Subway Franchisees Adamantly Defend Ad Fund Actions
MILFORD, Conn. – In the litigation between the trustees of the Subway Franchisee Advertising Fund Trust and Subway parent company Doctor’s Associates Inc., issues are raised on whether the franchisor should have more control of the fund, which totals approximately $500 million. In its countersuit filed last August, DAI accuses lead trustee Jeffrey Offutt, and now adding all other trustees to its counter, of being in violation of their fiduciary duties by being engaged in a series of activities regarding the trust. It reads, “Apparently, the Trustees are intent upon wasting Trust assets, in violation of their fiduciary duties, by continuing to press Offutt’s groundless case.”
One such allegation by DAI is that it is underwriting the prosecution of a former SFAFT trustee, Dielli Husen, who was a Subway franchisee and development agent (DA). As a DA he serviced a designated geographic territory as an independent contractor. His duty was to help identify and recruit prospective franchisees, facilitate DAI’s sale of franchises, to assist franchisees in finding and building out suitable locations, and to inspect Subway stores to ensure compliance with operating standards. The franchisor pays DAs a portion of the franchise fees and a percentage of the continuing royalties received from franchisees in the DA’s territory.
According to court documents, in 2006 and 2007, DAI disapproved Husen’s attempt to sell his two development agent agreements and declined to extend one of his agreements beyond its 25-year term, which expired on July 8, 2008. Husen filed for arbitration against DAI alleging it was obligated to approve his transfers and to renew his expired development agent agreement. He asserts that the franchisor declined to do so in retaliation for his activities while an SFAFT trustee. Later he filed a separate suit against DAI’s founder Frederick DeLuca, on the same grounds. The trustees, through their in-house counsel, have agreed to pay for Husen’s attorney’s fees in the arbitration and related federal suit, pursuant to provisions of the trust. The lawsuit filed against DeLuca has been dismissed and the arbitration ruling has not yet been determined.
As clarification, one source has affirmed that SFAFT does have money involved with the past trustees lawsuit with DAI because that trustee feels action was taken against him for his service as an SFAFT trustee. But he adds, ”If that is the case, the trust must help defend. If the courts find it not to be true and DAI was correct in its actions, the trust must be repaid.”
Another allegation by DAI is that the trustees have unilaterally amended the Trust Agreement to convert SFAFT from a common trust fund to a statutory trust pursuant to Connecticut’s Statutory Trust Act. By making the change, DAI claims that the trustees did not seek or obtain DAI’s written consent to amend the trust in a timely manner and therefore it is invalid and a breach of the terms of the Trust Agreement and the trustees’ fiduciary duties.
The third allegation made by DAI in its counter suit to the trustees’ complaint is that they have refused to release financial records to DAI. On August 8, 2008, the parent company sent an email to SFAFT requesting the opportunity to review a variety of records related to disbursements from the trust. It asked for all expense accounts for the past 12 months for all SFAFT employees and board members; an account of costs of SFAFT meetings and conferences; and an account of entertainment, meals, tickets or other gifts and favors provided to employees and board members; and for salary and bonus programs information and retirement payments.
DAI insists that the trust clearly requires SFAFT to provide the information and records but, to date it has not complied with the requirements. SFAFT has proposed a non-disclosure agreement for DAI to sign prior to the release of documents, but the franchisor asserts that it is overbroad, unreasonable, and flies in the face of the Trust Agreement provision which unequivocally establishes DAI’s right to unimpeded access to all of SFAFT’s records and accounts.
But according to sources, SFAFT does not have an issue with DAI looking at the books, although it does have an issue with signing a non-disclosure statement. One stated, “The problem here is that SFAFT, like many marketing organizations, has contracts with talent endorsements that cannot be released to the public. It is in their contract, as they don't want others knowing what they are paid by one organization versus another.”
Doctor Associates Inc. alleges breach of contract and breach of the Trust Agreement, and requests the court grant DAI relief in its declaration against SFAFT. It asks for a permanent injunction implementing its requests, asking for judgment against the trustees for all funds disbursed regarding their decision to “indemnify” former trustee Husen; all funds disbursed to pay costs of the “instant” lawsuit after the date of its counterclaim; and such other relief as the court deems just and equitable.
DAI does contribute some money to SFAFT. But according to a source, most of it is matching contribution from when the SFAFT rate went from 2.5% to 3.5%, and then to 4.5%. He said vendors also used to contribute to the fund through product add-ons, which of course the franchisees pay for. “Some of the DAI matching money has started to sunset. But, as was stated in the court documents, DAI probably is correct in contributing $100 million since 1997, or almost 10 years. Yet the fund is spending over $500 million,” he explains adding, “Do the math on the percentages and you will see a large majority of the money comes from franchisees.”
Blue MauMau has also learned that SFAFT does have a published Transparency Policy. One insider said the argument is that it is not the DAI Transparency Policy for franchisee organizations. “Issues that are in the DAI policy are that no board of director of an organization may receive any rebates. And another is the releasing of executive salaries by name. That is a fine line with privacy issues.” He thinks if people really look at what SFAFT is spending on overhead versus similar organizations, and its performance, they would be very complimentary. But he asks, “Are they perfect? Of course not.”
As far as the issues raised regarding Jim Hansen, Blue MauMau confirmed he was an SFAFT trustee, and at one time the chair of SFAFT. He did not get paid a salary for that service. He was hired by North American Association of Subway Franchisees (NAASF) as CEO and sold his stores. According to a source, “He was paid a salary in that capacity. People can argue if that salary was fair or just, but it was not part of SFAFT.”
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DeLuca Still Waiting for Control of Subway Ad Fund
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