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BrightStar Forces Franchisee into Arbitration, Demands $2.5M

CHICAGO – As BrightStar Healthcare readies itself for at least two jury trials and arbitration with franchisees, the home healthcare franchisor is also preparing for battle with a California franchise owner. The renowned franchising company, under the control of CEO/co-founder Shelly Sun, is demanding that the franchise owner pay $2.5 million in damages for breaching  four franchise agreements.

Allegations in the legal actions appear to be similar. Franchisees claim that company executives induced them into signing their franchise agreements by falsely promoting that BrightStar had a “proven business model.” The Illinois-based company promotes three lines of services for franchisees: medical skilled care, non-medical and medical staffing functions. In at least two legal actions, franchisees allege company officials misrepresented that BrightStar was an expert in the “skilled nursing homecare sector,” one that provided an industry-leading software program to support franchisees’ businesses. They state the company falsely promoted that its program helps owners with scheduling, payroll, billing and accounting needs, so that they could focus on sales and servicing their customers.

Franchisee’s troubling escapade in running his franchise

Court filings outline California franchisee Edward Navales’ franchise experience as being similar as other litigating franchisees. After researching the home healthcare industry in 2007, Navales met with CEO/co-founder Shelly Sun and husband, senior vice president/co-founder J.D. Sun. Relying on the company’s representations, orally and in writing, Navales formed EPN Enterprises and then bought a franchise opportunity with BrightStar. From 2008 to 2011, the California buyer entered into four agency franchise agreements, allowing him to operate BrightStar franchises in Sacramento, Fairfield, Antioch and Concord, each for a 10 year period. Navales was also required to personally guarantee each of the four contracts.

As he began growing his business Navales realized BrightStar’s system was inadequate in supporting his “skilled” home healthcare operation under EPN Enterprises. Court documents further state that the franchisor could not accommodate the type of billing required by insurance companies. It could not produce invoices and claims under industry standards in accordance with California’s common insurance billing requirements. Because the ABS system could not produce correct forms for submittal processes, EPN had to hire more personnel to bill insurance companies so that his staff could handle other functions such as billing, medical records and authorizations.

Navales also contends that the software did the opposite of everything BrightStar claimed it could do and knew about the problems prior to him signing his franchise agreements. He said other franchisees had told him they experienced the same problems beginning in 2008. When they complained, franchise owners were told that solutions to the software problems were forthcoming.   

Then-president Brian Schnell, who was hired in January 20012 from Faegre Baker law firm, sent out an email to franchise owners in June stating that BrightStar’s technology system had not been geared toward skilled or managed care. He said the same was true with updated versions ABS1 and ABS2. Schnell explained that a very small percentage of franchisees run their businesses in “skilled care.” While he recognized that the "skilled care” franchisees were having problems, Schnell further stated, “We just elected to focus on other priorities first due to the most immediate need of the greatest number of franchisees.”

Navales claims that BrightStar’s ABS software and other failures caused damages to his franchise operation. He maintains that many insurance companies delayed or refused payments to his company for claims, causing cash flow and financing problems. When the franchisor failed to provide his company with detailed position descriptions of key staff, field personnel and medical lines of business, as well as training material for Navales’ medical staffing business, he said he had to create it. 

He states that BrightStar also failed to make a concerted effort to seek out contracts that were national in scope to supplement the revenues of franchisees, as the company had promised. However, in 2011 the franchisor asked Navales to provide a client location for a television video of work being performed to be used as training. EPN obliged and was able to have a long-time local client accommodate BrightStar. Unknown to Navales, the franchisor sought the filming as part of its plan to be on the nationally syndicated television show “Undercover Boss” in which CEO Shelly Sun starred.

Navales told Blue MauMau that the client, Lone Tree Convalescent Hospital, family owners of multiple facilities which he developed and services, appeared on the Undercover Boss program without his knowledge. He said they could not believe BrightStar would film their facility for a national television show without their permission. 

Blue MauMau confirmed with the administrator of the hospital, Phylene Sunga, what transpired because of the filming of the Undercover Boss episode. She said when owners saw the previews of the episode they were enraged, not only with BrightStar but Ed Navales. While she had had a good working relationship with the franchisee and felt he had always been very responsible and talented, always thinking outside the box, she had to take their accounts away from his company.

As a result of the undisclosed purpose of the filming and actions of BrightStar, Navales claims he lost the client, costing him over $300,000 in annual revenues.

BrightStar targets California franchisee for forming franchisee association

At the company’s annual event in 2011, Navales heard from other franchisees about BrightStar’s failures of performance. Franchise owners voiced their concerns about the ABS software computer problems, lack of advertising support and other issues, all familiar to him.

