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Franchisees Sue Papa Murphy's as Pizza Chain Prepares for IPO

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This article was updated on 4/10/2014. 

Papa Murphy's franchisees don't think they've gotten a fair slice of the take-and-bake pizza business.

More than 20 franchisees filed a lawsuit against the franchisor last week, accusing Papa Murphy's of misrepresenting and omitting key facts about the chain's financial performance and advertising in franchise disclosure documents, .

The franchisees argue that Papa Murphy's failed to disclose accurate information about the financial performance of stores in Southern and Southeastern states. They also said they were not told that they would have to contribute more on advertising to achieve sales on par with the Pacific Northwest and other parts of the country.

While Papa Murphy's franchising agreement allegedly requires store owners to contribute 5 percent of gross revenue to an advertising pool, some franchisees report being forced to pay up to twice as much to support additional marketing.

Related: Bankrupt Quiznos Settles With Franchisees in Cost Dispute

“We have yet to receive service of the lawsuit despite making a request to the plaintiff’s attorney," Papa Murphy's International said in a statement. "That said, we are disappointed that any Franchise Owner would pursue litigation despite ongoing discussion and support from Papa Murphy's. Assisting Franchise Owners to grow sales and increase profitability is an ongoing priority for us.  Based on our knowledge of the issues, we deny the allegations and will vigorously defend any claims.”

The franchisees represent more than 60 of the company's 1,425-plus stores in the 38 states, Canada and the United Arab Emirates. Their Papa Murphy's restaurants are located in the South, where the company's bake-at-home pizza concept has reportedly proved to be less successful than other areas of the country. At least nine of the plaintiffs listed as Texas-based companies, while others are located in Missouri, Georgia and Florida.

Plaintiffs are seeking estimated damages of $23 million – about $1 million per franchisee.

The lawsuit comes at an unfortunate time for Papa Murphy's, which filed for an initial public offering last month. The company set the goal of raising $70 million.

Historically, franchisee support has been one of the strong points of Papa Murphy's, which reported a net loss of $2.6 million in 2013 while increasing revenue 20 percent to $80.5 million. With this lawsuit, however, the IPO could begin to look less appetizing.

Related: Take-and-Bake Pizza Chain Papa Murphy's Files for $70 Million IPO