GREEN BAY, Wis., Nov. 21 /PRNewswire/ — In a class-action lawsuit filed yesterday in U.S. District Court for the Eastern District of Wisconsin (Green Bay Division), franchisees of Quiznos Sub allege that the company has systematically defrauded its franchisees in a scheme designed to build the brand at the expense of its operators in the field.
The lawsuit (Case No. 06-C-1210) contends that the company forces franchisees to buy food and supplies from Quiznos or its affiliates at inflated prices while concurrently setting artificially low retail prices for its products, making the stores unprofitable for the franchisees. In addition, the franchisees allege that Quiznos unlawfully participates in a scheme to sell the franchises by omitting or otherwise misrepresenting key facts about Quiznos’ business operations in an effort to induce potential franchisees to buy a franchise. Seeking damages for lost investments as well as injunctive relief, the suit alleges, among other things, statutory and common law fraud, violations of federal and state antitrust laws, violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act, breach of contract, and violations of the Wisconsin Fair Dealership Law.
The class action in Wisconsin is the second significant lawsuit on behalf of Quiznos franchisees in less than a year, according to Justin M. Klein, Esq., a partner in the Red Bank, N.J. law firm of Marks & Klein, LLP. Klein represents a similar group of franchisees that filed a class action against Quiznos in New Jersey earlier this year. Klein also represents the plaintiffs in the Wisconsin lawsuit, along with Mark M. Leitner and Joseph S. Goode of the Milwaukee-based law firm of Whyte Hirschboeck Dudek S.C.
“Quiznos has been taking advantage of its franchisees for years through practices that we contend are illegal and in violation of the franchise agreement,” said Chris Bray, president of the Toasted Subs Franchisees Association, Inc. (TSFA), a trade group representing Quiznos franchisees that helped organize the class-action suit. Bray, who owns two locations in Texas and has been a franchisee for nine years, said Quiznos “has slowly, methodically and deliberatively modified the business model, year over year, to make it economically favorable to them, to the detriment of the franchisees. It is time to put a stop to this.”
Added Klein: “Quiznos has a one-sided relationship with its franchisees in which the company makes money and the franchisees go out of business in short order, lose everything, and are replaced with another franchise.”
Defendants in the Wisconsin lawsuit include, among others, The Quiznos Franchise Company, LLC, and Quiznos Franchising LLC, both of Denver, Colo.; various affiliates of the company; Richard E. Schaden of Lafayette, Colo., and Richard F. Schaden, of Westminster, Colo., the father-son owners of Quiznos; and Cervantes Capital, LLC, of Denver, which is alleged to run the Quiznos operations. The 28 plaintiffs in the class action are all operators of Quiznos franchises in Wisconsin.
Quiznos, once a publicly held company, was taken private by the Schadens in 2001. A subsequent dissenters rights lawsuit by shareholders alleged that the Schadens undervalued the share price in the takeover. That lawsuit was settled in 2004 when the company agreed to pay each shareholder an additional amount per share. During that time, Klein said, Quiznos expanded its number of franchises significantly. In late 2005, the Schadens unsuccessfully tried to sell their stake in Quiznos with a price tag of $2 billion. In April 2006, Quiznos announced that J.P. Morgan Partners, the private-equity division of J.P. Morgan Chase & Co (JPM) would acquire a significant share of Quiznos pursuant to undisclosed terms.
“We are trying to protect franchisees who are being taken advantage of,” concluded Klein.