Two north suburban real estate brokers have filed arbitration complaints against Prudential Insurance Co.`s real estate franchise operation, claiming their businesses were all but wrecked in the wake of Prudential`s acquisition last year of Merrill Lynch & Co.`s residential real estate network.
The two brokers, both Prudential franchisees, are each seeking more than $150,000 for ”destruction of business” plus other damages that could amount to hundreds of thousands of dollars more.
Each claims that Prudential representatives led them to believe they would not be faced with competition by other Prudential real estate offices in their business territories. Prudential disputes those claims.
The brokers are Robert Green, owner of Prudential MGM Realty Inc., which has offices in Skokie and Buffalo Grove, and Michael Vecchione, owner of Prudential-Continental Real Estate North in Deerfield.
Green, 58, who had been in business under the name MGM Realty since 1964 until he became a franchisee of Prudential Real Estate Affiliates in August, 1988, said ”unbelievable” damage had been done to his business by Prudential`s purchase of the Merrill Lynch offices plus other problems associated with the franchise.
The Prudential takeover in August, 1989, which involved 450 former Merrill Lynch real estate offices nationwide, put him in competition with more than 15 new Prudential-operated offices located in or adjacent to his areas of operations, Green said.
The squeeze put on his business by those offices, which are called Prudential Preferred Properties, forced him to close offices he had in Niles and Chicago`s Rogers Park area, Green said.
In Vecchione`s case, he said the Prudential-Merrill Lynch deal meant that he was competing with a Prudential Preferred Properties office only a block away from his office on Waukegan Road in Deerfield.
In addition, Vecchione said, the takeover occurred only five months after he became a Prudential franchisee. Vecchione, 37, bought the Deerfield real estate office in late 1988 after a career in commercial real estate leasing and managing, and became a Prudential franchisee in March, 1989.
The Vecchione complaint said that as a result of Prudential`s actions, Continental, which been had been showing a profit of at least $80,000 a year before becoming a Prudential franchise, is now losing money ”constantly” and is more than $200,000 in debt.
Both Green and Vecchione said that although they had not been granted exclusive territories in writing, they had been given verbal assurances by Prudential representatives that additional franchises would not be granted in their areas.
”In all the conversations I ever had, I was assured that as long as I was diligently working to get my market share, Prudential would stand behind me,” said Vecchione. ”They said they would never consider becoming a Century 21, with an office on every corner, yet five months later I`m competing with with an office four times my size.”
The Vecchione and Green complaints, filed in Illinois and California
(where the franchise operation is based) with the American Arbitration Association by Loop attorney Harvey Barnett, say that in addition to losing business, the brokers are unable to recruit top salespeople because the existence of Prudential Preferred Properties has taken away the name recognition they hoped to gain by becoming Prudential franchisees in the first place.
In joining the Prudential affiliate group, the two brokers both paid upfront franchise fees-usually around $22,000-and sent to Prudential levies totaling 8.5 percent of gross sales commissions.
In their complaints the brokers charge that since Prudential itself owned the old Merrill Lynch offices until they were sold off to brokers just recently, those offices were operating for almost a year without having to pay fees.
A fact that particularly galls the two brokers is that only the former Merrill Lynch offices have the Prudential Preferred name, while they simply got a ”Prudential” added to their company names.
”The `Preferred` is the killer,” said Barnett. ”You don`t have to be a genius to know the difference between, say, Midas Mufflers and Midas Preferred Mufflers. You don`t need a sophisticated market survey to tell you that.”
At the time of Prudential`s $300 million purchase of the Merrill Lynch offices, the giant insurer`s real estate affiliate had about 430 established franchisees. The combined offices now number almost 1,000, making Prudential the fourth-largest residential real estate chain in the country, according to the company.
Prudential spokesman Tom Jago said that the move created 60 conflict situations around the country and that 48 of those had been settled, six are in negotiations and six are in litigation.
Settlements involved such measures as combining offices, granting exclusive rights to handle commercial properties in an area and making payments to the pre-existing franchisees, Jago said.
In one case, involving Dallas franchisee EquiSource Realty Corp., an arbitrator awarded the existing franchisee about $1 million, including attorney`s fees, according to Jago. That sum has yet to be paid, however, and the case is in litigation.
Where negotiation has failed to settle the conflicts, they have been submitted to arbitration through the arbitration association, as called for by the franchise agreements.
Jago said Prudential rejected assertions by Vecchione and Green that they had been given to understand other Prudential franchises would not be opened in their area.
Only in eight contracts around the country were exclusive territories spelled out, and Veccchione and Green are not among the eight, Jago said.
”We never sold exclusivity other than to those eight,” he said. ”We realized some franchisees would be concerned about bringing in the Merrill Lynch offices, and we have worked with them to ameliorate their concerns.”
Vecchione`s complaint said he was offered $250,000 by a Prudential
”conflict resolution team” but that he rejected it as ”a mere pittance of the harm done. . . .”
In the other case, Prudential attempted to settle with Green by closing a former Merrill Lynch office that had been across the street from Green`s Buffalo Grove office.
”That wasn`t a satisfactory resolution,” said Green. ”It didn`t encompass the major problem of my being surrounded” by the former Merrill Lynch offices. Green called said those offices constitute a ”mega-franchise within the franchise.”
Green said that he had hoped through negotiations with Prudential representatives to improve his position by taking over some of the former Merrill Lynch offices himself but that they were finally sold to former Merrill Lynch agents.
Jago argued that in the vast majority of cases the Merrill Lynch takeover has strengthened the pre-existing franchises, because they have access to Merrill Lynch`s relocation network and benefit from increased Prudential real estate advertising.
He said a company survey showed that the number of transactions done by the franchisees were 14 percent higher for the first six months of 1990, after the Merrill Lynch takeover, than for the same period in 1989, before the move. But Green and Vecchione claim they have gotten no such benefits or increased business. And the Green complaint added that because of a previous dispute between Prudential and a Chicago firm called Prudential Realty, he was unable to list his proper company name in the telephone directory and that there was no record of the name in directory assistance all through 1988 and 1989.
Even now, he claimed, calls to directory assistance asking for his office are almost always given the number of a nearby Prudential Preferred office.
”I worked all my life to build my business up,” said Green. ”Then I find I`m competing with my own parent company, and people can`t find my name in the phone book.”
He said he had been approached by Prudential initially to become a franchisee and decided to affiliate because he thought franchising was the wave of the future and that Prudential would be an ”honorable” company.
”But I found out they were just big corporate America and they could do what they wanted,” he said.
