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Wisconsin Quiznos franchisees file class action
KnowledgePoints case settles with no details available
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Janet Sparks is the former publisher of Continental Franchise Review, an industry newsletter that covered the franchise community for more than 30 years before being acquired by Franchise Times Corporation. Janet can be reached at 303-799-7398 or at jsparks@franchisetimes.com |
Quiznos’ franchisees’ Toasted Subs Franchisee Association plans to file a class-action lawsuit in every state where they have litigants.
A class action lawsuit filed against Denver-based Quiznos Subs alleges the franchisor concocted an illegal business scheme to deceive franchisees by fraudulently inducing them to purchase franchises and then exploiting their control and economic power, all in an effort to extract unjustifiable payments from them. By doing so, the group alleges Quiznos reaped grossly inflated sales and profits, which created an illusion of corporate strength and growth, while causing substantial harm to franchisees. In a three-year period, Quiznos’ number of units has grown from 1,500 to 5,000.
The complaint filed November 20, 2006, in federal court in Green Bay was on behalf of 28 Wisconsin franchisees. Defendants named in the suit included not only the franchisor and its affiliated entities, but also several individuals, among them the son-and-father team of corporate executives, Rick Schaden and Dick Schaden.
Another named “pattern of behavior” which causes franchisee failures is enforcing franchise agreement provisions that require franchisees to pay royalties over the entire 15-year term of the contract. The lawsuit claims that after threat of legal action against a franchisee, Quiznos seeks a signed, unconditional waiver of all rights to prevent the franchisee from seeking any redress. As bankrupt franchisee locations close, Quiznos brings in the second generation (and sometimes third and fourth generation) at lower entry costs since the new franchisees purchase the recovered equipment, which Quiznos facilitates. Once the store has been secured by the new franchisee, the franchisor extracts the same monies, and continues its “illegal scheme of increasing revenues on the backs of those with no control,” according to the complaint.
Franchisees also allege RICO (Racketeer Influenced and Corrupt Organization) violations by reason of the company’s violation of the Sherman Act, the Wisconsin Antitrust Act and other Wisconsin state laws.
Quiznos history
Quiznos opened its first unit in 1981 and began franchising 10 years later. From 1994 to 2001, the franchisor was a publicly traded entity. In 2001, the Schadens and other family members took the company private, despite the fact that 95 percent of the other shareholders objected to the move. The Schadens’ used their majority control to force the sale of minority shareholder interests at $8.50 per share.
But the dissenting minority shareholders challenged the fairness of the price, and the court ultimately determined that the fair market value was $32.50, four times more than the Schadens had paid.
In April 2006, Quiznos sold an undisclosed stake in the company to JP Morgan.
Franchisee/Franchisor response
According to Chris Bray, president of the Toasted Subs Franchisee Association for Quiznos franchisees, they plan to file a class action in every state where they have litigants. He said, “We have them in multiple states and we plan to do this expeditiously, because we are seeking justice for franchisees who have been maligned and defeated for years. We are now bringing it to an end.”
Bray said they have tried to negotiate with Quiznos to no avail. When Bray sent a letter to JP Morgan, explaining what the franchisees were up against, the franchisor answered it with a lawsuit against him and the franchisee association. Bray, the owner of two Quiznos in Texas, has been a franchisee for nine years.
Bonnie Warschauer, senior vice president of communication for Quiznos, said in a written statement: “Based on our initial review—the claims are without merit and we will defend the suit vigorously. We believe the vast majority of our franchisees recognize and appreciate the value of being associated with the Quiznos brand and receiving the support and leverage that comes with being associated with one of the country’s fastest growing restaurant brands.”
On a sad note...
The end of November brought a new dimension to the clash between franchisees and the franchisor. A Quiznos’ franchisee in the Los Angeles area committed suicide, leaving a note attributing his death to his insurmountable problems with Quiznos.
The suicide note has been posted on the Toasted Sub Franchisee Association Web site (toastedsubs.info), as well as on other Internet sites.
Elgin and Fowler settle KnowledgePoints
(Previous article: Franchise Times, Sept. 2006, Continental Franchise Review)
The attorneys have now completed the process in settling the legal matter of the KnowledgePoints debacle. But after the court dismissed with prejudice the case between Jeff Elgin, CEO of Capistar, and W. Berry Fowler, founder and former CEO of KnowledgePoints, as well as founder of Sylvan Learning Centers, many in franchising will reflect back on the legal battle to draw their own conclusions regarding the outcome.
Although the settlement agreement is not confidential, Capistar attorney Sonia Miller-Van Oort of Flynn, Gaskins & Bennett explained that the parties have agreed not to disclose the details. In answer to my questions, she stated in a written, sterilized reply, “Capistar initiated a lawsuit against Berry Fowler and Barb Garber (Fowler’s sister-in-law), demanding their return of Capistar stock. Berry Fowler never answered the complaint Capistar filed, because the parties agreed to temporarily stay the proceedings. The litigation concluded when all the parties entered into settlement agreements. The obligations of the settlement agreement have been met, and the court issued an order dismissing the case on November 2, 2006.” Kenneth Protonentis, Fowler’s attorney, declined to comment.
In light of the recent announcement that Elgin will resume the CEO position with his FranChoice brokerage firm in January 20007, another question begs to be asked: Will the Elgin/Fowler lawsuit be disclosed in the Uniform Franchise Offering Circulars of Capistar companies? Miller-Van Oort stated, “Although we represent Capistar and KnowledgePoints Development Corp. with respect to certain litigation, we do not prepare our clients’ UFOCs. Notwithstanding that, we can represent that our clients have every intention of making all UFOC disclosures that are required of them relating to litigation in which they have been involved.”
Now it appears the lawsuit will only be a small bleep on franchising’s radar screen, just another legal dispute dismissed, another settlement between the parties that won’t be publicized. But as we look back through the facts of the case and the strong but muddled allegations, we wonder: What in the world was that all about?
