Franchisees Strengthen Charges against Quiznos on Deceptive Business Practices

DENVER (Blue MauMau) - Attorneys for Quiznos Subs franchisees have now filed an amended complaint in Colorado's federal court adding new defendants and new claims to the original suit recorded in August 2007. Justin Klein of Marks & Klein explained how after a year of discovery, the story is now more succinct concerning the national class action. "This new amended complaint provides a more comprehensive overview of how Quiznos has made money off franchisees over the years, basically shifting from being an operational franchising company to a food distribution company."

According to Klein, Quiznos has been very adamant about not turning over many of the documents that they have requested, so it took a lot of time before they could see the whole picture. "They have been very guarding of their information, so we have had to go to court to force them to turn over a number of things," he further explained.  But over the course of discovery, he said they had learned a lot of information that's now in the amended complaint.

But Rich Emmett, Quiznos' chief legal counsel, sees this latest filing as a big yawn. He feels the amendments to their suit are the exact same allegations as before, that all they did was switch some parties in and others out. He declared, "There is absolutely nothing new. It's a retread of what was there before."

Emmett said they would likely file a motion to dismiss as they have in other cases. He added, "And we are hopeful, like in a number of the other cases, the court will just say that the claims are meritless." In explaining their position, he said Quiznos has not been required to file an answer in any of the complaints, some of which have been pending for more than two years. "Most view that as very telling in terms of the merits of the case," he continued. 

This national class action suit is one of four related cases in the U.S. that seek class relief for Quiznos franchise owners. Two ongoing lawsuits, filed in Illinois and Wisconsin, also allege complaints over the operation of their restaurants. The third, filed in Colorado, involves the rights of a putative class of 3,200 franchisees who paid a $25,000 franchise fee to Quiznos, yet never opened a restaurant. Quiznos refers to these transactions as "SNOs," meaning "sold but not opened." Franchisees allege it was another scheme by the franchisor to generate $75 million in franchise fees, giving them nothing in return.

Quiznos' Prolonged Deceptive Scheme

The crux of the lawsuit focuses on what franchisees label as an illegal and deceptive business scheme, which they say has been played out since 2000 to induce unwitting prospects to purchase and operate Quiznos sandwich shops and pay franchise-related fees. They depict it as Quiznos' way to exploit its control and power "in order to extract exorbitant and unjustifiable payments from franchisees." In perpetrating their plan, Quiznos is accused of implementing slick sales tactics and marketing the "American dream of business ownership in the fastest growing franchise in the United States."  The complaint states that Quiznos preyed on ordinary consumers with little experience in operating a business and with little understanding of the legal ramifications of its one-sided, nonnegotiable franchise agreement.

With 4,636 franchises in the U.S. today, a number that is continuing to grow, Quiznos currently classifies the majority of its franchisees as financially distressed, according to the lawsuit. It further asserts, "Financial distress for the typical Quiznos franchisee became a way of life in or about October 2000 when defendants [Quiznos] first set out to implement the schemes alleged . . ."

The franchisees' complaint sets out to prove that the case is about broken promises, unfulfilled contractual expectations and false and misleading statements and omissions. "Plaintiffs [franchisees] invested their life savings in Quiznos only to face economic ruin and negative earnings." In their amended filing, the attorneys allege that store operators are similar to indentured servants, that it is not uncommon for them to work 60 to 80 hours a week, only to make no money and then be forced to invest additional dollars to stay open and avoid being sued by Quiznos for the present value of 15 years worth of royalties.

Franchisees assert that the core of the problem is the false representation in Quiznos franchise disclosure documents (FDD) that the franchisor and its affiliates negotiated purchase arrangements with suppliers for the benefit of the franchisees, which often included volume discounts. They state that prospective franchisees believed this common sense representation and relied on it to their detriment. In reality, they claim, Quiznos uses the mandatory supply relationships it imposes upon its franchisees to extract "supra-competitive profits from the franchisees, altogether ignoring its legal obligation to negotiate prices for their benefit."

Former Executives and New Allegations Added to Suit

Quiznos, its web of affiliated entities and the individuals who operate and control the Quiznos system were named as defendants in the original lawsuit. Now added to the list is Steven B. Shaffer, Quiznos' former president, and Patrick E. Meyers, former general counsel, who have had long-term connections to the company and its owners, the Schadens. Franchisees claim Shaffer was overseeing many of the illegal sales practices alleged in the new complaint. He first started with Quiznos in 1992 in St. Louis as a franchisee and then took over as an area developer, and eventually grew his territory to one of Quiznos' largest in the U.S. Later he assumed a vice president position in Denver, in charge of franchise support services, before becoming its president from 2004 to 2006.  

Meyers' history with the franchisor began as a result of knowing Rick Schaden in college. After pursuing his legal career in private practice in the early 1990s, he served as director and then general counsel for Quiznos, and was responsible for finance, planning and support. The amended suit states that in May 2003, less than three years after hatching Quiznos' alleged "scheme,” Meyers testified under oath that 40% of Quiznos units were not breaking even. Franchisees claim in their amendment, "Despite historic knowledge of the financial 'house of cards' on which the franchise system is based, defendants have knowingly continued to sell franchises to unwitting consumers over the past eight years on the contrived promise that Quiznos offers its franchisees a turnkey operation and 'proven business system.'"

The complaint also asserts that Meyers owns stock and/or membership units in one or more of the Cervantes entities, another newly added defendant in the amended lawsuit. According to Klein, Cervantes is akin to the head of a snake, explaining it is the Schadens' personal company that owns all of the Quiznos entities. He said that is information which they have learned through discovery, but nobody has testified about it yet.  

A new claim regarding Quiznos' alleged breach of its fiduciary duty in managing its advertising fund provided more substance to the litigation. Klein said, "Based on discovery, we found clear violations of the use of the advertising fund and mismanagement of that fund. Because it is a fund that is held in a trust there is a fiduciary duty. The franchisees are the beneficiary of that trust, so Quiznos has breached their fiduciary duty to the franchisees."

Emmett said he had read that claim, but doesn't know what they are talking about. He exclaimed, "We looked at that claim and we have no idea what they are basing it on, factually or legally. Those expenditures were all proper and appropriate in support of the Quiznos system."  He added, "All that money is accounted for."

Klein offered as a summary of its amendment, "The situation is not getting better for franchisees, it's getting worse." He said stores are closing at an astronomical rate, that franchisees are going out of business. "Quiznos has put them in the position they are in. With the economy doing what it is doing right now, it's that much harder for a Quiznos franchisee to be successful because the deck is already stacked against them."

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