Alan J.   Liddle reports at Nation’s Restaurant News that a judge has granted preliminary approval for the settlement of four class-action lawsuits filed by Quiznos Sub franchisees against their franchisor that could significantly alter the relationship of the feuding parties and cost the franchisor up to $100 million.

The proposed settlement could impact more than 6,900 individuals now associated with the Denver-based Quiznos system “and several thousand who have closed their franchises,” attorneys for franchisees indicated in court documents.

The cases revolve around the system’s supply chain and food costs, marketing and advertising funds and disputes among franchisees that agreed to but did not open locations and whether royalties are owed. The parties will return in June to U.S. District Court in Chicago for hearings to determine the fairness of the provisions in the proposed settlement.

Quiznos has denied all claims made in the lawsuits, which date back to 2006, and the settlement agreement involves no finding or admission of liability.
“This settlement is very good news for Quiznos,” said Ellen Kramer, a spokeswoman for Quiznos. “Litigation is a time-consuming process that shifts valuable time and resources away from our most important focus – great-tasting food, franchise owner profitability and customer satisfaction.”

The settlement is “the culmination of several years of contentious litigation and reflects what we believe is a positive step for the future of the Quiznos system,” said Justin M. Klein, one of the plaintiffs’ attorneys.

Klein’s firm, Marks & Klein LLP of New York and Red Bank, N.J., is representing the plaintiff franchisees along with the firm of Kravit, Hovel & Krawczyk SC of Milwaukee.

If left unchanged, the settlement would require Quiznos to change franchisor policies and provide concessions to franchisees. It could cost the sandwich-chain parent at least $23.6 million in franchisee payouts and forgiveness of unpaid royalties and advertising and marketing fees, according to court filings.

The settlement, as proposed, would require the following from Quiznos:

  • To offer credits against the purchase of food or equipment to an estimated 2,300 operators who acquired franchises but never opened restaurants. The credits would equal the price of a franchise fee, which is typically $25,000, if the operators remain in the Quiznos system and open their locations. That tally could total $57.5 million for Quiznos. If the franchisees elect to leave the system, they would receive a refund of between 5 percent and 32.7 percent of the price of their franchise.
  • To pay $19.4 million in contributions to the chain’s advertising and marketing trust funds through Dec. 31, 2012.
  • To make additional payments of nearly $14 million, including up to $11 million for plaintiffs attorneys’ fees.

Quiznos has agreed not to oppose the relief sought in the settlement, the motion indicates.

The lawsuits span cases in Illinois, New Jersey and Wisconsin, and involve claims of violations of U.S. racketeering and corruption statutes, as well as transgressions of various state regulations. The charges are refuted by Quiznos.

Additional settlement provisions include:

•An agreement by Quiznos to drop all of its claims against individuals who did not open restaurants, but had agreed to in the past.
•Agreement by Quiznos to forfeit claims of sales royalties and advertising and marketing fees owed it by current and former franchisees and franchisees who have not opened restaurants. This concession, attorneys for the plaintiffs estimated, has a value of $5.7 million.
•Quiznos’ recognition of an independent association of franchisees, to which it will also contribute startup money. A franchisee advertising advisory council also will be established.
•The creation of a formal dispute resolution process for addressing franchisee grievances; the formation of a formal program to assist franchisees who want to sell their stores and aid franchisees who want to acquire more locations; and the promise of financial aid to cover franchisee costs associated with future mandates to take part in a national sandwich delivery program, if any.
•An annual third-party audit of the prices Quiznos charges franchisees for mandatory food products and supplies; the creation of a formal program that standardizes the process for approval to use products or services other than those mandated by the chain; and a reworking of the franchise disclosure document that clarifies the role of franchisor-owned entities in the system’s supply chain.
•The creation of a retraining program to help franchisees better understand the requirements of running a Quiznos restaurant; the creation of a program for considering franchisee requests for waivers of the chain’s maximum pricing; the creation of a system for monitoring the backlog of franchisees who have not yet opened a restaurant and for helping them locate sites for their restaurants.

Quiznos had 2008 U.S. systemwide sales of about $1.7 billion from 4,381 restaurants.

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