2 Boise business owners win millions from franchiser they say double-crossed them

Roger Thurston has spent 30 years building up his Boise business. He sold business forms, checks, promotional items and office supplies through a distributorship operated under a national franchiser, Safeguard Business Systems.

He was successful, and in 2006 he sold nearly 1,900 of his sales accounts to Dawn Teply, a sales representative who had worked for Thurston for 11 years. The sale allowed Teply to establish her own Safeguard distributorship, also in Boise.

Thurston never thought Safeguard would double-cross him, but that’s what he and Teply say the company did. A Boise jury and an arbitration panel agreed. The jury has awarded Thurston $6 million in a lawsuit, and an arbitration panel awarded $4.4 million to Teply.

Thurston had built a good relationship with Safeguard, a Dallas-based company that had been in business for 30 years when he signed on as a distributor in 1987. The company gave its distributors exclusive selling rights to their customers for three years each. Every time Thurston or Teply made a new sale, the clock reset, preventing other Safeguard distributors from selling to that customer.

Thurston, Teply and a third Idaho Safeguard distributor, Craig Empey, of Idaho Falls, who was not involved in the lawsuit, had combined annual sales of $1.82 million. They ranked in the top five for per capita market penetration in Safeguard’s geographic areas in the United States, court documents said.

Relationship soured

By 2013, though, the relationship between the two Boise Safeguard franchisees and Safeguard was starting to sour.

Ten years earlier, Safeguard had been acquired by the Deluxe Corp., a Minnesota company that is one of the nation’s largest sellers of banking checks. Deluxe reported 2016 sales of $1.8 billion.

Here’s what court records show:

In 2013, Safeguard bought two of Thurston’s and Teply’s Treasure Valley competitors, DocuSource and Idaho Business Forms. They became Safeguard distributors.

At that point, DocuSource and Idaho Business Forms should have stopped doing business with customers who also bought from Thurston and Teply, according to the terms of Thurston’s and Teply’s Safeguard distributorship agreements. That didn’t happen.

Safeguard was required to disclose information about the common customers. Instead, it hid that data.

Safeguard supplied products to DocuSource and Idaho Business Forms at prices that were 40 percent less than the wholesale prices offered to Thurston and Teply. That put them at a competitive disadvantage and angered customers, who concluded that the two distributors had been ripping them off.

“The customers then called Dawn and Roger and asked why they had been gouging them,” said James Mulcahy, a California lawyer who represented Thurston at trial in December and Teply during arbitration last summer. “It was a perfect recipe for trying to destroy their businesses.”

Thurston and Teply maintained that under their distributorship agreements, they should have been able to buy their products at the same price as other Safeguard distributors.

Under the distributorship agreement, which automatically renewed every five years, Thurston and Teply could buy products from companies unaffiliated with Safeguard. But after Deluxe took over, Safeguard began pressuring its distributors to order business forms made by Deluxe, the lawsuit claimed. Safeguard also wanted distributors to buy other products supplied by other companies, “preferred vendors” handpicked by Deluxe, Thurston and Teply said.

Thurston’s lawsuit accused Deluxe of annual anticompetitive price increases. Preferred vendors also raised their prices to make up for a 7 percent “rebate” that Thurston and Teply said Deluxe required of them.

Arbitrators: Pay $4.4 million

Thurston and Teply sued in August 2014, contending that Safeguard continuously violated their rights after buying the two other Boise companies a year earlier .

While Thurston’s case went to trial, Teply’s distributor agreement called for her dispute to be settled by arbitration.

The ruling in her favor came first. Last October, a three-member arbitration panel awarded Teply $4.4 million, including $2.4 million in attorney fees. The panel found Safeguard was liable for breach of contract, intentional interference with business relations and violation of the Texas Deceptive Trade Practices Act. The Texas law came into play because that is where Safeguard is headquartered.

On March 29, Ada County District Judge Steven Hippler, who also presided over the lawsuit, upheld the arbitration award. Under the Federal Arbitration Act, a court must confirm an arbitration award unless overwhelming circumstances require it to be overturned.

