Class Action Lawsuit against Quiznos Turned Down

Posted Fri, 2009/04/24 - 16:39 by Don Sniegowski

Alfred A Arraj Federal Courthouse, District of Colorado. Photo/GSA

DENVER – The U.S. District Court for the District of Colorado ruled on Monday that a group of Quiznos franchisees cannot collectively participate in a class action lawsuit because their signed franchise agreement specifically bars them from doing so.

Eighteen budding franchise owners banded together in a class action lawsuit, alleging that they participated in a quasi-Ponzi scheme in which they deposited between $20,000 and $25,000 each for a Quiznos sub shop, but then were not given permission to open a location.

The franchise contract declares that franchisees must open a store within a year or else they lose both that right and their money. But franchisees cannot set up shop until Quiznos approves their site, and Quiznos has been slow to do so. In the lawsuit, attorneys claim that their 18 clients are a drop in the bucket of the 3,200 franchises that have been sold but not opened.

The chain has an estimated 4,000 plus stores that are open for business.

Before the court is able to look into charges of fraud and Ponzi schemes, the court first must look at the procedural issue of whether Quiznos franchisee plaintiffs had the right to come together to sue their franchisor in a class-action lawsuit when their franchise contract specifically bars class action. The court reasoned that the only way to nullify what two adults sign in a contract is to ask, “Is the class action bar unconscionable under the law?”

Court order denying class action

The franchisees in the lawsuit grouped together presumably because such franchise lawsuits can individually cost $80,000 or more in legal fees, with a possibility, not a guarantee, of winning and recovering the money the individual has lost. But some franchisees balk at the thought of spending $80,000 to perhaps recover only $25,000 in deposit money.

Justin Klein of law firm Marks & Klein LLP, attorney for the franchisees, takes exception to the ruling. “The Quiznos franchise agreement says that franchisees have to sue Quiznos one on one,” he explains. “The purpose of our seeking a class action is because it is too expensive to sue Quiznos. It could cost hundreds of thousands of dollars for the individual to sue Quiznos in order to recover their initial franchise fee, which in some cases is $20k - $25k.”

In an attempt to persuade the judge that a class-action lawsuit was the only fair solution open to depositors despite the banning of it in the contract, the franchisee attorneys showed affidavits of a number of attorneys who would not take such a case because of the small amount of money that its individual victims would pay.

But the judge disagreed and responded that not only is there a possibility that the franchisee may recover more, but that individually these type of lawsuits are also not cost prohibitive. The judge declared, “Proud attorneys notwithstanding [for not humbling themselves to take low fee cases], the court cannot say that a franchisee who stands to recover $60,000 to $75,000 plus attorney’s fees will be left wanting for competent legal representation. Moreover, an individual case would not require a large up-front investment of resources.”

At the heart of the procedural argument was why did the franchise owner sign a clause that barred him from legal action and why does he want to undo it now? The court used a Colorado law benchmark, the "Davis Factors" (see page 50 of court order, pdf), to weigh whether the agreement barring class-action lawsuits, signed by two willing parties at the time, is “unconscionable” and thus void.

Judge Christine Arguello explained that from the standpoint of the Davis rule, “under Colorado law, a take-it-or-leave-it contract does not automatically render the agreement unconscionable.” The court goes on to say, “Plaintiffs were not faced with the Faustian decision of terminating their pre-existing contract or accepting a newly-added class action bar they did not want.” She adds, “They were free to purchase a different franchise or invest their money elsewhere without any financial repercussions to themselves or Quiznos.”

Another issue was whether or not the clause was written in so small a fine print as to reasonably escape notice by the agreement signer. Once again the court declared, “The provision containing the class action bar is written in the same typeface, using the same font size as the remainder of the franchise agreement.” The court then added that between adults, “With certain exceptions, courts should not be in the business of telling parties how to style their contracts and this case is no exception. Therefore, this factor also favors enforcement of the class action bar.”

Judge Arguello concluded that the contract wasn’t unconscionable according to Colorado law and so the bar on class action held, therefore there would be no court hearing on the case.

Klein and his franchisee clients are disappointed. He says of the verdict, “I think that the agreement is unconscionable and that the class-action prohibition renders franchisees without a meaningful way to vindicate their rights.”

In regard to the judge’s ruling that dismisses the scheduled trial, a spokesperson for Quiznos told Blue MauMau, "For all parties involved, litigation is a long and tedious process. This ruling allows us to further focus our time and resources on what is most important — continually improving our core business, increasing franchise owner profitability and providing a quality product at an outstanding value to consumers."

Klein states that the franchisees are not done. “We will continue to pursue whatever course of action that we have to in seeking a class action of the 3300 people who have been damaged by Quiznos,” he says. “If it means that Quiznos has 3300 individual lawsuits, then that is what it will get.”

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