You're Toast!

The system started in this country after the Civil War as a way for Singer Sewing Machines to get its product to market. It spread in the early 1900s with car manufacturers franchising to dealers and soft drink companies to bottlers. Today there are at least 650,000 individual franchise businesses in the United States in seventy industries. What began as a simple method of distribution -- attractive to franchise owners because they got to sell an already proven product, and attractive to companies because franchise owners shouldered the risk in getting that product out to new customers -- has grown far more complex.

Janet Sparks -- a columnist based in Highlands Ranch who writes for Franchise Times and bluemaumau.org -- has been following the sector for fifteen years. She sees the risks for franchisees becoming greater, with more abuses and less regulation now than ever. "I truly think it's getting worse," she says. "Franchisors are getting away with too much. They are not regulated. The FTC turns a blind eye to fraud. Something needs to be done now. So many people are losing so much."

While regulation remains scant, it's up to lawyers like Klein to take on franchisors for bad business practices. To that end, Klein is the legal counsel for the Toasted Subs Franchisee Association and the man behind the class actions in Wisconsin, Michigan and Illinois -- with more to come. He's far from the first or only lawyer to sue Quiznos, but Klein is confident that his barrage of lawsuits will reveal the Quiznos business model as a racket.

Klein became aware of Quiznos a few years ago, when the sub shops started popping up around New Jersey. Then in 2005, a man came into his office saying he'd bought a Quiznos franchise about three years earlier and still didn't have a location. Klein asked him how much he paid. He said he had paid an initial $25,000 franchise fee but couldn't find a site within the trade area he bought into.

"That doesn't sound right," Klein told him. "If they're doing something wrong, then there's got to be other people like you."

Within a few weeks, Klein had found 27 New Jersey franchisees that had bought into the company more than eighteen months earlier and still had no location; Quiznos was refusing to refund their $25,000. "I was astonished," Klein says. "So I filed a class action that basically said that Quiznos dupes people into thinking they are buying an area that can support a store and dupes people into thinking that they will be able to comply with their contractual obligation to open within twelve months, which is what they have to do under the [franchise] agreement. What Quiznos later discloses is that, sure, you have to open in twelve months, but it could take you twelve to eighteen months just to find a site."

(Quiznos last year disclosed that as of December 31, 2005, 2,940 franchisees had not opened stores within the allotted twelve-month time frame. They represent 67 percent of all franchisees waiting to open a store.)

After Klein filed his suit in New Jersey, the TSFA quickly caught wind of it and came looking for him. "Chris Bray starts to tell me about the operational problems within the Quiznos corporation, and I realize that $25,000 fee is like nothing compared to what's going on here," he says.

What was going on, Klein believed, was that starting in 2001, Quiznos had implemented a business strategy to extract millions from franchisees while simultaneously making it difficult, if not impossible, for them to turn a profit. "Our argument is they don't really care how many sandwiches they sell, because they don't make their money off of product you sell as a franchisee," Klein explains. "They make their money from the product that the franchisees purchase.

"Quiznos was requiring these people to buy products and services at inflated prices that were not related to the quality standard," he continues. "To say that you are required to buy cleaning supplies at a higher price than you can buy them from Sam's Club does not make sense, and that's what was going on according to Quiznos' own documents. They received well over $100 million in rebates every year off the backs of their franchisees, and that's a problem, especially when the franchisees are losing money the way they're losing money. And it seems every change the company makes is to benefit or line the pockets of the company."