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Judge upholds settlement in Quiznos class action

Four class-action lawsuits brought by disgruntled Quiznos Sub franchisees against the chain’s owners concluded Friday when a federal judge entered a ruling upholding the terms of a settlement valued at $206 million, according to court documents.

In upholding the terms of an initial settlement submitted last November by attorneys representing more than 8,000 current or former franchisees and Quiznos Franchise Co. LLC and related parties, Judge Rebecca R. Pallmeyer of the U.S. District Court in Chicago overruled the lone formal franchisee objection to the agreement.

Attorneys for Wisconsin Quiznos franchisees Gary and Jill Gevaart of Globe Food Services LLC had argued that the settlement did not consider the plight of franchisees who took on personal debt to stay current in their obligations under the franchise agreement. But Pallmeyer noted that the Gevaarts, like all franchisees, could have opted out of the settlement and filed a separate suit against Quiznos and stated that “nothing in the record supports their concern that the settlement agreement is unfair to persons in their situation.”

Pallmeyer’s ruling brings to an end a matter dating back to 2006 that originally took the form of four class-action lawsuits, all of which were consolidated last year at the request of attorneys for both sides after lengthy negotiations and third-party mediation.

In the lawsuits, attorneys for franchisees alleged that Quiznos Franchise Co. LLC and other entities with ownership or control of the Quiznos chain, including parent QCE Holdings LLC, had violated U.S. racketeering and corruption statutes. Those allegations revolved around the chain’s supply chain and food costs, marketing and advertising funds, and disputes among franchisees who agreed to but did not open locations and whether royalties are owed.

Quiznos has denied all claims made in the lawsuits, and the settlement agreement involves no finding or admission of liability. Neither Quiznos nor its attorneys returned requests for comment about the settlement.

The settlement includes numerous provisions for cash payouts, supply discounts and debt forgiveness for individual franchisees, ranging in value from $250 to hundreds of thousands of dollars, depending on the royalties or marketing fund fees forgiven.

It also calls for business changes to the Quiznos franchise system, including the creation of an independent franchisee association, which attorney Mark M. Leitner identified as one of the settlement's most significant elements.

“Truly independent, assertive franchisee associations are crucial in helping to equalize the balance of power between franchisees and their franchisor,” said Leitner, who represented the Quiznos franchisees along with his associate, Joe Goode, at Kravit, Hovel & Krawczyk SC of Milwaukee and Justin M. Klein of Marks & Klein LLP of New York and Red Bank, N.J.

Leitner said he, Goode and Klein agree that three other changes outlined in the settlement stand out as significant for franchisees:

• A new annual review of pricing, which Leitner said would help "both franchisees and Quiznos better evaluate their competitive positions."
• The creation of a program by which franchisees could seek waivers of maximum-price ceilings set by Quiznos.
• The establishment of a program to resolve franchisee grievances.

“The court's approval of the settlement marks what we hope is the beginning of a new era in the Quiznos system,” Leitner said.

Following submission of the proposed settlement to the court last fall, Quiznos spokeswoman Ellen Kramer said: “This settlement is very good news 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.”

In addition to the direct payouts and other benefits for individual franchisees, and the changes highlighted by Leitner, Goode and Klein, the settlement also calls for Quiznos’ owners to take a number of steps, including:

• Make $19.4 million in contributions to the chain’s advertising and marketing trust funds between January 2009 and Dec. 31, 2012.
• Launch a formal program to assist franchisees who want to sell their stores and aid franchisees who want to acquire more locations.
• Promise financial aid to cover franchisee costs associated with future mandates to take part in a national sandwich delivery program, if any.
• Establish an annual third-party audit of the prices Quiznos charges franchisees for mandatory food products and supplies compared with prices available elsewhere, and create a formal program that streamlines and standardizes the process through which franchisees may request franchisor approval to use products or services other than those mandated by the chain.
• Rework the chain’s franchise disclosure document to clarify the role of franchisor-owned entities in the system’s supply chain.
• Develop a retraining program to help franchisees better understand the requirements of running a Quiznos restaurant.
• Create a system for monitoring the backlog of franchisees who have not yet opened a restaurant and for helping them locate sites for their restaurants.

Under the settlement, franchisee counsel Kravit, Hovel & Krawczyk and Marks & Klein will split the lion’s share of $10.8 million in legal fees and cost reimbursements awarded by Pallmeyer. A portion of the award will also go to Whyte Hirschboeck Dude, a Milwaukee firm at which both Leitner and Goode worked before joining their current firm.

Other lawsuit participants, such as the individual franchisees who initiated the litigation, will receive “incentives,” or additional payments totaling nearly $3 million, court documents indicated.

Contact Alan J. Liddle at [email protected].

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