As Lawsuit Settlement Nears, Quiznos and Franchise Owners Need to Hug it Out

Last Updated Jul 2, 2010 7:00 PM EDT

After several years of contentious litigation, sub-shop franchisor Quiznos is close to reaching a settlement of the multi-year class-action lawsuit that covers nearly 10,000 of its current and former franchisees. The suit leaves Quiznos with a very long list of required changes it must make in how it operates, but the most important change isn't on there: Actively reaching out to franchisees, mending fences, and bringing this organization back together so it can move forward successfully.

There's rarely been an example of such entrenched bad blood between the two essential parts of a franchise organization, store owners and the parent company. The mood is literally serious as the grave. Franchisees vent about their lot at Quiznos on the Web site of their renegade franchisee group, the Toasted Subs Franchisee Association, the board of which was sued by Quiznos after TSFA posted the suicide note of one former franchisee on its Web site.

Among the allegations Quiznos is paying a reported $200 million to settle include price-gouging members on supplies they must buy from the franchisor to fatten their own profits, and making hundreds of franchisees who paid their signup fee but couldn't find an approved store location forfeit their up-front money. More recently, in the recession, franchise owners were compelled by Quiznos to lower prices while also handing out coupons, a combination they alleged made the business model unprofitable.

One thing's for sure -- franchisees have deserted the chain in droves. The company's public franchisor dislosures reveal nearly 1,000 Quiznos franchise locations closed from 2007 to 2009, leaving the chain with less than 3,700 stores. The franchisee community site Blue MauMau estimates that figure has since grown to 1,800 shuttered units.

But instead of focusing its resources on helping the surviving franchisees succeed, Quiznos announced a major intiative last week to use money from a recent recapitalization to open 600 new stores, many of them company-owned. This marks a major departure for Quiznos, which now has just three company-owned stores. Franchisees have protested the diversion of precious resources they'd like to see spent on strengthening the franchise system. Also, since Quiznos has little store-operating expertise, this initiative could prove a big and unprofitable distraction, just when Quiznos really needs to knit its frayed franchisee network back together.

Just before the deadline to opt out of the suit last week, a few franchisees were mulling defecting to start a new class-action suit, alleging franchisees just aren't getting enough in the settlement, which only contains $25 million in cash. The rest is in items such as Quiznos paying into an advertising fund.

Quiznos needs to be quick with the olive branch to avert the continuation of its costly lawsuit drama. More importantly, franchisees need to start feeling the love so they'll get back to focusing on their store operations. Hold a retreat, send corporate managers on a national tour, go geocaching together to build relationships -- Quiznos needs to do whatever it takes to get franchise owners back to promoting and building up this brand, rather than tearing it down.

Photo via Flickr user The Consumerist Related:
  • Carol Tice

    Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include Allbusiness.com and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.

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