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Quiznos class-action case close to settlement

The massive class-action lawsuit pitting Quiznos Sub franchisees against the chain’s franchisor moved closer to completion this week as attorneys for both sides appeared at a proposed settlement “fairness” hearing in Chicago.

It will take as much as a couple of weeks for Judge Rebecca R. Pallmeyer to issue a written ruling about the settlement — which sources have pegged to be valued at more than $100 million — that she tentatively approved last November.

Justin M. Klein, of Marks & Klein LLP of New York and Red Bank, N.J., one of the franchisees’ lead attorneys, and a representative of Denver-based Quiznos Franchise Co. LLC each declined to comment further about the matter pending receipt of Pallmeyer’s written findings.

At stake in the matter is hundreds of millions of dollars in negotiated benefits for as many as 6,900 current and former franchisees of the sandwich chain, including cash payouts, supply discounts and debt forgiveness.

Initial analysis of documents filed with the court in the case and interviews with franchisee attorneys by Nation’s Restaurant News suggested that the settlement had value of about $114 million.

Bruce Schaeffer of Franchise Valuations Ltd., an outside expert hired by attorneys in the case, placed the value at about $206 million, according to a report at the website that bills itself as a “franchisee community.”

Schaeffer could not be reached at press time to confirm the number reported by Blue Maumau or otherwise discuss his findings.

Beyond payouts or other benefits to individual franchisees, the proposed settlement also calls for Quiznos’ owners to take a number of steps or make numerous changes, including:
• Make $19.4 million in contributions to the chain’s advertising and marketing trust funds between January 2009 and Dec. 31, 2012.
• Recognize and help fund the startup of an independent association of franchisees and create a franchisee advertising advisory council.
• Create a formal dispute resolution process for addressing franchisee grievances.
• 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.

The case — which comprise four separate class-action lawsuits dating back to 2006 and were consolidated last year — involved allegations by attorneys for franchisees that Quiznos Franchise Co. LLC and other entities with ownership or control of the Quiznos chain had violated U.S. racketeering and corruption statutes. It revolves around the chain’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.

Quiznos has denied all claims made in the lawsuits and the settlement agreement involves no finding or admission of liability.

“This settlement is very good news for Quiznos,” Ellen Kramer, a spokeswoman for the company said last November after Judge Pallmeyer gave her tentative approval to the settlement that resulted from a mediated negotiation process involving both parties. “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.”

Franchisee attorney Klein said at the time that 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.”

For the fiscal year ended in December, Quiznos Sub had estimated U.S. net systemwide foodservice sales of about $1.57 billion from about 4,000 restaurants.

Contact Al Liddle at [email protected].

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