Ziebart Franchisees Sue Company, Allege Overcharging
A group of 29 current and former Ziebart franchisees on Friday filed a lawsuit in Wayne County Circuit Court claiming that Troy-based Ziebart Corp. is violating franchise agreements by overcharging for products.
The lawsuit also raises questions about the safety of a chemical Ziebart franchisees must use to rustproof cars and trucks.
The franchisees represent 49 stores or about a quarter of Zibart’s 212 U.S. stores, said Norman Yatooma, an attorney for the franchisees and president of Birmingham-based Norman Yatooma & Associates P.C. Together, the franchisees account for $35 million in total sales, he said.
Yatooma said he would file a motion seeking class-action status for the case early this week.
Ziebart’s agreement with franchisees requires them to buy proprietary products from Ziebart at reasonable prices, Yatooma said. In return, the franchisees pay an 8 percent royalty fee on total sales.
But Ziebart’s patents on some products have lapsed, and comparable products are available at lower prices, according to the lawsuit.
An example, Yatooma said, is a sealant Ziebart is selling to franchisees for $34 when the actual cost is $8.
Ziebart has been known since the 1960s as the place to get a car rust-proofed, but now it sells a variety of automotive accessories.
Systemwide sales for Ziebart’s parent company, Ziebart International Corp., fell to $150 million last year from $160 million in 1999. What’s more, Ziebart International’s total locations worldwide dropped from about 600 in 1999 to 500 last year, according to information Ziebart provided to Crain’s for the list of metro Detroit’s largest franchisors.
Ziebart Corp., the franchise company for Ziebart stores in the Unites States and Canada, posted revenue of $18 million last year and net income of $831,532, compared with revenue of $16.2 million in 1999 and net income of $283,198.
The franchisees’ case was assigned to Wayne Circuit Judge John Gillis Jr. The plaintiffs requested a Nov. 9 status conference.
Ziebart executive vice president and COO, John Lynch, declined to discuss the lawsuit Thursday because he had not yet read it and also declined to discuss financial numbers not disclosed in public documents. Lynch issued a statement about the lawsuit:
“To the extend it has to do with pricing, you must realize that ‘pricing’ is always an ongoing topic of discussion between franchisees and franchisors. … If the suit has to do with our pricing policies and/or structure, I am confident we can work out our differences outside of litigation.”
Brian Schnell, co-chairman of the franchise-law practice group at Minneapolis-based Gray, Plant, Mooty, Mooty & Bennett P.A., said lawsuits alleging overcharging for proprietary products are common.
“My view is there is nothing wrong with that as long as it’s adequately disclosed,” said Schnell, whose firm usually represents franchise corporations. “One of the issues franchisors face is if they change the rules of the game in the middle of the game. Then there might be an issue.”
Still, Schnell said that even if 5 percent of a company’s franchisees sue the franchisor, the lawsuit distracts the company from business and can harm it financially.
Yatooma said his conservative estimate of damages caused by lost investments and profits is $40 million.
In February of last year, Ziebart switched suppliers for a sealant used to rustproof the undersides of cars and trucks, according to the lawsuit. The new sealant caused employees to experience headaches and nausea, damaged the machines used to apply the chemical and was less effective than the previous sealant, according to the lawsuit.
But Tom King, a co-owner of a Ziebart franchise in Saginaw, said he has not had any problems with Ziebart’s new sealant.
“Why we didn’t experience it, I don’t know,” he said.
Although King does suspect that Ziebart is marking up prices for products, he decided not to get involved in the lawsuit.
The sealant contains benzene and toluene, according to the lawsuit. Both chemicals have been linked to a variety of mild to serious illnesses among workers, according to the U.S. Occupational Safety & Health Administration.
The lawsuit also claims that Ziebart’s royalty and pricing practices are partly responsible for the declining number of stores.
“In the last year, 35 Ziebart stores have closed,” Yatooma said. “That’s happening while the average store sales increased from approximately $325,000 in 1996 to $350,000 in 1998. It appears that the more sales Ziebart franchisees generate, the less money they make.”
Franchisees have tried for more than a year to work out their disagreements, said Ron Dengler, owner of Ziebart stores in Davenport, Iowa, and Moline, Ill., and former president of the Ziebart Dealers Association.
“I’d like to see the system continue to exist and the name continue to grow instead of constricting like we’ve been,” he said.