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CHICAGO – Attorneys for Quiznos franchisees will appear before Judge Rebecca Pallmeyer in Illinois federal court on Friday at 10 a.m. to ask for preliminary approval for a class action settlement of all class lawsuits. Last September, plaintiffs in this case, Ilene Siemer v. The Quiznos Franchise Company, amended their complaint to bring all four actions suits before the court.
Quiznos defendants have authorized franchisees’ counsel to state that they, Quiznos, do not oppose the relief their clients are seeking. Franchisees are asking for monetary compensation of approximately $42 million for approximately 10,000 franchisees, for current franchise operators to be released from significant potential claims that Quiznos asserted against them, and for significant changes in certain company business practices.
In the past litigation, franchisees have accused the Denver-based company of operating a prolonged deceptive business practice that has been carried out since 2000. Operators allege that the franchisor induces 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 what was referred to as the fastest growing franchise in the United States.
One class action suit, SNO Class Action, represents buyers who had purchased a Quiznos franchise but never opened their restaurant, referred to as “sold but not opened.” The other three cases brought claims on behalf of all Quiznos franchisees that had opened and operated stores, and is now under “Franchise Operator Class Action.” In the proposed settlement, franchisees are seeking the following:
The settlement agreements outline the compensation for the class members, depending on their status in the lawsuits. As part of the breakdown, the SNO Class Action gives plaintiffs two choices. One is remaining in the system and receiving a credit in the amount of the franchise fee, approximately $25,000, toward the purchase of equipment and supplies needed to open and run their restaurant. The second is to leave the system and receive a refund between 32.7 and 5 percent of their initial franchise fee, depending upon when they purchased their franchise. Even if they have previously settled with Quiznos they will receive some compensation. And they will benefit from a release from Quiznos of all claims against them, including claims seeking lost future profits caused by failure to open restaurants.
The Franchise Operator Class Members will receive monetary benefits, depending on whether a particular class member remains in the Quiznos system operating a restaurant or has exited the system as of the preliminary approval date. Members still in the system will receive $3,150 in credits on food purchases over a three-year period. Those who have transferred their shops to other owners will receive $475, and those who have ceased operations as of the preliminary approval date will receive $1,700. The total value of these payments will be $17,850,000 if there are no opt-outs and if all eligible class members submit claims.
Quiznos will also release current and former operators from claims for unpaid royalties and marketing and advertising fees, including SNO members. The estimated benefit to the class members of this release is approximately $5.71 million, according to the brief.
But the proposed settlement agreement provides significant benefits over and above direct financial benefits to franchisees who continue to operate Quiznos restaurants, including $19.4 million to its advertising and marketing trust funds between January 2009 and the end of 2012, $10 million of which must be spent on local advertising.
Other Proposed Benefits
Quiznos will also recognize an independent association of franchisees (IAOF), and will provide funding to incorporate the organization and its initial operation. The current Toasted Subs Franchisee Association (TSFA) is not mentioned.
Some of the other benefits include the creation of an advertising advisory council, an annual review by an independent third-party auditor of Quiznos’ food and supplies prices charged to franchisees, a formal dispute resolution program addressing franchise operators’ grievances, and a formal program to assist franchisees who want to sell their stores and to assist those who want to purchase additional franchises.
The settlement will also include that Quiznos will make changes in its franchise disclosure document to clarify the role of Quiznos-owned entities in the supply chain. And if Quiznos adapts a national delivery requirement, financial assistance will be given to franchisees to help cover the cost of materials needed for them to participate in delivery.
Settlement Finalized after Mediation
The franchisees’ brief for the proposed agreement gives the history of the litigation and the mediation efforts in adopting the settlement. The parties first began discussing settlement in earnest in April 2008. In August 2008, attorneys and client representatives for both sides met in Los Angeles for mediation sessions, with no results. After nearly a year of additional discovery and notion practice in all four cases, the parties again resorted to mediation, this time on July 2, 2009 in Denver with Michael O’Donnell of Wheeler Trigg & O’Donnell LLP. The final execution of the settlement agreement was on October 27, 2009.
What the Settlement Accomplishes
The Quiznos franchisees’ brief states that the settlement should receive preliminary approval because it accomplishes several significant objectives. First, it provides some type of monetary compensation to every person who has owned a Quiznos franchise in the past, whether or not the franchise ever opened for business or continues to operate today. Second, current franchisees are released from significant potential claims that Quiznos had the right to assert against them. And third, the settlement creates “significant business changes likely to benefit franchisees on a going-forward basis, including the “creation of an independent but Quiznos-recognized franchisee association, which has never existed in the Quiznos system before.”
According to the brief, the settlement agreement provides that the overall value of the deal will be appraised, and that the appraised value will be presented at the final fairness hearing, proposed for June 30, 2010. And it states, “The maximum agreed payments by Quiznos to franchise operators, the contributions to the advertising trust fund, and the known dollar value of releases, yield a total of $42.96 million.