Fair treatment of Subway DA?

Submitted by Fayaz on Tue, 04/13/2010 - 12:31pm.

 

Daytona Subway DA, 2002(??)
 
During the course of 20 years, Terry Quinn has made about $8 million helping Subway Restaurants Inc. develop its sandwich shops in 20 Ohio counties.
But nowadays, the development agent's territory has shrunk to four counties in central Ohio.
In December, Milford, Conn.-based Subway pulled Quinn's rights to further develop or receive revenue from the Dayton domain, comprising 16 counties in western and southern Ohio. That means he's out franchise fees and royalties for 80 Subway restaurants he developed for the company.
"We've had a series of incidents with Subway," said Quinn, the owner of Grandview-based Quality Sandwiches of Ohio Inc. "I had previously sued them over some issues in the Dayton territory, and I think I won $150,000. After that, Fred DeLuca (Subway's founder) found a loophole in my Dayton contract so he terminated it prematurely."
Quinn has filed a case with the American Arbitration Association's East Hartford, Conn., division to get his territory back and to recover lost profit. He's also seeking punitive damages. A decision is expected by December. He said his agreement prohibits him from filing a civil suit against the company.
Quinn alleges Subway yanked his Dayton territory because of a clause in his contract that says he had to have more units in his markets than the largest fast-food chain has.
DeLuca could not be reached for comment. Les Winograd, a spokesman for Subway, said he was not able to comment on the dispute.
Long-term relationship
In addition to the 80 units in Quinn's former Dayton territory, he is the franchisee of 10 units in Central Ohio, has five under construction and has developed 61 others.
He thinks his problems with Subway revolve around a personal conflict with DeLuca, whom he's known for years, and have little to do with his performance as a development agent.
"I'm the only development agent in the system that has followed (DeLuca) down two dark holes — Cajun Joe's (restaurant chain) and We Care Hair," he said. "We went out and developed stores for him. I lost close to a half a million of personal money in Cajun Joe's. With We Care Hair, they just sold the company, and I didn't go with it, so my royalties just ceased — $80,000 a year. I had 16 years on my contract left and I took $28,000 in arbitration to settle."
Quinn also is concerned about the future of his Columbus Subway territory, for which he has only "a few" years left on his contract.
"He would have taken me out of both (Columbus and Dayton) if he could," Quinn said. "I'm ahead with unit growth in Columbus so he can't take me out of here. It's too hard developing little shops like we've got from a distance. But once you have it developed, you can maintain it for a long time, milk it and get rid of the middleman."
Disputes all too common
Subway, which now has more units in the United States than McDonald's Corp., has used franchising as the main vehicle to drive expansion. All but one of Subway's 17,015 restaurants in 72 countries are franchised units. According to Nation's Restaurant News, Subway had 13,247 units in the United States as of December 2001.
The company is known for having problems with franchisees. In a 1998 analysis of franchising practices by Fortune Magazine, the sandwich chain was listed as having more franchisee and development agent-related claims against it (260) than Burger King, Taco Bell, Wendy's, Hardee's, KFC and McDonald's combined.
Entrepreneur.com, however, has listed Subway as its No. 1 franchise opportunity for 2002, ahead of 7-Eleven Inc., McDonald's and Holiday Inn Worldwide. The rating was based on financial strength, growth rate, franchising experience and start-up costs.
Peter Macrae Dillon, a partner with Siskinds Franchise Law Group in Ontario, Canada, said "disputes between franchisors and franchisees are as inevitable as spats between husbands and wives."
"In the case of disputes between area developers and their franchisor, the stakes are higher than those involving single-unit franchisees," Dillon said. "There are more dollars at stake in an area involving multiple units. Second, most franchise agreements contain cross default provisions that provide that the termination of any single unit agreement will result in a default under all of the other agreements."
As a result, Dillon said, the pressure that a franchisor can bring to bear on an area developer is "enormous and, some would say, coercive."
The American Arbitration Association declined to provide details on Quality Sandwiches of Ohio vs. Subway. Quinn hopes the lone arbitrator hearing the case will recognize that Subway never treated his company as two separate divisions.
"If you put Columbus and Dayton together, even if I'm behind in one, I'm way ahead in the other," Quinn said. "He gave me no real time to cure for being behind in Dayton."

Laura Newpoff writes for Columbus Business First. Reach her at lnewpoff@bizjournals.com.
 
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