“This court concludes that confirmation of the award in full is warranted,” Hippler wrote in a 12-page decision.

Jurors: Pay $6 million

The ruling in Thurston’s favor came soon after, in December, after a three-week trial in Hippler’s courtroom. The jury found that Safeguard repeatedly violated Thurston’s franchise rights and tried to cover up its inappropriate conduct. The jury found that Safeguard’s actions had reduced the value of Thurston’s business by two-thirds.

Its $6 million award included $4.4 million in punitive damages.

The jury found no liability on the part of Deluxe. It ruled in favor of the parent company in each of the claims made against it. Similarly, the arbitrators who decided Teply's claim found that Deluxe was not liable for damages.

Mulcahy, the lawyer for Thurston and Tepler, said the punitive damages were based on conduct by Safeguard’s corporate counsel, Mike Dunlap. Mulcahy said Dunlap concealed from Thurston and Teply that the company-owned distributors were selling to the distributors’ protected customers.

As a result, they did not receive commissions they were entitled to, Mulcahy said.

“That lawyer completely deceived those people,” Mulcahy said.

At the Thurston trial, Dunlap testified that he was working to get the accounts straight and ensure that Thurston and Teply received their proper commissions. He said it was a complex operation that required more than a year’s work.

“My goal, ultimately, is to try to provide some kind of agreement where everyone wins, and that is the goal of this process,” testified Dunlap, who no longer works for Safeguard and could not be located for comment.

In reviewing the jury award, Hippler found that Dunlap consistently misrepresented or concealed the extent of account-protection violations despite receiving monthly reports that detailed infringing sales by Idaho Business Forms and by DocuSource. (DocuSource was subsequently sold and no longer does business in Idaho.)

Safeguard: You’re wrong, judge. Judge: No, I’m not

After the trial, Safeguard asked the judge to reconsider. Safeguard argued that the jury’s decision was not supported by sufficient evidence and that the award was excessive, especially the punitive damages. The company said the reduction in the value of Thurston’s business was not supported by evidence. It asked Hippler to dismiss the punitive award entirely.

Hippler disagreed. In a ruling issued March 24, the judge found that the jury’s award was reasonable based upon evidence provided at trial.

“Accepting all the evidence adverse to Safeguard as true, and drawing all inferences in favor of Thurston, the jury could find that Dunlap’s conduct, on behalf of Safeguard, was fraudulent and oppressive,” Hippler wrote. “Therefore, substantial, competent evidence supports the jury's punitive damage award.”

The judge is still considering whether to award Thurston attorney fees. At a hearing Thursday, Safeguard attorney Paul Genender said the $2.5 million requested by Mulcahy’s firm was unreasonable. He said the firm should not receive more than $150,000 in fees.

Mulcahy argued that the case was complicated after Safeguard refused to share information with his firm. That also led to the case dragging out for nearly three years, he said.

Mulcahy said the outcome of the Boise case could have serious ramifications for Deluxe and Safeguard, because they took similar advantage of distributors throughout the country.

“It sends a message to Deluxe that they need to take care of these other distributors or they may be hiring attorneys to handle similar claims,” Mulcahy told Hippler.

Has Safeguard changed?

Genender declined to say whether Safeguard plans to appeal the awards. He also declined to comment on the case itself, saying it was still pending litigation.

It is unclear whether Safeguard has made any changes to its business operations.

Under terms of the arbitration decision, Teply will cease being a Safeguard distributor after payment is made. Thurston is not sure whether he will also lose his distributorship.

Fighting the company, Thurston said, has been stressful.

“We’ve been put through a real meat grinder,” he said.

This story was revised April 28, 2017. he original version of this story did not include that Deluxe Corp. was not found liable for damages by either the arbitrators in Dawn Teply's case or the jury in Roger Thurston's case. Each of the awards was against Safeguard Business Systems only.

This story was originally published April 7, 2017 at 6:40 PM with the headline "2 Boise business owners win millions from franchiser they say double-crossed them."