Franchise Concept on Blackboard

RE/MAX New England and two of its former franchisees are facing off in U.S. District Court in Boston next month in a David v. Goliath case that could have big implications for franchisees.

Former RE/MAX franchisees Andrew Armata and Stacey Alcorn allege RE/MAX New England hindered their growth and structured franchise agreements to make it virtually impossible for owners of multiple offices, like themselves, to leave the franchise. Armata said the agreement stifles innovation and entrepreneurism.

Pamela Alexander, CEO of RE/MAX NE’s parent company RE/MAX Integra, denies the charges and alleges Armata and Stacey breached their franchisee agreements.

Stacey Alcorn bought her first RE/MAX franchise in 2000. Alcorn and Armata became business partners in 2004 and by 2013, they had 13 offices, 260 agents, and the feeling that RE/MAX NE was actively trying to limit their growth. Armata said RE/MAX first removed protective buffers around existing offices and allowed new offices to open, sometimes in a town that already had a RE/MAX office.

“They also attempted to sell franchises to some of our current agents,” Armata said. “They also interfered with a number of our attempts to purchase other offices, specifically in Portsmouth, New Hampshire and Medford, Massachusetts.”

Alexander said the company supported Alcorn and Armata, and provided them with a variety of growth opportunities along the way.

“In their time with RE/MAX we encouraged their growth,” Alexander said. “They didn’t have a deep real estate background. We provided them with tools and they built their organization around that framework. We also offered them a variety of opportunities to expand by involving them with broker/owners who made the decision to sell and they grew their business significantly by seizing on those opportunities.”

On April 14, 2014, Alcorn and Armata severed their relationship with RE/MAX and opened LAER Realty. In July of that year, RE/MAX NE sought and was denied a temporary restraining order that would have stopped LAER Realty from doing business.

Armata and Alcorn are the first to challenge the RE/MAX NE post-term, non-compete clause in court.

“That is true,” Alexander said. “We don’t have a lot of legal issues with our franchisees. We’re very fair and open and our system is excellent. Andy and Stacey are a prime example of that. They were hardworking entrepreneurial-types but didn’t have a lot of real estate experience. Under our system they grew dramatically and we applauded that growth. Our system allows people like them to grow themselves a significant business like they did.”

Armata said he and Alcorn paid RE/MAX NE roughly $10 million in franchise fees between 2000 and 2014, a figure that Alexander disputes. She called Armata and Alcorn “chronic late-payers.”

“We went through five bad years after the crash and every single month they got paid their franchise fees, even if we were a few days late once in a while,” Armata said. “We had some tough months, Stacey and I didn’t take paychecks sometimes, but they got paid every single month.”

Alexander characterized the suit as an unfortunate part of running a global franchise with more than 34,000 agents.

Alexander conceded that though the partners did pay RE/MAX a lot of money over the years, it was largely because the two used the RE/MAX brand and system to build their successful businesses.

When Armata and Alcorn cut ties with RE/MAX in 2014, 200 of their 260 agents came with them to LAER. Since then, he said they’ve doubled their number of agents, the number of transactions and their revenue. He said that success is proof of his team’s work ethic and did not come from anything he learned as a RE/MAX agent.

“They don’t give you any kind of a system, all they give you is a balloon,” Armata said. “There is no training, no secret sauce, no nothing. It has nothing to do with the brand or the franchise. Every office is run by the owners. There is no system of operation. We built our own system.”

Fighting For Future Franchisees

Armata said the RE/MAX NE franchisee agreements he and Alcorn signed prohibited them from opening another independent office outside of the RE/MAX franchise. Additionally, the five-year termination dates on the various offices they owned were staggered, meaning it would take years for the pair to end them all before they could open their own.

He said the company restricted his growth within the franchise, forbade opening offices outside of it, and the contract made leaving impractical, all of which effectively voided their contract.  RE/MAX claims the pair are still bound by the terms of the contract.

“The goal of our litigation is to say that multi-office owners have a no way out agreement unless we get a judge to say [RE/MAX NE] can’t stagger the terms,” Armata said. “There is nothing more important to us than getting out of a system where the franchisor actively worked against us. They didn’t want us to get bigger, so we created LAER Realty.”

Alcorn and Armata said they are confident they will prevail in federal court in next month, but either way, they’re looking forward to putting this chapter behind them and focusing on their new business.

“One of us will have to write a check to the other and it will be over,” Armata said.

Alexander said the company has already recovered from the loss of Alcorn and Armata’s franchises and they intend to defend their contracts in court.

“We have struggles from time to time and we try to work things out,” Alexander said. “We’ve sold 47 franchises in North America so far this year and last year we had a record year in New England. That speaks well to who we are and to the franchisee agreement. All we ask franchisees is to stay within the realm of that agreement and work hard toward growth and market share for their agents. It’s important we defend our contracts, but life goes on; there’s never any malice on our part.”