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Quiznos Disclosure Shines Light on Settlements, Litigation

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DENVER – Shedding new light on ongoing  litigation, settlements and the current status of the franchise system, Quiznos amended its franchise disclosure document on October 12, 2012.  While the company at one time boasted over 5,000 units, today it struggles to maintain 1,600 traditional restaurants.

After Quiznos reached a settlement in 2010 with thousands of franchisees in a national class action lawsuit, the sub sandwich chain found itself in dire financial trouble, coping with sluggish sales, lack of cash flow and a high debt load. After Richard E Schaden and his private equity firms CCMP Capital Advisors LLC and Consumer Capital Partners struck a purchase deal with New York billionaire hedge fund owner Marc Lasry, Quiznos principals convinced creditors to support the chain’s debt restructuring plan. As a result, the sale of the 30-year old sandwich chain, under The Quiznos Franchising Company LLC, was finalized with Avenue Capital Group in early January 2012.

What we now know is that only $6 million was paid out to the thousands of franchisees out of the $206 million class action settlement of August 13, 2010. Another $10.8 million in cash was paid separately for attorney and expert witness fees. In March 2011, the company’s insurance carrier reimbursed Quiznos’ former owners $9,800,000 to cover the settlement and defense costs related to the case.

FDD under new ownership

Avenue Capital Group filed its first franchise disclosure document in March 2012, under QFA Royalties LLC. In light of the amended document, which Blue MauMau has obtained, financial statements dated December 31, 2011 and 2010 address the previous ongoing litigation and settlements.

As part of the notes to the financial statements, QFA Royalties disclosed that it had not accrued any charges under the settlement agreement because the previous owners, Schaden’s group, had the burden of that settlement. However, upon termination of the underlying franchise agreements, QFA Royalties paid the former company $2,182,500 that was previously recorded in deferred initial franchise fees and costs held by his firm related to the class members.

Under Item 3 of its disclosure document that is supplied to buyers, litigation history, the franchisor now lists 91 cases that date back to 2004. Eleven of those lawsuits in the United States and Canada are pending. As part of its financial statements, QFA Royalties notes that several of the lawsuits and settlements “could affect its [the new company’s] financial situation.” 

One such case is Ballwin Food Beverage, Inc v. Quiznos Franchising, filed in 2010 by 18 current and former franchisees who opted out of the national class settlement.

The franchisees accused the sub sandwich chain of violations of Colorado Organized Crime Control Act, using a fraudulent scheme to sell mandated essential goods at inflated prices. They also alleged Quiznos used a fraudulent scheme to sell franchise agreements and used unlawful control over franchisees through a pattern of racketeering activity. They also asserted the franchisor violated the Colorado Consumer Protection Act, aiding violations of Colorado’s Civil Theft Act, including conspiracy to commit and aiding and abetting civil theft.

The owners sought preliminary and permanent injunctive relief, and an order declaring certain provisions of their franchise agreements unconscionable and therefore unenforceable. They also asked the court to render their franchise agreements as deceptive and award them compensatory and statutory damages. In addition they sought disgorgement of Quiznos’ illegally-obtained profits, and attorney fees.

Because the financial statements in the amended FDD only addressed QFA Royalties’ financial status through March 26, 2012, it was noted at that time that if the Ballwin case wasn’t settled or if it had an adverse judgment “the resolution could have an adverse effect on QFA Royalties’ financial position and its results of operation.”

Quiznos reached a settlement in the Ballwin case on August 30, 2012, agreeing to pay franchise owners $8,376,035, and an additional $1,623,964 for their attorney fees.

Another settlement noted in financials was Joe Martrano v The Quiznos Franchise Company, filed in 2008 in district court of Western Pennsylvania by 13 current and former franchisees. Among their claims were fraudulent inducement and breach of contract arising out of the sale of franchises. They sought preliminary and permanent injunctive relief. The company entered into a settlement with all but one franchise owner and paid $500,000. The case was dismissed in January 2012.

QFA Royalties’ FDD also notes that in 2011 it paid $3,875,000 in a settlement with former area directors whose area marketing agreements were terminated for noncompliance with development quotas. Approximately half the settlement was paid in notes payable.

Although not noted in the financial statements, the amended disclosure document shows another high-profile case that opted out of the class action suit. In July 2012, the law firm of Marks & Klein was disqualified from representing the franchisees in Meena Mody v The Quiznos Franchise Company, when the court ruled the firm had a conflict of interest after hiring a Quiznos outside attorney who had a key role in the class action litigation. The case settled in October 5, 2012, with Quiznos agreeing to pay franchisee plaintiffs $50,000.  

Other notable disclosure in Quiznos FDD

John Gordon, principal of Pacific Management Consulting Group, who also provides expert testimony in litigation for franchisee plaintiffs, said he was surprised at the $6 million actual cash paid out. He thought it would be more in the range of $20 million. But the analyst said the $206 million was a “theoretical multi-year value,” the opinion the judge called for in order to assure the settlement was fair.

Gordon explained that the $206 million was a true total when the non-cash reforms that the parties agreed to were added into the agreement, showing what would be accumulated by the franchisees over a period of years. While most franchisees received only a pittance in cash, the named plaintiffs collected some $50k each.

Gordon also notes that Quiznos now discloses the range of fees it is paid by suppliers on beverages, food, equipment, cleaning supplies, payroll and even credit cards. The latest FDD also shows that unit gross sales includes coupons, discounts and meals. But most revealing is that average store sales are very low and there are fewer units open today.

Blue MauMau requested an interview with Quiznos CEO Stuart Mathis, or another company principal, to ask what is in store for the franchisees in 2013 and what is the current financial status of the company.  Mr Mathis’ assistant stated that he was not available at this time.


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Quiznos FDD Document.pdf1.87 MB
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