Pie Face in legal action, as former franchisee seeks $800,000 for misleading conduct

Australian franchise Pie Face is embroiled in a legal battle with a former franchisee, who is alleging the pie chain was misleading and deceptive when communicating the expected returns for the franchise stores.

Former franchisee Prit Dutta launched court action in February this year claiming the earnings information provided by Pie Face prior to his purchase of two stores was “not based on reasonable grounds and was incomplete”.

Dutta told SmartCompany he’s seeking $800,000 in damages.

Dutta, who once owned two Pie Face stores in central Brisbane, says he’s not the only one to have been allegedly misled by Pie Face.

“Basically in short, six out of seven Brisbane CBD store franchisees have faced financial losses or store shut down. The Albert Mall store has seen it twice,” he says.

“The story is the same in Sydney and Melbourne. Too many stores are located too close to each other and are sold at a premium price leaving no room for the franchisee to survive.”

Dutta says the stores are all located within a five minute walk from one another.

“It’s part of the problem… we’re all suffering and they’ve left no margin for success,” he says.

Dutta says he purchased the two Brisbane stores he used to own in a short amount of time “having been promised a certain profit”, but within a year he’d made substantial losses and got out of the business.

“They gave me an Excel spreadsheet showing everyone was making a profit of between 11% and 25% and they projected everyone would make this in profit, regardless of differences in rent costs,” he says.

“I entered a settlement with Pie Face for one of the stores for $200,000, I had no choice. But I’m still stuck with losses, so I’m pursuing the matter in court for my other store.”

SmartCompany contacted Pie Face, but the franchise had no comment.

In the Statement of Claim, Dutta alleges the earnings information failed to contain information regarding the facts and assumptions on which the projection was based, the period for which the projection was relevant and whether the projection included depreciation, salary for Dutta and the cost of servicing loans.

It is also alleged the earnings information did not include assumptions about interest and tax.

Dutta is alleging Pie Face engaged in misleading and deceptive conduct by telling the store it would “easily get $25,000 in sales and will make a ‘killing’”.

Pie Face also allegedly told Dutta the franchise store would make an operating profit of more than $100,000 in its first year of trade.

Dutta says he was also told the store would be located on the corner of the George Street mall and would have outdoor seating.

“I was promised outdoor seating and dining, but I never got it. Initially they also told me the wrong location. The real location was two blocks away from the mall. I told them I didn’t think I’d make any money there, but they said not to worry and I believed them,” he says.

Dutta says there is a group of Pie Face franchisees who are preparing to launch a class action against the franchise.

“They’re ready to go, they’re just working out which lawyer to go with and how much it will cost since many nearly went bankrupt,” he says.

This isn’t the first time allegations such as these have emerged against Pie Face. The Australian Financial Review reported last year around 50 Pie Face franchises were up for sale, but Pie Face founder Wayne Homschek denied these reports to SmartCompany.

“We have some of the best wholesale margin/pricing that exists in the country, if not the best,” he said at the time.

With regard to reports which emerged last year three franchisees would be suing the company, Homschek also said this had been taken out of proportion.

“You will note that they only have one franchisee now threatening legal action…and they have never filed a claim notwithstanding all the noise that was made in January [2013] that they were about to.

“It’s a joke really but it’s a pity as it is harming our business, which is going very well other than for this episode.”

Another former Pie Face franchisee Tom Bulmer told SmartCompany he has also faced losses of about $200,000 and he has made a complaint to the Australian Competition and Consumer Commission.

“Everyone in Brisbane seems to have failed or are on the chopping block…To get out, we ‘sold’ the store back and if our store sells to another, we can get our money back. The terms of our agreement cannot be disclosed,” Bulmer says.

“Unlike most small business, we had no problem with revenue. The customers stormed in, but soon thereafter the franchisor opened many stores including one a block away from us.”