You're Toast!

Franchise owners thought they'd make a fortune serving the toasted sandwiches created by Quiznos. Instead, they got burned.

So did Colorado franchisees Dan Walsh, Dan Serafin and Samir Tailor, who sued the company in 2004 for encroachment, claiming that their sales dropped dramatically when Quiznos allowed additional stores to open in close proximity to theirs. Since the company's contract with franchisees does not grant any territorial exclusivity -- the company can open stores as close to existing stores as it wants -- attorney Ted Bendelow argued that the issue was about economic viability. "The knowledge of the marketplace and what it takes to sustain a franchise is really within the unique and sole knowledge of the franchisor," he says. "That's where I think they have the greatest responsibility, not putting people into a situation where going in, you know there's trouble."

Denver District Court Judge R. Michael Mullins didn't agree and ruled for Quiznos, saying the plaintiffs had not proven that their reduced sales were caused by the proximity of other stores. More important, the plaintiffs' contract stated that site selection is their responsibility and that sites do not come with territorial protection. "In short, the Franchise Agreements are clear that Quizno's approval of a site was in no way a guarantee as to the sustainability of the location or as to its future success and also that Quizno's retained the right to open franchises anywhere else it chose," he wrote.

Walsh lost his two stores and his investment during the course of the litigation. He recently filed for bankruptcy. "Basically, you're signing away your life," he says today. "They made you believe they were going to take care of you. It turned out to be a crock."

Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Attorney Ted Bendelow represented Quiznos franchisees.
Anthony Camera
Attorney Ted Bendelow represented Quiznos franchisees.

Instead, Quiznos expects Walsh and other franchisees to adhere to the letter of their contracts, which require that they acknowledge the risk of owning a business and disregard any promise or assurance a Quiznos employee or contractor might have made. Bendelow, however, sees that as a problem because the Quiznos franchise agreement is an adhesion contract, meaning it's one-sided and non-negotiable. "The franchisee literally cannot change a comma or a period in the document," he says. "It was written by Quiznos for Quiznos, and so, as one might expect, the franchisor has all the rights, and the franchisee has all the responsibility. It doesn't do you any good to read the contract, because you can't negotiate it anyway. Here it is. Either you're in or you're out. You really go in with a leap of faith."

One-sided as the contract may be, Quiznos does disclose the dynamics of that relationship to franchisees in detail through its Uniform Franchise Offering Circular, which it files with the Federal Trade Commission and is required to show prospective franchisees. And while the document is a massive 437-page book, the UFOC discloses -- in all caps in the first two pages -- terms such as franchisors' right to open stores wherever they want, liability for future royalties if the agreement is terminated, and the company's ability to terminate an agreement if a franchisee does not open a store within twelve months. It also lists brief summaries of the forty lawsuits in which Quiznos is a defendant.

Outside of court, attorney Cohen recently released a statement that the claims in the Illinois class action are "false, misleading, and wholly without merit," and that Klein and Bray have "repeatedly demonstrated that they have little knowledge of the Quiznos business, or appreciation for its many successes."

The Colorado team for the Toasted Subs Franchisee Association are all carefully watching Chris Bray's lawsuit against Quiznos. It may determine whether or not they have a right to organize and to publicly criticize their franchisor.

When they meet at a Denver-area Quiznos on a recent afternoon, they talk in hushed tones with one eye on the front door. They talk about how to grow their numbers and how to get the rest of the one-third of Colorado franchisees who they say have already joined the TSFA to actually show up to meetings.

"The fact that we want a food co-op, that we want to fix our stores, that we want more say -- that should not be a secret," says the store's owner, who, like the other members, asked to remain anonymous for fear of retribution. "I don't want us to be against Quiznos, because we are Quiznos."

She hasn't made a profit on her store in years, not since another location opened nearby. Another owner in the room had sales well above average last year but still was in the red after food costs, royalties and discounts that aren't reimbursed. "And believe me, you guys," she says. "I run a tight P and L, and it's ugly."

She recently found out from the owner of a single, independent restaurant that his service calls from Pepsi are free. Yet they charge her $75 every time they come through the door -- money that she believes gets kicked back to Quiznos corporate. Those types of charges, and the tens of thousands in royalties she paid last year, are killing her; she'd like to get out of the system, but Quiznos stores aren't selling.

Most franchisees don't want to sell. They'd rather stick with the product and company they believed in enough to invest their savings. What they really want is a chance to be successful. They seek bargaining power through the recognition of an independent franchisee association and a business model that gives franchisees some oversight. Subway's franchisees, for example, after much dissent and litigation in the '90s, now have a recognized association and control their own food and advertising co-ops.

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