Subway's Franchisees Sue to Retain Control Over Ad Fund

Parent Doctor's Associates Wants to Jointly Manage $400 Million Trust

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CHICAGO (AdAge.com) -- Following weeks of negotiations, Subway restaurant's owner-operators filed a lawsuit to block a new franchise agreement that diverts control of the chain's $400 million ad fund away from a trust controlled by franchisees to another fund jointly managed by Doctor's Associates, Subway's franchiser.
The Subway Franchisees Advertising Fund Trust has hired noted franchise lawyer Lee Abrams, partner at Mayer, Brown, Rowe and Maw, Chicago, for legal advice.
The Subway Franchisees Advertising Fund Trust has hired noted franchise lawyer Lee Abrams, partner at Mayer, Brown, Rowe and Maw, Chicago, for legal advice.

Battle over control
By signing the agreement, franchisees would effectively share control of the Subway Franchisees Advertising Fund Trust, the group that directs the chain's advertising, with Doctor's Associates. The independent SFAFT, controlled by franchisees and with a few corporate members, has held sole sway over the budget since 1978. Subway is 100% franchised.

The suit was filed in Ansonia-New Haven Superior Court in Connecticut.

Noted attorney
The trust hired noted franchise lawyer Lee Abrams, partner at Mayer, Brown, Rowe and Maw, Chicago, for legal advice. According to SFAFT, it offered concessions to Doctor's Associates through a "comprehensive document" it says "codified" processes already happening to provide input into the decisions made by the trust and its board.

Subway founder "Fred DeLuca had it right when he agreed to the current trust structure -- a structure that has helped propel the brand to unprecedented levels of growth and success," Tom Seddon, CEO of the trust, said in a statement. "As an entrepreneur himself, Fred recognized the importance of empowering the small-business owners of Subway franchises with control over advertising and marketing programs. Unfortunately, for reasons that are not clear, Fred has now decided he wants to change this proven formula and unilaterally assume control -- 16 years after his original agreement with franchisees. At a time of record sales and growth, we do not know why Fred would want to do this now."

'Jointly managed'
"Our challenge was with the words 'jointly managed,'" Mr. Seddon said in an interview, noting that the contract update, which takes effect April 1, was a surprise. He said that Doctor's Associates had stated it has no intention of diverting funds from the trust, and that the point could be easily handled. More problems emerged, however, and talks ultimately broke down over the length of the agreement. "We had some very good discussions and dialogues with [Subway]. We felt like we were going to be able to get this resolved. You never know until you get to the last few things."

Representatives for the franchisee association were in a board meeting and unavailable for comment. A Doctor's Associates' spokesman said, "We are still hopeful that we can come to an amicable resolution."

SFAFT represents 25,564 restaurants in 84 countries.
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