Subway Franchisees File Second Lawsuit

Control of Advertising Fund Heats Up Before Chain's Weekend Convention

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CHICAGO (AdAge.com) -- Just days before convening Subway Restaurants' annual systemwide convention, the battle between Doctor's Associates, the privately held franchisor of the chain, and its franchisees has escalated with a second lawsuit.
The restaurant's annual systemwide convention is this weekend, and the control of the $400 million ad trust will surely dominate the discussion.
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Filed by the North American Association of Subway Franchisees (NAASF) in Connecticut Superior Court in New Haven, Conn., the suit aims to block revised terms of an April 1 franchise agreement drafted by Doctor's Associates. Language in the new contract shifts control of Subway's $400 million-plus advertising fund from the franchisees to a party designated by Doctor's Associates. The new contract also has an "agree to agree" clause that modifies the terms of franchise agreements for all existing units to the new terms when franchisees sign a new store contract.

Upcoming confab
The suit was filed on behalf of the franchisees as beneficiaries of the Subway Franchisee Advertising Fund Trust. Franchise lawyers Dady & Gardner, Minneapolis, are representing the association. No doubt, the suits will dominate talk among the 3,000 delegates attending the confab this weekend in Toronto.

"We've not seen the lawsuit so we cannot comment on it," a spokesman for Doctor's Associates said.

The suit comes three weeks after the fund's elected trustees who manage and control Subway's $400 million advertising fund sued Subway founder Fred DeLuca and Doctor's Associates for violating their 1990 trust agreement by trying to take control of that fund.

The new agreement and an amendment dated July 1 "threatens to erode the foundations of the Subway system, by destroying franchisees' trust in the good intentions of our franchisor, and violating one of our foundational documents, the 1990 Trust Agreement," Kevin Brough, chairman of NAASF, said in a statement.

Talks broke down
Both groups have been meeting with Doctor's Associates since mid-April, but talks broke down when the franchisor balked at proposed changes, according to the association.

"Franchisees have more invested in this brand than anyone else, including the parent company; it is essential that their rights and investments be protected," said Jim Hansen, NAASF's CEO, noting that the suit doesn't ask for monetary damages. "Our goal was to seek a collaborative franchise agreement that would be fair to all stakeholders. When we realized that [Doctor's Associates] wouldn't budge on several key items critical to the franchisees' rights, we felt we had no choice but to ask the court to enforce the trust agreement and to protect our members' rights under their franchise agreements."

Brand vs. restaurants
According to Mr. Hansen, the July 1 amendment includes the franchisee trust, but on conditions that that trust meets transparency and prudent spending policies set by Doctor's Associates and works with the franchisor on promoting the Subway brand. However, those conditions are not mutually agreed upon and put the franchisees at a disadvantage.

"Promoting the Subway brand is materially different because [the agreement] used to say 'promoting Subway restaurants,'" said Mr. Hansen, adding that money in the fund could then be applied to marketing that doesn't benefit the restaurants.
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