Navales decided at that point to form an independent franchisee association. When he did, he alleges that the company and CEO Shelly Sun began targeting him with a series of default notices which eventually led to terminating his franchise agreements.

Since that time, franchisee Paul Wichman, also in California, formed another group this year known as BrightStar Independent Franchisee Association, under the umbrella of the American Association of Franchisees and Dealers. He said the franchisor respects their right to free assembly, as they should in the state of California. But he said, “They do not want to have any direct conversations with us.

“We proposed in an open letter to BrightStar in the Franchise Advisory Council forum, that is also published on our website, that we put together a program that is focused on unit profitability, so that we can help franchisees succeed.” Wichman said the failure rate is much too high in the system, and it’s mostly because the people coming in do not understand how much capital it takes to run the franchise. “They don’t have the financial staying power required. That’s the bottom line. It has to change,” Wichman exclaimed.

The new head of the franchisee association told that they were unable to turn a profit with their franchise until they had invested $650,000.

Navales’ legal fight escalates after termination

BrightStar filed a lawsuit against Navales and his EPN Enterprises company in late 2013, seeking preliminary injunctive relief to enforce certain post-termination obligations. At the same time, Navales filed his complaint in state court seeking declaratory judgment against BrightStar, CEO Shelly Sun and another franchisee through the Peter Lagarias law firm in San Rafael, California. His claims include violations of California Franchise Investment Law and Unfair Competition Law, as well as common law fraud, negligent misrepresentation, breach of contract and defamation and trade liable.

The same day it filed its federal complaint, BrightStar filed a demand for arbitration to recover damages caused by EPN Enterprises, mandated by the company’s franchise agreement. The parties dismissed their court actions in February 2014 to bring all respective claims into arbitration under the American Arbitration Association (AAA), in Illinois, BrightStar’s home turf.

BrightStar claims misconduct by franchisee Navales

Franchisor attorney Fredric A. Cohen of Cheng Cohen in Chicago, representing BrightStar, did not respond to Blue MauMau’s email asking for comments.

In its arbitration filing, BrightStar Franchising asserts that franchisee Navales through his company EPN Enterprises acknowledged when purchasing his franchises that BrightStar had the right to terminate its franchise agreement “upon notice and without the opportunity to cure” if the company sent out more than two notices in any 12 month period.

The franchisor claims Navales and EPN breached its four franchise agreements through a list of misconduct, including servicing customers outside its territory, infringing upon other franchisees; failing to attend mandatory leadership conferences; ceasing to process payroll through ADP offices; and failing to provide BrightStar its federal and state income tax returns, profit and loss statements and bank statements.  

In its second amended demand for arbitration it claims that the franchisee was served three separate notices to cure: failure to provide 2012 bank statements; failure to maintain its joint commission accreditation; and failure to maintain “in full force and effect its commercial lines of insurance coverage.” On December 5, 2013, BrightStar exercised its right to terminate EPN’s agreements for cause because of its repeated breaches.

The franchisor alleges that after termination, EPN also breached its post-termination obligations. It further claims that for a period of time EPN competed unfairly with BrightStar and used its confidential information and telephone numbers in connection with competing businesses. The company contends that is in violation of federal and state laws and its former franchise agreements. And EPN failed to pay all amounts owed, mandated by its agreements.

As previously stated, BrightStar demands EPN pay $2,500,000, and reserves the right to claim additional damages if it determines that Navales and his company’s breaches were intentional.

Other litigation, not listed in BrightStar Minnesota FDD

In researching the company’s past and current legal cases, Blue MauMau reviewed BrightStar’s franchise disclosure documents for 2011 to 2014 and compared its litigation to state court filing. Several lawsuits were not listed in the franchisor’s FDDs.

Kirsch v. BrightStar was filed August 30, 2012 in Illinois district court, with its last filing on July 18, 2014. According to court documents, the case is set for jury trial on November 3, 2014. BrightStar’s 2013 FDD (for year 2012) states “No Litigation”.

Another case, Cameron Rose, Jr. v. BrightStar, filed January 18, 2013 is only listed as post termination enforcement with no details of the case. It shows a second listing, a AAA arbitration on February 5, 2013, as BrightStar v. D Cameron Rose, Jr. & Danielle M. Rose with no other disclosure.

And yet another, BrightStar v. Brian Duncan in Illinois. The case was filed April 2013 and is now closed due to a settlement between the parties. The case is not found in any BrightStar FDDs.


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AttachmentSize
BrightStar 2014.02.06_BrightStar Arbitration Demand with Attachments.pdf266.87 KB
BrightStar - Second Amended Demand with Exhibits 1-4.pdf3.02 MB
BrightStar -First.Amended.Counterclaims.06.16.14.pdf1.8 MB
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