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 user 2010-10-19 at 8:31:29 am Views: 78
  • #24266
    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

    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.
    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.”

    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
    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.”

    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
    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

    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.”