True Story

Quiznos lawsuits start with a bang, unfold like a crime novel



Beth Ewen

Who can guess the source of this passage? 

“This case is about a rogue franchisor and its web of affiliated entities, owners and individuals, who, through a fraudulent scheme based on deceptive and illegal business practices, has stolen hundreds of millions of dollars from its franchisees, leaving them in financial ruin.”

No, that’s not the opening of the latest James Patterson thriller. Rather, it’s the case summary for one of 13 lawsuits brought by franchisees against Quiznos, the Denver-based sandwich chain that settled a massive class-action case in 2010, and may have thought those troubles were over at the time. Instead, the real-life pain continues.

This particular case was filed by Avengers Inc., a group of Quiznos franchisees in Los Angeles with a suitably dramatic company name. In Avengers Inc. v. Quiznos et al., filed in U.S. District Court in Denver, plaintiffs allege Quiznos created pass-through companies to hide mark-ups to food, paper and other supplies franchisees were obligated to buy.

Profits from those hidden mark-ups reached “more than $100 million each year” by the mid-2000s, the lawsuit claims, and the Schaden Ownership Group, led by defendant Richard E. Schaden, then “set in motion a plan to fraudulently transfer hundreds of millions of dollars to themselves, leaving Quiznos insolvent and the franchisees on the path to certain failure.”

And the lawsuit continues: “It should come as no surprise that after more than a decade of running its parasitic scheme, Quiznos has sucked most of its franchisees dry and its remaining franchisees are nearly tapped out.” 

It seeks 28 claims for relief, from aiding and abetting civil theft to unjust enrichment to fraud by concealment. The other lawsuits follow the same narrative, and at least one plaintiff group has had to close its stores since filing.

Claims ‘have no merit’

Quiznos’ outside attorney, Ric Cohen of Cheng Cohen in Chicago, is landing some big punches of his own. The plaintiffs’ law firm, Ballard Spahr, was booted in late May from all 13 cases under Colorado’s professional conduct rules, when the judge agreed with Quiznos claims that partners at Ballard Spahr had a conflict of interest. 

“Moving to disqualify is unusual and nobody enjoys or relishes it,” Cohen says about the tactic. “But what prompted it was the remarkably unusual step of a client’s former lawyers suing them.”

Although dramatic, the decision to disqualify Ballard Spahr isn’t the most significant win to date for Quiznos, Cohen says. That distinction goes to the court’s motion this spring in six of the 13 cases mandating arbitration and to stay those six cases pending the outcome. 

Cohen disputes the assertion by some of the plaintiffs, that they had opted out of the 2010 Quiznos National Class Settlement over a similar variety of claims concerning Quiznos’ supply chain, marketing programs and other practices. 

He adds those practices were all thoroughly dissected at the time by the courts. “What’s frustrating to me is when franchisees or particular counsel continue to pursue claims that at this point it ought to be clear to them have no merit,” he says.

He characterizes the former lawsuits against Quiznos as the work of a single activist lawyer group, and the current lawsuits as a pale attempt to copycat. In the run-up to 2010, “the company was repeatedly sued by a tenacious single group of lawyers, who brought multiple class actions across the country, and numerous one-offs, and now they’re gone,” Cohen says.  Today, “you’ve got one lawyer, now disqualified, who’s the only guy suing on behalf of these opt-outs.”

Setting the lawsuits aside, the business picture for Quiznos looks bleak, according to the Restaurant Finance Monitor, Franchise Times’ sister publication. Average unit volumes fell 12 percent last year, to $291,000, and according to DebtWire this year’s volumes fell 13.5 percent in the first quarter, 5.8 percent in April and 11 percent in May. 

The number of U.S. locations fell by more than 400 last year, to 1,935 domestic units. “Let’s put it another way,” the Monitor report said. “At the beginning of 2009, the chain had 4,378 locations. That means there are more Quiznos outlets that have closed in the past five years than are currently open.” 

This comes after ownership changes and restructuring. In late 2011, the Schaden Ownership Group transferred its interest in Quiznos to Avenue Capital Group, according to the lawsuit. Quiznos then entered into a debt-restructuring deal in which Avenue Capital converted some debt to equity and paid an additional $150 million in exchange for a 72.6 percent ownership stake in Quiznos. 

Jeff Cohen (no relation to Ric Cohen), the Ballard Spahr attorney who was handling the franchisee lawsuits against Quiznos, was philosophical about his firm’s disqualification. “Things happen in life. You just do the best you can for your clients. Courts have their own views of things.” He notes the fight goes on and the plaintiffs are suffering. 

Jeff Springer of Springer & Steinberg in Denver has already scooped up the cases, but he wouldn’t give details of his approach. “We’re fighting motions to dismiss right now, so I wouldn’t want to do any chest-pounding while we’re sorting that out,” Springer said.

The prose in the Avengers lawsuit can finish the tale, from the franchisees’ point of view. “Though unknown to plaintiffs until late 2012, it is now clear that the defendants named in this action ruthlessly pursued the fraudulent scheme alleged above…to plaintiffs’ financial and emotional detriment.” 

Beth Ewen is managing editor of Franchise Times. Send interesting legal cases to bewen@franchisetimes.com.