Restive franchisees are suing Subway Sandwiches & Salads--still in the midst of an agency review--for about $100 million, alleging misuse of franchisee advertising funds.
The suit was filed this month in Madison County(Ill.) Circuit Court, on behalf of 32 franchisees in nine states. It charges Subway owners and members of Subway Franchisee Advertising Trust Fund, the independent staff and franchisee member group that administers Subway's ad dollars, with misappropriation of the chain's entire $100 million ad budget. Franchisees kick in 2.5% of sales to bankroll the ad trust fund.
The suit claims the trust overpays for office space and equipment leased from Subway's headquarters; uses the franchisees' ad money to fund recruitment ads to attract more franchisees; and improperly uses ad funds to evict franchisees who don't pay their franchise fees.
CONFLICT WITH FOUNDERS
Moreover, the suit states there is a conflict in allowing Subway founders "Frederick DeLuca and Peter Buck to control advertising decisions and/or to veto advertising decisions made by the trustees/defendant." It further asserts that "implementing advertising programs to sell sandwiches at, near or below cost increases the gross sales of the franchisees, collectively, thereby increasing the royalties from which Frederick DeLuca and Peter Buck derive their income while increasing the cost of sales and decreasing the profit margins of the franchisees."
Also cited by name in the suit are the dozen members of the ad trust's board and Cindy Eadie, staff director of the trust.
In addition, the suit names key Subway suppliers including Kraft Foods, Armour Swift-Eckrich, Frito-Lay, Pepsi-Cola Co., James River Commercial Products and Solo Cup Co. It alleges those suppliers willfully raised the price of their products to franchisees "with a portion of the price increase" going to the ad trust and Messrs. DeLuca and Buck.
Specifically, the suit asks for damages against each board member and Ms. Eadie in the amount of $100,000 each; $50,000 in damages from Subway Franchise World Headquarters; and "in excess of $20 million" each from Messrs. DeLuca and Buck. The suit also asks that the eight suppliers pay damages in the amount of $10 million each.
Subway responded that the lawsuit is without merit.
The suit is the latest chapter in the acrimonious relationship between Subway franchisees and corporate headquarters that sparked the agency review last month (AA, July 1).
The review followed a plan to funnel the $40 million Subway now spends on local ads into national TV, clashing with the franchisees' goal of more local advertising.
CAUGHT IN THE MIDDLE
The ensuing ruckus caught Hal Riney & Partners/Heartland, Chicago in the middle. The shop was asked by Subway to prepare a media plan earmarking most of the $100 million for national TV.
More than 80 shops, including Riney, are pitching the business, said ad trust Chairman Joe Hart, an Atlanta franchisee named in the suit. The trust's staff group will winnow the list to five finalists that will present a creative assignment in October, he said.
The ad trust already has rejected a proposal by Messrs. DeLuca and Armstrong to split creative, media and other portions of the account because "instead of getting one focused voice, we'd get four or five," Mr. Hart noted.
Copyright August 1996 Crain Communications Inc.