Judge Dismisses Federal Lawsuit against Quiznos
Federal Judge Rules That Quiznos Franchisees "Are Bound by the Terms of the Franchise Agreements They Signed."
MILWAUKEE (Blue MauMau) – Federal Judge William Griesbach of the U.S. Eastern District Court of Wisconsin announced today the dismissal of a banner lawsuit against Quiznos. Twelve franchisees, represented by attorney Justin M. Klein of Marks & Klein, allege that Quizno’s Franchise Company, LLC defrauded them. The sandwich shop owners accuse Quiznos of gouging franchisees to require them to purchase food, supplies and services at exorbitant prices from approved vendors, who in turn provide hidden kick-backs to Quiznos. It is alleged that the company then set artificially low retail prices that dug into store profitability.
Allegations of the franchisor having exorbitant mark-ups and kick-backs were ruled as vague. There was another more critical issue. Whether such price gouging exists or not, the judge specifically cited that the Uniform Franchise Offering Circular (UFOC) in which all franchise owners must sign was quite clear. The franchisor could charge mark-ups and kick-backs without restriction; specifically:
ITEM 8 of UFOC: We (Quiznos) and our affiliates have the right to receive payments from suppliers on account of their dealings with you and other Franchisees and to use the amounts we receive without restriction for any purpose we or our affiliates deem appropriate...
The claims of the franchise owners were undone by the franchise agreements that each signed (see attached memorandum and order, pdf - 28 pgs). Summarizes the judge, “Having chosen to become Quiznos franchisees, plaintiffs are bound by the terms of the franchise agreements they signed. If Quiznos has breached its agreement with them by charging them exorbitant prices for the goods and services needed to operate their franchises, their remedy lies in contract, not under the antitrust laws."
Federal racketeering, Sherman anti-trust and fraud charges were all dismissed. In regards to these charges, the court observed, “claims of fraud on which plaintiffs’ civil RICO claims rest are fatally undermined by the exhaustive disclosures and specific disclaimers and non-reliance clauses set forth in the franchise agreements they signed. I also conclude that the complaint fails to state a claim under the Sherman Act and its Wisconsin equivalent."
Franchise owners claimed that area developers gave them false expectations of what their store would earn when they were investigating to buy a franchise. The court dismissed the allegation saying that such false earnings claims were not relevent because the UFOC expressly stated this warning in all capitals and bold letters (see below):
"OTHER THAN THE ABOVE INFORMATION, WE DO NOT FURNISH OR AUTHORIZE OUR SALESPERSONS TO FURNISH ANY ORAL OR WRITTEN INFORMATION CONCERNING THE ACTUAL OR POTENTIAL SALES, INCOME OR PROFITS OF A QUIZNO’S RESTAURANT."
The court also ruled that the jurisdiction of the lawsuit was not entirely appropriate. State claims should be tried at the state level, not in federal court. Comments the judge, "With plaintiffs’ federal claims gone, I then dismiss the remaining state law claims without prejudice to allow plaintiffs to pursue them in state court under whose law they arise.”
With the franchisee lawsuit having failed, Richard Emmett, Executive Vice President and Chief Legal Officer for Quiznos, spoke with Blue MauMau about how the ruling could help the network focus on important issues.
“Now hopefully this distraction is behind us. We do not want to spend our time in court", says Mr. Emmett. "We want to spend our time improving the system and franchisee profitability. So we are pleased with the decision, not only because we think the decision is right but also because it will allow us to direct more resources to the benefit of our franchisees.”
Franchisee attorney Justin Klein is currently evaluating whether to file the suit in state court and / or appeal in federal court.
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Related readings:
- National Class Action Filed Against Quiznos
- Quiznos' Chief Counsel Speaks Out on Issues
- Quiznos to Pay $2M in Canadian Settlement
- Quizno’s Australia, 7 Years via the ACCC
| Attachment | Size |
|---|---|
| WisconsinQuiznosRuling.pdf | 172.07 KB |
- Franchise topic:
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Although the court has ruled, the court does not enforce. Quiznos Zees in debt might examine alternatives to full payment. Without fee and if desired, even anonymously presented, I will be happy to review and suggest alternatives. Start by looking at our website:performancesourceinc.com.
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Jim Herst is president of Performance Source Inc., a nationwide strategist organization serving business managers with credit restoration and payment systems in addition to designing cash flow processes. More information is available on si
Nation's Restaurant News really misunderstood this case. It normally has such a high level of reporting. But look below on how it describes why the Quiznos franchisee case in Wisconsin failed.
That is not right.
