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Quiznos' Attorney Shows Lack of Transparency in Settlement

On the day Quiznos filed for Chapter 11 bankruptcy, outside counsel Fredric ‘Ric’ Cohen declared to a popular magazine for franchising readers, “Vindication. It’s vindication,” seeming to say that his client was exonerated in settling the last 13 franchisee lawsuits.

Cohen told Franchise Times reporter Beth Ewen that when attorneys for the franchisees called him wanting a settlement for “millions of dollars,” he told them no. He said Quiznos would only agree to no payment, but it would not enforce the liquidated damage provision. He said the franchisees then took the deal.

But in reality, 12 of the 13 cases settled for $2.5 million, with the parties signing mutual releases, waiving their rights to future litigation. 

Cohen dug his hole a little deeper saying, “In a nutshell, it seems like Quiznos is pretty much done with litigation over product distribution for good.” The franchisor attorney then surmised, “It’s been a 10-year process, and in those 10 years there has never been an adverse ruling against Quiznos. It’s been defending baseless litigation and it’s taken its toll on the company. It shows what bad litigation can do to a very good company,” he stated. 

But again in reality, Quiznos shows in its latest FDD, the litigation is not finished. Another 13 cases are pending in the United States and in Canada. Cohen also failed to explain to reporter Ewen that the vast majority of their cases never go before a jury or judge. For the past ten years, Quiznos’ mantra has been to string out expensive litigation, then settle in favor of the franchisees. That assures the company will not receive an adverse ruling. 

One question the Franchise Times reporter missed: Why didn’t Quiznos fight vigorously to defend itself against the egregious allegations brought by hundreds, even thousands, of franchisees for the past decade in individual and class-action lawsuits? Franchisees accuse the franchisor’s top management of being engaged in fraudulent schemes to sell mandated goods at inflated prices, and in abusive coupon and discount programs to the detriment of store owners. Allegations do not stop there. They also claim the sub sandwich chain gained unlawful control over franchisees through a pattern of racketeering activity.

Ms. Ewen should have asked Cohen why wouldn’t Quiznos, at one time reported as the fastest growing sandwich chain in the U.S., fight to clear its name and reputation of those accusations if they felt they were unjustified.   

Is Quiznos playing a shell game with FDDs?

What attorney Cohen didn’t want Franchise Times to know was that the franchisees in the lead case Avengers Inc., et al. v. QFA Royalties, who settled the litigation for the $2.5 million, signed the settlement agreement with Richard ‘Rick’ Schaden, former owner and officer of Quiznos, named individually in the lawsuits. They did not settle under Quiznos.

Because Rick Schaden is also cofounder and financier of the Smashburger chain through his private equity firms, state and federal regulators require that the Quiznos litigation also be revealed in the hamburger chain’s franchise disclosure documents.

Smashburger and Quiznos filed their 2014 Franchise Disclosure Documents in Minnesota on March 26 and March 27, 2014, respectively, by Cohen’s law firm Cheng Cohen. Both registration renewals disclose the last 13 lawsuits as part of Item 3 Litigation. While Quiznos declares it intends to defend itself vigorously against the action, Smashburger FDD lists the lawsuits as “completed litigation,” explaining the parties settled $2.5 million in favor of franchisees.

That’s why the declaration of “vindication” is strange. Since Cohen Cheng prepared both disclosure documents, and represent the companies in litigation, the law firm knew $2.5 million was paid out to franchisees.

Stranger still, why is there a discrepancy in the two disclosure documents, Quiznos' FDD (pdf) and Smashburger's FDD, regarding the same 13 lawsuits when they were obviously settled a month prior to the franchise disclosure documents?

Is Quiznos, through the help of its legal counsel, playing the magic “shell” game, challenging buyers to guess which “shell” to look under for the right disclosure of its 13 lawsuits?  If the buyer picks the Quiznos FDD shell, he finds ongoing litigation. If he picks the Smashburger FDD shell, he finds the matter was settled for millions.

