MILFORD, Conn. -- The Subway Franchisee Advertising Fund Trust (SFAFT), acting on behalf of more than 10,000 Subway franchisees worldwide, earlier this week said it has filed suit against Doctor's Associates Inc. (DAI), the franchisor of the quick-service restaurant (QSR) chain, to prevent DAI from breaking terms of a trust agreement between the franchisor and franchisees.
SFAFT's lawsuit, filed Monday in Ansonia-New Haven Superior Court in Connecticut, seeks to block Subway founder Fred DeLuca and DAI from seriously diminishing the control and protection [image-nocss] that Subway franchisees currently have over where and how their advertising contributions are spent on advertising and marketing programs that help grow the business.
"While we respect our founder's vision, and regret the need to resort to legal action, the fact is that franchisees have helped build that vision into what it is today," said Tom Seddon, CEO of SFAFT. "The hard work and financial capital of franchisees are no small part of Subway's success. Franchisees are owed the right to control their own assets, as promised when the trust agreement was signed."
Since being formed in 1990 as part of an agreement between franchisees and DAI, SFAFT has been a critical driver in growing Subway franchise restaurants and making Subway into the world's leading QSR brand, it said. As a legal trust governed by a board of elected franchisees, SFAFT has been able to offer franchisees a high level of protection for their advertising contributions while driving business performance, it added.
"Fred DeLuca had it right when he agreed to the current trust structurea structure that has helped propel the brand to unprecedented levels of growth and success," said Seddon. "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 control16 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."
The current issue stems from a new franchise agreement first introduced by DeLuca on April 1, 2006, that includes certain terms that allow DAI, at any time it chooses, to redirect franchisee advertising contributions away from SFAFT to a separate entity created by DAI. These terms in the new franchise agreement are in direct conflict with the 1990 trust agreement that established SFAFT. It is asking the court to bar DAI from including the new terms in its revised franchise agreement and to require DAI to live up to the commitments it made in the 1990 agreement.
The changes to the franchise agreement would affect both new franchisees and existing franchisees who open new locations. Any potential new entity would not provide franchisees the same level of control and protection as SFAFT, because SFAFT is a trust, it said.
"DAI has stated that it has no intention of diverting franchisee advertising fund contributions from SFAFT, so we truly don't understand why they are unwilling to simply change the franchise agreement to reflect that to the satisfaction of franchisees," said Seddon.
Significant effort went into SFAFT's attempts to reach a fair and reasonable compromise with DAI and DeLuca, in hopes of avoiding a lawsuit, SFAFT said. It outlined a number of measures that would increase collaboration between DAI and SFAFT, providing DAI more input into decision making for advertising and marketing programs. It also proposed building further on the trust's existing stringent legal governance and disclosure requirements to increase information sharing between the two organizations. In the end, however, SFAFT said it had no choice but to turn to the courts to preserve the rights of Subway franchisees and provide the protections and safeguards that the franchisees need to support their business.
"Across the board, franchisees are expressing strong support for the legal action and we are confident that the court will affirm their rights to protect and direct their long-term investments in building the Subway brand," according to Seddon.
A Subway corporate spokesperson said he couldn't go into details of the dispute. "We still hope we can come to an amicable resolution," Les Winograd told the Arizona Republic.
Headquartered in Milford, Conn., the Subway chain has more than 26,000 locations in 84 countries.
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