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.
Quiznos is facing more class-action lawsuits over delays in getting locations approved for its franchisees, and keeping their $25,000 franchise fee.
More from the Denver Post article:
The case alleges “deceptive business practices” in the company’s franchise sales method and demands that the company stop selling franchises in New Jersey until all existing franchisees get locations or are refunded their franchise fees.
In a separate case filed in December in the Ontario Superior Court of Justice, the plaintiffs allege that the company is violating Canadian franchise law by not disclosing to potential franchisees full details and processes for securing locations.
Quiznos, of course, denies violating any law.
Hat tip: Paul SteinbergFranchisors usually carefully craft the franchise agreements to enable wiggle room in stalling or denying approval of locations. Warning flags include evidence of high franchisee turnover or higher proportion of revenue from non-royalty revenue which can sometimes be gathered and deduced from the UFOC Items 19-21. I know of a major dating franchise where one location in a big city has been sold 3 times over in the past few years, with the most recent franchisee begging the previous franchisee who sold it to him to take it back for FREE because it was draining money. If he closed the business, he would have breached the franchise agreement and would be obliged to pay tens of thousands in fees, charges and damages.
Update: March 1, 2006
You can track the Ontario case on Goldman Sloan Nash & Haber’s web site, the Canadian law firm representing the plaintiff. The firm posted the detailed statement of claim (complaint) against Quiznos.
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The amended statement of claim can be found here:
http://www.gsnh.com/quiznos/amendedstatement_feb2406.pdf
This is going to be an interesting case to watch. There are a number of important issues which may be decided, including whether a franchise disclosure document can be so materially incomplete it isn’t a disclosure document.
But, for me, the heart of this problem is being obscured in the pleading. Quiznos has a cruel, but fair (ie legally disclosed), contract with respect to losing your deposit. The real question is: is this practice commercially reasonable, pursuant to section 3 of the Ontario Arthur Wishart Act. (This was not pleaded.) It is just not commerically reasonable to take all of the deposit money if a suitable location cannot be found.
Actually,the allegations in NJ are even more shocking; here the allegation is that Quizno’s deliberately blocks franchisees from opening a store BECAUSE the franchisor wishes to forfeit the franchise fee and re-sell to another franchisee. This was the gist of the UPN-9 Investigative Report, I have can send you a DVD of the news piece if that would be useful to you. I am not entirely convinced, but the facts don’t put the franchisor in a good light.
I would be interested in the DVD; my address is: Suite 1250, 180 Dundas Street West, Toronto, On M5G 1Z8.
But the Ontario action is entirely framed on the theory that Quiznos didn’t disclose various material facts about their practice and not on how they exercised their contractual discretion.
Does anyone else think it is odd that both franchisees in document paid $30K in franchise fees BEFORE receiving and signing the franchise agreement. Isn’t the franchise fee typically paid upon execution of the franchise agreement?
In the US cases, the UFOC was delivered, the Franchise Agreement executed, and the franchisee fee paid. After those events, the franchisee was supposed to find a suitable location to open the store. Regulations in the US are strict with regard to disclosure and the timing of any franchise fee payment to the franchisor. Most states do NOT have franchise relationship legislation, which is quite distinct from franchise disclosure legislation; New Jersey is one of the few states where the courts would be sympathetic to a relationship claim.
As I did a quick glance at the Canadian pleadings, it struck me that they are alleging that the failure of the franchisor to disclose the huge backlog of signed (but unopened) franchises was itself a violation of disclosure requirements insofar as a prospective purchaser may have known that failure to open in 12 months would result in forfeiture of the franchise fee, but this is quite different from a prospective purchaser knowing that they had a snowballs chance in hell of actually getting site approval for a location. I think it is a solid common-sense argument, but I don’t know that it would be very well-received in most US courts (although the argument is conceptually similar to the Scheck v. Burger King encroachment decision).
I have first hand knowledge of this. One of the real problems that exist in these purchases is that the new owners did indeed find locations to place their stores. Corporate kept refusing the location approval until the 12 months had passed. Then WHAM BAM thank you for the $25,000 donation to help us stay afloat. That is nothing but deceptive business practices in which they use all throughout the system.
Any franchise that charges an average of 33% food cost…STAY AWAY FROM….you can buy from sams club at half of that!!!
Ive ran a very profitable restaurant for 30 years….with not one national supplier….one last note this is a tough way to make a living…if your not a workaholic…keep your day job!