ongoing royalty fees.”  In January 2006, the Garilepps formed their
corporation, Zantum, LLC, for the sole purpose of selling Caboodle
franchises under the directorship.

When the Garliepps started
experiencing problems in late 2005, Jon Garliepp became gravely
concerned about the Caboodle cartridges and the shortage of products
that caused back orders.  When customers began returning defective
cartridges, he complained to company officials. Wencel and others
assured him the quality remained good and not to worry. But Garliepp
soon realized Wencel and Iuppa had been making misrepresentations about
Caboodle Cartridge system and became fearful of his own liability. He
then chose not to sell any franchises.  In early 2007, Garliepp obtained
from the Caboodle website a report from the American Testing Laboratory
that confirmed his suspicion that the Caboodle product did not have OEM
quality, as they had been told.

Caboodle Shuts Down, Owners Take Legal Action
After
a series of events including the closing of Caboodle facilities, namely
the remanufacturing plant, the Garliepps asked Wencel to return their
$90,000 down payment, but he refused. The company eventually had a total
of 61 franchise stores and in 2007 the last franchise and directorship
were sold. In 2008, Wencel closed his own store and Caboodle Cartridge
stopped doing business without returning any of the franchise payments
to area directors.

In April 2008, Garliepp took legal action with
other owners against the company entities and its principals. Attorney
Lagarias filed the third amended complaint on behalf of Zantum, the
Garliepps and other plaintiffs alleging that the defendants were liable
on a number of theories, including fraud, negligent misrepresentation
violation of the California Franchise Investment Law, and other state
codes.

The negligent misrepresentation was based on claims that
Caboodle had a central facility with sophisticated equipment for
refilling cartridges, and had a testing program to assure quality. 
Although Garliepp knew Caboodle was purchasing Epson Cartridges from a
German supplier, he said he was never told that the franchisor was
outsourcing 50 percent of its remanufactured cartridge product from
third-party vendors.Caboodle’s told prospective investors that
the company was operating its own retail store which averaged over
$1,000 per day in sales.  Other allegations included telling franchise
owners they would be able to sell remanufactured product at margins from
50% to 80%. They also said that they had their own network of
distribution centers.

But they didn’t.
After a four-day
bench trial in April 2009, the judge found that only Zantum was entitled
to recover the $90,000 directorship payment from Wencel, the only
defendant, on the negligent misrepresentation allegation. Vice president
Iuppa was dismissed from the judgment because he was found to be acting
only as an agent under Wencel. After Wencel appealed, the appellate
court ruled to uphold the lower court decision. Other franchisee
plaintiffs settled their disputes out of court.

The appeals court
stated, “. . . while “the representations made in the advertising and
other materials provided to prospective purchasers of franchises and
Area Directorships were made in good faith and not for purposes of fraud
or deceit, they were nevertheless not accurate, were negligently made,
and were material inducements to purchasers of both franchises and area
directorships. The consequence of this failure is that those who
purchased Area Directorships received nothing of value.”Lagarias said
that the Court of Appeals really dug into the record, even beyond his
legal briefing.  “I won at trial, Caboodle appealed. The Court of
Appeals laid out a lot of the evidence and facts of the
misrepresentations, and the case is now final.”

[Author]

October 19, 2010 at 8:31 AM