By Alan Prendergast
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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."
According to Klein's complaint, Quiznos also saturates the market with stores, distributes coupons for free and discounted food for which franchisees receive no reimbursement, and uses a portion of the advertising fee it charges franchisees to sell more franchises instead of to promote their product.
When a franchise goes out of business, as many inevitably do, the owner is threatened with a lawsuit to pay royalties over the entire fifteen-year term of his contract. Quiznos offers to resolve that dispute if franchisees sign a waiver giving up their right to seek redress. The bankrupt, vacant store is then passed on to another prospective franchisee. "In this manner," Klein says, "Quiznos suffers no loss and only a short-term interruption in royalties, while also meeting their requirements to provide locations to their excessive backlog of franchisees."
Klein cites a 2003 court document from another case in which Quiznos attorney Ric Cohen stated that "40 percent of Quiznos units are not breaking even," -- a figure that was not disclosed to his clients before they signed into the company. "What happens with Quiznos franchisees now is that it's just a matter of time before their debt catches up to them, before they max out their credit cards and take out their second mortgages and ruin their lives and their family's lives and their family's family's lives, meaning in-laws and whomever else they can borrow money from to try to get it to work, because franchisors will tell you: 'If you just keep it open a little bit longer...'"
Fred Westerfield is a client who couldn't hold it together any longer. He's closed his three Wisconsin Quiznos stores and filed for bankruptcy. He and his wife are losing their home and cars and almost ended their twelve-year marriage.
"We had money we earned and invested," he says. "We were smart. I thought this was going to be a good investment. They classify people as bad operators. They can't say that about me. I won awards. I followed all the rules. I worked seventy-plus hours a week. I put my heart and soul into those stores."