[1] Charlotte Observer
Tom Lockhart moved from Atlanta nine years ago planning to open nearly a dozen Mellow Mushroom restaurants in Charlotte, providing people with a place to kick back, eat some pizza and enjoy a wide selection of beer.

But his vision was a bust. He opened only five. Just a few years later, he shut down two as money grew tight.

Mellow Mushroom sued him for breach of contract and won a $1.3 million judgment. He filed for bankruptcy protection and reopened the pizza restaurants under a new name, Moondog’s.

Then, last month, came the latest blow: A federal court in Charlotte barred him from selling pizza.

"If I had to do it all over," Lockhart says, "I’d have stayed in Atlanta."

Although he’s still running Moondog’s restaurants here, Lockhart’s fate is a reminder that even in a boomtown like Charlotte, not every business venture is a guaranteed winner. And it’s a cautionary tale to choose business partners wisely.

Court documents, bankruptcy filings and interviews with the major players shed light on what happened to the popular Mellow Mushroom restaurants in Charlotte. The company has the largest regional pizza chain in the Southeast.

Lockhart says Home-Grown Industries, which franchises Mellow Mushroom restaurants, got greedy and employed hardball tactics at a time when he needed help.

But company officials tell a different story. They say Lockhart seemed overwhelmed by the demands of the business, and that though they tried to help, he lacked the financial resources to make the Charlotte restaurants work.

Hungry for success

Lockhart got to know Mellow Mushroom from his time in Atlanta, when he was a contractor who built restaurants for a franchise operator there. When he and his wife, Dawn, learned they could acquire the right to operate Mellow Mushrooms in Charlotte, they jumped at the opportunity, Tom Lockhart recalled.Founded in Atlanta in 1974 by Georgia Tech students, Mellow Mushroom became known for its high-quality pizzas and funky hand-painted walls.

Since then, it has expanded throughout the Southeast and recently started marching westward into Texas, Louisiana and Indiana. It has roughly 90 restaurants, operated by individual owners who sign a 50-page franchise agreement detailing all aspects of the restaurants’ operation.

Beginning in 1999, the Lockharts signed a series of 15-year franchise agreements with Home-Grown Industries.

The agreements, found in court documents, listed details of how the operation was to be run, dictating terms on operating hours and store layout and revenue targets. They called for Lockhart to pay 7 percent of weekly sales to the company and said Lockhart may not operate competing pizza restaurants if the two sides parted ways.

To hear Lockhart tell it, his timing was terrible. His Mellow Mushroom in the Highland Creek area , in the northern part of Mecklenburg County opened just before the 9-11 terrorist attacks. He said those attacks hurt the economy and devastated his business.

In September 2005, he closed his East Boulevard and Highland Creek stores because they were losing money. And he stopped paying fees to Home-Grown Industries because he couldn’t afford it.

"I had stores losing money every month, and they still wanted me to pay them royalties," Lockhart says. He faults the company for failing to spend money to advertise, even though a portion of the fees he paid went into a marketing fund. The franchise agreement did not require the company to spend those fees in any particular market.

Richard Brasch, the chief executive of Home-Grown Industries, says the company offered advice on how to improve Lockhart’s operation and that in any event, the problems ran deeper than advertising.

He says the company started hearing that Lockhart was struggling with high employee turnover, and that he was making pizzas with generic cheese instead of the more expensive Grande brand cheese Mellow Mushrooms are supposed to use. Cheese is typically the biggest food expense in a pizza restaurant.

"You don’t want to be the food police, but you want franchises to comply with specific requirements," Brasch said. "We had difficulty getting Tom to do that."

Home-Grown Industries sued Lockhart in October 2005. The two sides settled four months later with a $1.3 million judgment against Lockhart.

Brasch says the restaurant business typically requires enough financial resources to weather downturns. In part because of its experience in Charlotte, Home-Grown Industries has increased its financial requirements for multi-store franchisees.

Asked if he got in over his head, Lockhart said: "We didn’t think so at the time. The economy was fairly robust. … We started out doing really well. No one could see 9-11 coming."

Starving for survival

The Lockharts filed for bankruptcy protection in December 2006, as did their corporation that ran the Charlotte Mellow Mushrooms. Bankruptcy documents show that at the time, they owed $1.3 million to Home-Grown Industries, $350,000 to Childress Klein for the Highland Creek store and $150,000 to Edens & Avant, the landlord of the East Boulevard store.

They also owed money to food distributors and landlords of remaining restaurants, according to bankruptcy documents.

After the Lockharts made $121,000 in 2004, their employment income plummeted to just $20,000 in 2005 and less than that in 2006, according to their bankruptcy filing.

But their legal tussles weren’t over.

Home-Grown Industries terminated their franchise agreements in May for nonpayment. Lockhart renamed the three remaining restaurants Moondog’s Pizza Pub. The name comes from the 1959 movie "Gidget," in which the title character’s love interest is a surfer named Moondoggie.

But the two sides headed to court again, over the issue of whether Lockhart had fully severed his ties to Mellow Mushroom.

The company said Lockhart copied the Mellow Mushroom menu and simply changed the names of the pizzas. A chart in court papers, for instance, alleged that Mellow Mushroom’s "Mighty Meaty" became Moondog’s "Cowabunga" (pepperoni, ground beef, sausage, ham and bacon).

The company also complained Lockhart continued to use the image of "Mel," a pizza-flipping yellow-and-green mushroom character Home-Grown Industries had trademarked.

It sought to bar Lockhart from selling pizza at or near the former Mellow Mushroom restaurants, as described in the previous franchise agreement.

In a federal court hearing in Charlotte in August, Lockhart’s lawyer, Nathan Hull, tried to argue that the restriction was unreasonable, since there’s no secret formula to making pizza, according to court transcripts.

But Judge Robert Conrad didn’t seem to buy the argument: "You are talking to a court that grew up in Chicago and has a very definite opinion as to one pizza versus another. So you’re treading very thin ice there."

In October, the court entered an order barring Lockhart from serving pizza.

This month, he closed his original store in Olde Towne Village on Carmel Road in south Charlotte. Moondog’s restaurants in Cotswold and NoDa remain and serve calzones and hoagies.

Today, Lockhart says the economy scares him, but he’s optimistic about the future. To him, the lesson is to choose business partners wisely and to not give away too much when signing a contract to start a business.

"In your zeal to have a franchise, be sure to read the dadgum agreement," he says.

Brasch, of Home-Grown Industries, says he’s not sure his company will ever recover the $1.3 million judgment it’s owed. He, too, stresses the importance of choosing the right partners.

He said he’s working with others interested in opening new Mellow Mushrooms in Charlotte.

Court: Pizza rivalries nothing new

A portion of the September decision by Judge Robert Conrad, chief U.S. District Judge for the Western District of North Carolina, on the pizza dispute:

"At oral argument, Lockhart conceded that the menus are similar because `pizza is pizza.’ The Court disagrees. Ever since Neapolitan Gennaro Lombardi opened the first American pizzeria in New York’s Little Italy in 1905, this confection of dough, cheese, tomato sauce, spices and assorted toppings has inspired intense local and regional rivalries.

"Chicagoans vehemently reject any `Second City’ designation when it comes to their succulent `deep dish’ pizzas; and, as counsel has acknowledged, Giordanno’s and Gino’s East have their advocates (although the Court prefers Pizzaria Uno and Due). …

"Even in the south, barbecue has begun to appear atop pizza. Wherever and whenever pizza is sold, there are few quicker ways to set Americans to bickering then [sic] to ask them who makes the best pizza."