Judge Griesbach never came to a conclusion on whether Quiznos engaged in price gouging. His point was that even if the franchisees were correct in that the franchisor charged exhorbitant prices to its franchise owners, so what? The franchise owners signed agreements that gave the right for Quiznos to force them to buy at high prices. And signed agreements are binding.
That is the point.
Disappointing coverage by NRN. Inaccurate. Too simple. How come the trade journals have such a hard time accurately reporting on franchise news?
Sounds like a reasonable guy...
The Truth Shall Set You Free!
TIF
The Truth Shall Set You Free!
TIF
I didn't read the memorandums, but the Judge's reasoning on item 8 makes no business sense.
How much money did Quizno's as a whole make on vendor rebates versus gross sale royalties?
Inquiring minds want to know, need to know, and have the right to the information.
If Quizno's is making 90% of their profit on vendor rebates, that is quite a different thing from making only 5%. But the item 8 "disclosure" was consistent with either scenario.
If we are going to be serious about disclosure, why cannot we have better Judges who understand what is material to a business decision?
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Craig, you have made an excellent point. What has happened here is the the reporter did not understand the Judge's ruling in the context of a summary judgment - confusing legal impossibility with factual impossibility.
Reporters would do better to ask about the significance of legal conclusions rather than simply assuming that they understand.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
The judge handled the issue exactly as he was required to handle it by statute, regulation and precedential other judicial decisions, as he cited them.
Amount of "extraneous" revenue derived from franchisee purchases has never been a disclosure requirement in any state or in the FTC Rule. Neither has its percentage of anything been a required disclosure.
How much the franchisor makes is beside the point in Due Diligence work anyway. The reason for that is that whatever the numbers might be at the time of disclosure, they can change. The contract does not freeze revenue relationships as of the date of execution. The issue in Due Diligence is that the franchisees are required to purchase only through the franchisor prescribed channel, and that channel is controlled by the franchisor and not by the franchisee association. That means there is no purchasing power to benefit the franchisees, and that all purchasing power benefits only the franchisor.
In Due Diligence, whenever you see what Quiznos does, you have to assume that abuse permitted will be abuse committed. When the issue is whether they stick it to you, how much they stick it to you doesn't count. All the minutiae some folks think they ought to know represents only make work in a real due diligence exercise. You look at the phenomenon, not at the nuances of the phenomenon. The only person you can trust to stick a knife into you is a surgeon.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Then Change The Terms of the Contract
An interesting ruling in which the judge reminds all of us that the contract we sign is king.
The judge seems to almost beg the Quiznos franchisees - look, if you want to remedy this, don't come seeking the law for fair play and justice. You are bound in commercial law by the contract you sign - as far as it doesn't break the laws of the land. If YOU FRANCHISEES want to implement change for the better, your remedy lies in changing the terms of your contract. Get some collective power and make the contract work for you for a change.
Hmmmm... I've just been slapped in the face with cold hard reality. Note to myself. I need to get active in supporting an independent franchisee association that can collectively press for change because the interests of my franchisor and my interests seem to have built-in conflicts. And I want my interests to win in such conflicts.
Richard wrote: "How much the franchisor makes is beside the point in Due Diligence work anyway."
I disagree. If I know that the substantive part of the franchisor's revenue is from rebates, rather than royalties. I would be very concerned.
Richard wrote: "Amount of "extraneous" revenue derived from franchisee purchases has never been a disclosure requirement in any state or in the FTC Rule. Neither has its percentage of anything been a required disclosure."
I disagree. The audited financials show the different revenue streams, and do so clearly, according to GAAP. The item 8 disclosure has to be meaningful and not something that you have to disclose.
Richard wrote: "In Due Diligence, whenever you see what Quiznos does, you have to assume that abuse permitted will be abuse committed."
I disagree. You would never buy a franchise, then. Franchise agreements are largely discretionary with respect to what the franchisor can do. Imaging worst case scenarios without looking for real evidence is silly.
Richard wrote: "All the minutiae some folks think they ought to know represents only make work in a real due diligence exercise."
I disagree. Real work involves reviewing, checking, and verifying details. Any one can come up with skeptical reasons not to do a deal.
Finally, Richard wrote: "The issue in Due Diligence is that the franchisees are required to purchase only through the franchisor prescribed channel, and that channel is controlled by the franchisor and not by the franchisee association. That means there is no purchasing power to benefit the franchisees, and that all purchasing power benefits only the franchisor."
I disagree. The item 8 disclosure doesn't tell you how much the purchasing power benefits the franchisees or not. Franchisors who use the the purchasing power to benefit the franchise network should disclose this to differeniate themselves from those franchisors who use the rebates to line their own pockets.