Quiznos is telling Franchise Times and prospective buyers that the litigation is ongoing, when in reality it has been settled in favor of franchisees.

Smashburger’s FDD states that as of February 25, 2014, Quiznos franchisees entered into a settlement agreement with Schaden, not Quiznos or QFA Royalties, agreeing to pay $2.5 million, in aggregate. On March 10, 2014, all 13 cases were dismissed by Denver District Court with prejudice as to Schaden. Since there was also pending arbitration, it explains that Schaden and six of the franchisee groups filed notices with the American Arbitration Association advising that the parties have reached a settlement and dismissed the arbitration as to Schaden.

The big question now for Franchise Times to ask: Is Quiznos’ disclosure of the final settlement in the Avenger case in Quiznos’ FDD a violation of state and federal franchise laws?

Another facet to Quiznos litigation

The one case that was not part of the $2.5 million award was settled last November for zero dollars.  Franchise Times reported on the settlement at that time, again quoting Ric Cohen. Referring to Newrent Overland LLC v. QFA Royalties et al., reporter Ewen said Quiznos’ attorney was “landing some big punches of his own.” His tactic was to have the attorney representing the franchisee groups in the 13 cases removed. Ric Cohen explained that Jeffrey Cohen (no relation to Ric) was that attorney. He described him as “Quiznos’ former lawyer who was now suing Quiznos.”

But Denver District Court documents state Jeffrey Cohen was not representing Quiznos. After moving from Patton Boggs in New York in March 2012, Jeff Cohen joined the law firm of Ballard Spahr in Denver, bringing the 13 Quiznos franchisee lawsuits with him. Knowing that, Ballard Spahr erected a strict “ethical screen” to prevent any conflict of interest that Jeffrey Cohen might have in the Denver law firm. 

It wasn’t until attorney Kim McCullough, now a partner at Ballard Spahr, revealed to Quiznos attorneys her work on the company’s franchise disclosure agreements in 2005, that Jeff Cohen's 13 cases might be considered a conflict of interest. Court documents state she maintained that some of the language in her disclosure agreements “was the reason for Quiznos’ legal victories.” That is when the franchisor’s outside counsels filed a motion to have Jeffrey Cohen removed from the cases. And they won. 

While at Patton Boggs, Jeff Cohen had successfully represented the 18 franchisee groups in Ballwin Food Beverage Inc. v. Quiznos Franchising, resulting in a $10 million settlement dated August 2012, five months after he joined Ballard Spahr. The allegations in the Ballwin case were identical to those in the 13 pending lawsuits he brought to Ballard Spahr. At that time, no claims of conflict of interest were raised by the Ballard firm or by Quiznos attorneys.

New litigation ahead for Cheng Cohen?

While reporter Beth Ewen asked Cohen to respond to rumors circulating that Quiznos would be seeking bankruptcy protection, he offered no comment. When telling her that Quiznos “is pretty much done with litigation over product distribution for good,” Cohen quipped, “What will I do with myself now?”

But in reality, it looks like there may be more litigation on the horizon for Cheng Cohen in representing its client. Avenue Capital and Fortress Investment, first-lien lenders who took over the failing franchise company in January 2012, announced plans to sue the former owners, the Rick Schaden management group, as part of their bankruptcy plan. The hedge fund companies accuse them of providing false financial projections that showed Avenue and Fortress could service their debt obligations and sustain their new capital structure. They also allege they pressured the debtors’ management to generate unreasonably aggressive projections for the express purpose of effectuating the 2012 restructure.

After representing Quiznos and the Rick Schaden management group for the past decade, and Avenue Capital for the last two years as owners of Quiznos, Cohen and his firm could catch a new wave of lucrative legal work. Now the question is which side will Cohen and his firm choose to represent?


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About Janet Sparks

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Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.