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Class Action Alleges 3000 Quiznos Sold but Not Opened

Lawsuit Claims Quiznos Collecting Upfront Fees, Giving Prospects Nothing in Return

DENVER (Blue MauMau) - Because the problem is now nationwide, an amended class action lawsuit was filed in U.S. District Court in Colorado on August 1 to expand the scope of the New Jersey lawsuit filed previously. The amended version alleges that Quiznos fraudulently induced prospects to purchase franchises at a price of $20,000 to $25,000 each, knowing that their stores would never open. It states that, according to Quiznos' own figures, it sold more than 3,000 franchises that never opened, resulting in approximately $75 million in revenues for the franchisor, without providing anything in return to the purchasers. The named franchisees in the lawsuit represent a putative class of thousands.

Last July, Quiznos in Canada agreed to pay $2 million in a class action settlement with Canadian franchisees, for similar accusations. It will allow the Quiznos Sub sandwich chain to refund part of an estimated 170 deposits and taxes to franchisees. The Canadian settlement will cover losses for more than 25 franchisees named in the lawsuit who lost fees in the range of $30,000 each.

Alleged Churning in System is Equivalent to "Ponzi Scheme"

Justin M. Klein, Marks & Klein, lead attorney for the U.S. amended suit, states in the complaint that franchisees are required to open a restaurant within a twelve-month period of signing their agreement or they will be in default. Quiznos maintains unilateral discretion over the approval of the franchisee's location and the franchise lease, both included in the franchise agreement. It states the terms are "extremely one-sided in favor of Quiznos." If a location cannot be secured, Quiznos then threatens termination due to the franchisee's failure to open a store within the time period. The franchisee can be held liable for years of unpaid royalties.

As an alternative to termination, franchisees are given two choices: they can extend the time to find a location in exchange for a general release, freeing Quiznos from any liability; or they can voluntarily terminate the franchise, which includes signing a release, and again freeing Quiznos from any liability. The class action lawsuit claims that the releases are then used by Quiznos to protect itself from the franchisees it has defrauded through threats and intimidation. It says, "Quiznos' overall approach to the SNO (Sold Not Opened) is the equivalent of a 'Ponzi Scheme,' which it hucksters to the general public."

The complaint also alleges that the franchisor sells the same trade area to multiple franchisees, stating, "That is, Quiznos 'churns' trade areas by selling the same area multiple times in an incessant need to raise capital and promote brand growth to the national marketplace." In doing so, it fails to disclose to a new franchisee that another had owned it and could not secure a location.

Inherent Conflict of Interest in Compensating Employees for Sales

The amended complaint also claims that Quiznos bases the compensation of its franchise salespeople and other employees on their ability to sell franchises. By doing so, it says, "This creates an inherent conflict of interest for Quiznos' salespeople, who are placed in a position where their livelihood depends upon selling franchises without regard for the franchisee's ability to ever open a store." The franchisor also provides bonuses to employees who sign up prospective franchisees to attend seminars, and to those who are able to secure signed applications. They are also paid to those who are able to secure a signed franchise agreement. This information is not disclosed in order to give franchisees a sense of trust and confidence in the Quiznos employees.

Franchisees are requesting, among other things, rescission of the franchise agreements due to their unconscionable nature and as induced by fraud, rescission of all contracts and releases obtained through economic duress, and damages. It also asks the court to issue an order for preliminary and permanent injunction enjoining the franchisor and its entities from continuing to take illegal action in selling any future franchises in the U.S., until all current franchisees are provided approved locations to open and/or Quiznos reimburses the fees collected to those who want them returned.

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Previous Quiznos Article:

National Class Action Filed Against Quiznos

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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.