Due diligence is not just an exercise in saying no; real due diligence is an exercise in coming up with reasons for your decision to say yes. Anyone can say no; nobody needs to pay an attorney even an American nickel if they think that they are going to turn down the deal.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Bob wrote: "Hmmmm... I've just been slapped in the face with cold hard reality. Note to myself. I need to get active in supporting an independent franchisee association that can collectively press for change because the interests of my franchisor and my interests seem to have built-in conflicts. And I want my interests to win in such conflicts."
And also join a trade association comprised of independent franchisee associations dedicated to empowering collective action. I wonder if such a trade organization exists.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Well said. And worth repeating.
Tough contracts do not violate the antitrust laws. That's all the judge said. With that ruling, the case goes back to state court absent diversity jurisdiction.
It has nothing to do with fair play and justice. It has to do only with the law of contracts.
Among the many subtleties missed in this and other cases is the issue of how to deal with incomplete contracts within otherwise complete contracts. Franchise contracts are different from normal contracts in that many things are left open as to detail. They are referred to mechanical substitutes for definiteness, like the operations manual that be amended unilaterally by the franchisor.
A franchise contract can be a complete contract with such open and indefinite items.
On the other hand, within the franchise contract is an agreement for the purchase and sale of goods with open price terms. Damn few lawyers ever have a clue as to the possibilities in this scenario. Hell, they don't even know to go look to the state law Uniform Commercial Code sections that deal with sale of goods with open price term clauses - you buy as we instruct at whatever the price may then be.
When your lawyer lacks an appreciation of how to use statutory schemes in tandem to make up for gaps in either of them, you the client take it in the neck.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Here is the link to relevant Colorado State Law.
Copied below:
"
4-2-305. Open price term. Statute text(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:
(a) Nothing is said as to price; or
(b) The price is left to be agreed by the parties and they fail to agree; or
(c) The price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party, the other may at his option treat the contract as cancelled or himself fix a reasonable price.
(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed, there is no contract. In such a case, the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account."
Please explain how you think this Act would have helped the Quiznos action.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
It is premature for that to come into play. The judge didn't rule on contract issues, but left them for the state court judge to handle.
Now that we have brought this point to light, hopefully their lawyers will figure out what advantage the UCC provides that the franchise law does not.
Why franchisees in bound purchasing cases haven't used this is beyond me. It is never a tie-in antitrust violation. I'm very surprised that Plaintiffs' lawyers tried to use the antitrust claim about that in this case. That tells me something about the quality of representation the Plainfittfs are getting.
There is little case law precedent about it - and for bloody good reason. Whenever I use it, the case seems to get settled. Of course you have to know how to use it.
These same lawyers represent the Dunkin Doughnuts Indian/Pakistani franchisees in the case where the claim is that DD is trying to purge brown skinned franchisees pursuant to some conspiracy to enhance the perceived capital value of DD in anticipation of an IPO. When I was interviewed by a newspaper about that case I expressed skepticism, as I did here on BMM. I didn't then appreciate the ability of franchisee counsel as I think I do now. I told the interviewer that if it were a sexual harrasment claim it would be impossible not to give it credence. However, a conspiracy to purge brown skinned franchisees to enhance an IPO will require an extremely high showing of very hard evidence for anyone to believe it. Absent a Wansee Conference style memorandum, I would rather represent DD on this one.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard wrote: "
It is premature for that to come into play. The judge didn't rule on contract issues, but left them for the state court judge to handle.
Now that we have brought this point to light, hopefully their lawyers will figure out what advantage the UCC provides that the franchise law does not."
Alright, I admit I am dense. What advantage do you see in the UCC that is not present in the franchise?
I don't see one.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Just about nobody sees what's there right in front of you. Think guerrilla tactics and call me back in the morning. Some things just don't come out of law books and reading treatises and the opinions of courts.
I may bean asshole, but I'm a bloody good asshole.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Actually, I was giving you a chance to demonstrate that you are not an asshole, bloody or otherwise.
I have a very good idea about what I would do - but that is not relevant.
You declared that you had a solution which involved the UCC, and now you want to play peek-a-boo.
If you think that you are giving out a trade secret, then don't say anything in the first place.
But if you want to help some franchisees, who aren't going to be your clients anyways, then spell out your solution. You cannot just granstand and call the other lawyers idiots.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
It is not a good sign when you have a bloody hole. Richard needs a colonoscopy.
I suspect that he's offended more than a few people in his career who might love to help out.
I have no altruistic interests other than to get the Due Diligence gospel out there. Once that rant is done, everything else if not open for anyone to expect gratis.
Even if I told you what, that wouldn't tell you how.
I can gerandstand and call out anyone I choose. Seems like most every time my take on 'em is correct.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
My colon is a colon that has seen Homeric action in the service of my "inclinations". It has weathered every storm. It is in perfect shape. It has its own autobiography, which you can read by clicking on the link below.
