The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Hard Rock Cafe’s former Nassau franchisee has moved to overturn the dismissal of its $18.877 million damages claim for “deceptive and unfair business practices”, claiming its Charlotte Street restaurant was “valueless” and of no worth.

HRCC Ltd and its principals, Keith and Kevin Doyle, in documents filed with the US 11th circuit appeals court this week, alleging that Florida’s middle district court had failed to determine whether it was induced into opening the restaurant on the basis of false profitability assurances.

The former Bahamian franchisee is seeking to overturn a previous ruling in favour of the Hard Rock franchisor and two of its senior executives, which found that its claim provided no evidence that Florida’s Deceptive and Unfair Trade Practices Act (FDUPTA) had been breached.

HRCC’s March 7, 2017, filing, which has been obtained by Tribune Business, lists numerous Bahamian companies and individuals that have an interest in the appeal’s outcome, including the Bahamian government; its landlord; food and drink suppliers; and former employees.

Among the corporate entities named are likely creditors of the former Hard Rock franchisee, such as the Bahamas Electricity Corporation (BEC); Bahamas Food Services; Burns House, the Bristol Group of Companies; Premium Foods; Purity Bakery; and Satellite Bahamas.

Other Bahamians named as interested parties include Hard Rock Cafe’s landlord, and now operator, former MP Marvin Pinder. Ex-employees Laforina Rolle, Ieisha Bowe and Donya Nottage are also named.

HRCC and the Doyles are alleging there are “unsettled questions of law that have not been conclusively addressed” by the Florida middle district court, which last year ruled in favour of the summary judgment application brought by Hard Rock International and two of its executives, Hamish Dodds and Michael Beacham.

The former Nassau franchisee had alleged that it was the victim of a conspiracy, involving Hard Rock International and the two executives, in which it was forced or squeezed out of the downtown Nassau business so that the franchise could be “resold to a third party for profit”.

However, the Florida court’s September 2016 ruling found that HRCC had failed to prove it had suffered “actual damages” as required by the state’s law, not merely loss of profits.

It also found that the “personal animosity”, which the Doyles and HRCC claimed were directed against them by the Hard Rock executives, did not amount to a ‘conspiracy’ that would result in “personal gain” for the latter from terminating the Nassau franchisee’s agreement.

But, setting out the grounds for its appeal, HRCC alleged it had been “induced” by Hard Rock to open a restaurant to complement the existing store, which was already profitable on a standalone basis.

It argued that it was solely the restaurant operation that caused it to “incur millions of dollars in damages”, and that the middle district Florida court had been wrong to lump this together with the retail store in its ruling.

“Hard Rock’s representatives had represented to HRCC’s principals that HRCC would recoup its investment costs within three to five years, and would earn profits of between 15 and 30 per cent of the franchise’s annual revenues,” HRCC reiterated.

“After HRCC opened a Hard Rock Café retail store, Hard Rock induced HRCC to open a restaurant with assurances that it would be profitable venture.”

This, HRCC recalled, required it to spend $1 million to repurchase the Bahamian franchise rights from Mr Pinder, who was then acting as a sub-franchisee. He continued as the Nassau franchise’s landlord.

“When it became apparent that the restaurant could not be profitable, HRCC attempted to work with Hard Rock so that it could be profitable, but Hard Rock refused, misrepresenting that all franchisees were required to operate under identical terms,” HRCC alleged.

“HRCC’s losses were further exacerbated by Hard Rock forcing HRCC to keep its restaurant open during night hours, in which the surrounding area was dangerous, requiring additional security, and driving down customer volume.

“In addition, Hard Rock forced HRCC to join and pay for a loyalty programme that could not be profitable for HRCC given its location in a vacation destination, such that repeat customers were rare. Ultimately, Hard Rock revoked the grace period normally given to franchisees for payment of royalties and terminated the franchise agreement.”

HRCC alleged that it had invested $4 million into the restaurant franchise alone prior to its 2014 termination, and paid $5 million in royalties to Hard Rock.

The restaurant lost its Nassau franchisee some $7.127 million prior to its closure, with the enforced night openings resulting in losses of between $600,000 to $800,000 over the period December 2011 to end-March 2014.

Besides the royalty rights and restaurant losses, HRCC is arguing that the damages it incurred also include the $1 million payment to Mr Pinder; $3 million in “development costs”; capital loans and interest worth $2 million; and $500,000 in expenses.

At the core of HRCC’s appeal is its argument that Hard Rock and its executives knew the restaurant business was “a money loser”, despite inducing and promoting it to open one.

“A document Hard Rock created to analyse its corporate-owned restaurants showed that for more than 75 per cent (50 out of 66) of its corporate-owned restaurants, costs exceeded revenues in fiscal year 2005, resulting in negative earnings before interest and taxes (EBIT),” HRCC alleged.

“And that was without even factoring in the royalties that franchisees, unlike corporate-owned restaurants, are required to pay to Hard Rock.”

HRCC argued that based on this, Hard Rock’s restaurant business was “not designed to be profitable”, thus making it “valueless”.

As a result, it claimed Florida legal precedent brought its case under the state’s FDUPTA law, raising “genuine issues of material fact as to whether the restaurant business was valueless”.

Arguing that Florida’s middle district court was wrong to separate the Nassau restaurant from the retail shop, HRCC added: “The District Court accepted the defendants’ contention that the item as delivered was not valueless because, although the restaurant business lost millions of dollars, the merchandise business was profitable, and taken together, HRCC made a small profit over the course of the franchising relationship.

“But the asserted unfair and deceptive conduct occurred with respect to the restaurant business. And there is record evidence from which it can be reasonably inferred that the two businesses were separate.

“HRCC’s merchandise business was opened prior to the restaurant business and, in fact, the franchise agreement enabled HRCC to defer opening a restaurant for up to 10 years upon payment of certain fees to Hard Rock,” HRCC’s filing continued.

“Although the agreement specified that the restaurant was intended to be opened within three years of the agreement, it also evidences that HRCC had the option to delay the opening for two one year terms by payment of $100,000 to Hard Rock, and by another three years by paying $400,000 to Hard Rock, followed by another one year term by paying $100,000, and a second one year term by paying $150,000. Thus, in total, HRCC had the ability to operate the retail merchandise business for 10 years before opening the restaurant.”

HRCC alleged that Hard Rock induced it to open the Nassau restaurant earlier based on assurances of profitability, despite knowing this was not the case based on its business model - thereby creating the ‘actual damages’ required by Florida law.