The actions that lead to the lawsuit are from an Ace Hardware franchisee alleging that they were defrauded by the company. What happened is Roy and Pattie Ewers are suing based on the fact that the company deceived them into buying a well-known hardware store in Northern Virginia (named Fisher Hardware). The basic idea is that the Ewers' would make an initial purchase. While Ace, set up the franchise and helped the facility to build upon the customer base that was established over 60 years. ("Ace Hardware Lawsuit," 2012)
However, after the Ewers' received a $1.8 million SBA loan is when they were facing numerous difficulties with a supply chain that was filled with bugs. To make matters worse sales were much lower than the financial figures that Roy Ewers examined before purchasing the store. The combination of these factors created inefficiencies that allowed the wrong items to be priced inaccurately in Ace's computer system. ("Ace Hardware Lawsuit," 2012)
For instance, at the Fisher Hardware location an item that was supposed to retail at $200.00 was mistakenly marked down to $2.00. This caused the facility to take massive losses on nearly every item they sold. At the same time, there were major backlogs in the supply chain. This made it difficult to communicate any problems and have them rectified. The inability to address these issues forced the Ewers' to become an independent store (with alternative suppliers). ("Ace Hardware Lawsuit," 2012)
They are suing the company for fraud; as the Ewers have proof of mangers being told to deliberately inflate financial figures. While at the same time, they uncovered the real financial statements from their Fisher Hardware location. It is indicating that sales and earnings are much lower than Ace led everyone to believe. The Ewers are suing the company for fraud and misrepresentation. This has sparked an independent investigation of the case and the firm's practices by two federal agencies. ("Ace Hardware Lawsuit," 2012)
Discuss what management could have done in terms of risk management to have prevented the events that lead to the lawsuit.
The first step that should have been taken by management is to improve their logistics and supply chain management. This is because the company is known for having these issues and failing to address them. The results are that a number of franchises are reporting similar issues. These frustrations and anger have grown to the point that there is a class action law of 50 franchisees making similar allegations. (Barney, 2012)
To prevent this, managers should have been focused on understanding and dealing with these issues. To achieve this goal they could have selected an executive to serve as the supply chain liaison. This is an individual who has experience building and improving upon logistics for retail organizations. (Barney, 2012)
At the same time, a team should have been developed that works directly with each franchise. Their job is to listen to franchisees' challenges and help to resolve them using the different resources of the company. If this kind of approach was taken, Ace would have helped to enhance the ability of their franchises to succeed. This is when the company's earnings and profit margins will rise from focusing on their needs. (Barney, 2012)
To improve communication and efficiency, the bureaucracy should have been dramatically reduced. This allowed a culture to exist lacking oversight and the ability to investigate the financial information presented. These actions are leading to the Ewers claiming that they were misled by corporate executives. To make matters worse, they have several managers who are involved in illegal activities and are afraid to speak out. Most notably: submitting fraudulent information about a firm and then helping to cover up any incriminating evidence. This is illustrating how the corporate atmosphere is a culture that is filled with greed and contempt when it comes to following ethical guidelines. (Barney, 2012)
If there had been an independent auditor, who was evaluating this information and reporting these violations. They could have detected what was happening and alerted the authorities about these issues. At the same time, the company should have created a committee that investigates and goes after individuals who are engaged in these activities. This would have prevented any kind of oversights and ensured accuracy through effective monitoring as well as enforcement. (Barney, 2012)
Discuss the ethical considerations reflected in the laws applicable to this case.
The laws that are applicable in this case are the state and federal franchise laws. These regulations require that all franchisors must file with the state, provide accurate information about the prospects of the franchise to investors and financial disclosures on the company / officers. Moreover, the buyers have a waiting period to carefully evaluate the information and determine its accuracy. This takes place before and after signing the franchise agreement. (Barkoff, 2008)
There are also fraud regulations that were broken when the firm provided inaccurate information to Ewers. This is problematic, as a criminal investigation has begun and there is the possibility that executives could be indicted for engaging in these kinds of activities. If this occurs, the company could see its reputation damaged by these challenges. (Barkoff, 2008)
At the same time, the fact that Ace is hiding the real financial information from Ewers is a violation of their rights as shareholders in the company. What happens is some firms (such as: Ace) will have franchisees purchase shares of ownership. This allows them to have control in what is happening with the company. The fact that the Ewers were not informed of this is a sign that Ace is knowingly trying to deceive them. (Barkoff, 2008)
From an ethical perspective, the actions that were taken by Ace go directly against their own policies and business model. They are focused on meeting the needs of franchisees by addressing their needs. The fact that they are hiding information and not responding to critical issues are a sign that the corporate atmosphere has become corrupted. (Barkoff, 2008)
The state and federal fraud regulations are indicating that the company violated criminal statutes in these areas. These laws are designed to protect franchisees and provide them with accurate information. The fact that this did not occur is a sign that these activities are continually happening. As a result, some kind of aggressive actions must be taken against company officials to prevent further abuses. This is how officials can protect the interests of franchisees and enforce different regulations. (Barkoff, 2008)
Determine which sources of law would be most relevant in this case and how management could leverage knowledge of those sources to prevent similar instances in the future.
The most relevant sources are federal and state franchising / fraud regulations. This is because these laws are providing a basic foundation that can be used to establish guidelines in the future. The management can utilize these sources as a way to prevent further abuses. (Cross, 2011)
The way that this would take place is establish a code of ethics for everyone to follow. In the event that someone is caught violating any provision they will be punished. If the evidence is indicating wrong doing, these individuals will prosecuted under the law. This will show everyone that any kind of flagrant violations will not be tolerated. At the same time, anybody who discovers something that is out of the ordinary is encouraged to contact a toll free hotline. This will be provided to various stakeholders, employees and franchisees. These policies will establish procedures that will identify and prevent possible abuses in the future. (Cross, 2011)
Recommend what management might be able to do to pursue alternate resolutions (outside of court).
The best option that management has available to them is to settle the case with…