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Bubba wrote: "Or can we hope to see actual fisticuffs occur at some point. "
Richard and I have an agreement to be congenial - just imagine how this might have turned out otherwise.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
No, Bubba. A main purpose of this board is an exchange of knowledge. If someone wants to discuss a cause of action available to franchisees, that is welcome. If someone does not want to discuss, that is fine.
By the way, the way for the Coffee Beanery franchisees to overturn that last ruling is so obvious I am amazed that y'all are so stupid you haven't figured it out yet. And I could give you the winning strategy for MegaMillions lotto, but if you're too dumb to have figured that out, you don't deserve to win the jackpot anyway.
So Bubba, if you still want to win MegaMillions, sleep on it and FedEx me a retainer check (Certified Funds only!) and then we'll talk.
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
Here's proof that it is futile to call Richard names. He likes it.
"No matter who wins, a lawyer dies!"
I used to live in Texas, and Texans are just as likely to slug you as to shake your hand as a greeting. Punching you in the gut can be seen as a sign of affection, and a kick in the nuts, well, that there is an indication of something special.
That being said, methinks Solomon would like to kick you in the nuts.
Paul,
Here is why I am skeptical about using the Sales Act and Open Price Terms.
In 2004, the Supreme Court of Texas ruled against some gas dealers who were trying this argument. Here is the quote:
"In this case, we must decide whether the price fixed by a refiner for the sale of its gasoline under an open-price-term contract with its dealers was in good faith as required by section 2.305(b) of the Texas Business and Commerce Code. The dealers claim that the refiner=s pricing practices are forcing them out of business and therefore are not in good faith. The trial court concluded that the refiner had established its good faith as a matter of law, but the court of appeals reversed the summary judgment, concluding that circumstantial evidence raised a fact issue about the refiner=s good faith. 102 S.W.3d 205. Although the refiner=s price was commercially reasonable when compared to the prices of other refiners in the relevant market, the court found some evidence in the record to suggest that the refiner=s price might have been influenced by improper subjective motives such as the desire to force some of its dealers out of business. Because we conclude that the refiner established as a matter of law that its price was fixed in good faith as defined in the Code, we reverse the judgment of the court of appeals and render judgment that plaintiffs take nothing."
(There is a whole article in the summer edition of the Franchise Journal on this issue, also, which I intend to summarize.)
To be fair to Richard, he did not claim that was viable cause of action, only a some tactic based upon the Sales Act. But I remain skeptical.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Why get annoyed when someone correctly describes you. If I didn'r respect Michael I wouldn't say anything to him at all. If I had to punch out everyone I offend, my knuckles would be chafed. I only punch out those who show up and ask for it - or those who won't behave in Muldoons. You only have to take out a few rather noisily and the rest get the message.
Punching each other is the hallmark of the true Neanderthal, It's our hailing sign and recognition ritual.
Richard Solomon, www.FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
That Texas case has nothing to do with what I am talking about.
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
I will bite, once again.
Richard wrote: "Even if I told you what, that wouldn't tell you how."
Then tell us what, since you won't be revealing any secrets.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
In that thar case, the court held that the price was objectively reasonable for the reason that it was a market competitive price. That has nothing to do with how to use the UCC in bound purchasing franchise disputes. If the prices in bound purchasing cases were competitive prices, there would be no dispute. The gravamen in bound purchases cases is that the prices are artificially high to an extreme degree. Look at the posts about Quiznos price comparisons against open market pricing for the same products.
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
The problem is for the US Quiznos people that unfortunately most of their purchases are "branded" with the Quiznos logo. That makes comparisons legally tricky - even though everyone knows that they are paying too much. How much is Quiznos branded turkey really worth?
In my view, the better attack is on the standards that have to lie behind the products; what are they, how are they used, and what would be acceptable substitutes.
The Texas case stated that we only need look to the market to see what reasonable prices are: well, in the Quiznos market everything appears to be overcharged, according to the franchisee complaints. The problem is that Quiznos has set their standards so high as to only pick out unique distributors, independent of quality.
I grant you that you might be able to get Coke at competitive prices, but it is the food ingredients that are killing the Quiznos franchisees according to them.
For the reason, I don't see the Sale of Goods Act providing Quiznos franchisees with any statutory relief.
Michael Webster PhD LLB
Franchise News
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
The gas was branded also. Putting a brand on a product does not by itself differentiate the product except for consumer transactions. Franchisee purchases are not consumer transactions. They are B to B transactions.
I aint trying to muss up yo hair. You do it like you like and I'll do it like I like.
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
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