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 user 2010-10-19 at 8:29:49 am Views: 73
  • #24264
     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.”