Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
in reference to: Doctor’s Assoc., Inc. v. Stuart
This above case from 1996 illustrates many of the horror stories you read on this blog, particularly site selection and mandatory arbitration clauses.
Site Selection:
Several Subway franchisees sued Subway corporate for basically screwing them on site selection.
First a little insight into Subway’s site selection process described in the court’s opinion.
After a Subway franchise is purchased, Subway helps the franchisee to find a site for the Subway shop. If Subway approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with Subway (red flag!).
In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. Subway corporate allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked Subway corporate for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois.
Subway corporate then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants’ objections, Subway corporate made Defendants locate their second Subway store in Granite City, less than two miles from Defendants’ first store. The opening of this second shop cut into the sales of Defendants’ first Granite City shop.
Subway corporate is your landlord. They can dangle an eviction notice in the face of franchisee to compel desired behavior. If Subway had the franchisee’s best interests in mind, that franchisor-landlord relationship could work in theory. Intuitively, you would think that maximizing the franchisee’s profits would maximize Subway’s profit, right? Wrong. (see The hidden ways franchisors make money off franchisees)
Arbitration Clause:
So you think, "If they try to screw me, I"ll sue them!", right? Well, you can’t because like most franchise agreements, the Subway franchisees agreed to settle disputes using an arbtration service instead of the government courts:
Any controversy or claim arising out of or relating to this contract or the breach thereof shall be settled by arbitration
Convincing a judge the arbitration clause is unconsciounable is a very high hurdle, but can be done as Rob Boulter has done recently in California representing Mail Box Etc. franchisees.. That means you have to argue your case in front a “unbiased” private arbitration company. Ironically, arbitration companies compete verociously for Subway’s business. If Subway thinks the arbitration company is unfair, it can contract with another arbitration company. In arbitration, there is no jury, few evidenciary and discovery rules, and the outcome is binding. You can sue them if you find a technicality in the contract (which the case above found in the Sublease Agreement which did not contain an arbitration clause like the Franchise Agreement).
Similar Posts:
- Subway’s DeLuca loses battle with franchisees
- Arbitrations Clauses
- Domain Names that include Franchisor’s Name – OK?
- Quiznos gets toasted with lawsuit
- Australian Case: Withholding Consent to Transfer Franchise
Quiznos sucks.
Quiznos blows subway away
There are many more dead or injured Subway franchisee’s than there are Subway millionaires.
it is a franchise. you are making money off of someone elses hard work buy buying the rights to their name, but also you must follow their rules. anyone who is opening a franchise should understand this. if you don’t like the rules, play a different game. if you want to become a millionaire, come up with your own concept and become a franchisor.
In a recent publication of The Franchise Times there is a story about a Subway Franchisee (a LTC) who was deployed to Afghanistan and who had to leave his two stores in the care of his brother and another franchisee when he left the country. He was in a “special development zone” and had worked hundreds of hours in his two stores to try to make them succeed. Apparently, a divorce, because of the long hours at work, perhaps?
Obviously, when he wasn’t there to supervise and to provide free labor, the franchisee and the brother somehow didn’t get the rent paid to Subway and in the end, he lost both of the units. The franchisee got one of the stores. Apparently, when he took it to Court, the Judge ruled for Subway. Not surprising. I thought there were laws about creditors having to wait until our deployed troops were back in the country before they could take their property away but evidently franchise law is supreme.
Just more of the same!
Carol
I have been w / Subway for several yrs. Current morale is low and franchisees very frustrated with billionaire Fred having become so greedy and power hungry. Previous poster commented how a franchisee needs to play by rules ect… well… when the rules keep changing at the pleasure of Fred , one cant accept that. The new franchise agreements and everything else spells trouble for a franchisee. I am trying to leave the system , selling my stores and I wont look back when all are sold and gone.
wrote on June 3, 2008 @ 4:49 pm:
Have you been turning a profit after paying yourself a salary?
[...] used your success to put competitors 4 miles down the road from you…it reminds me of the lawsuit regarding the proximity of other Subway franchises leading to the demise of many of those sub shop [...]