At the time, BNET argued that Subway's audience was primarily adults looking for lunch during their workday, and were therefore old and jaded enough to understand that just because Phelps had gotten stoned at a party did not mean that Subway was endorsing that, or vice versa. Subway was in a different position to Kellogg, which dropped Phelps as a sponsor immediately, because Kellogg's audience is kids and their parents who don't want to answer annoying questions from the rugrats about what that man is doing to that pipe over the breakfast table.
The order of events suggests that Subway had considered this all along. Even though it removed all links to Phelps from its FreshBuzz site, Subway never outright kicked Phelps off its roster. With the smoke (ahem) cleared, it appears that Subway is willing to do something highly unusual in the advertising business: Proceed with a campaign featuring a man who has taken a drug that most adults believe is largely harmless, but that nonetheless causes hysteria among those who believe the opposite. Most brands aren't mature enough to risk that.