Franchisees Sue Subway Over $400 Million Ad Fund
A group of franchisees representing 14,560 Subway restaurants operators have launched a legal battle against Subway’s parent company over how its multi-million advertising budget is controlled.
The lawsuit, filed July 18 by the North American Association of Subway Franchisees (NAASF) in Connecticut Superior Court in New Haven, accuses Doctor’s Associates, Inc. of backing a new agreement that gives Subway more control of advertising funds that franchisees pay into a trust. DAI established the trust in 1990 to pay for group advertising and promotion of Subway Sandwich Shop businesses, according to the lawsuit.
The trust contains in excess of $400 million, which covers Subway’s P-O-P, radio spots, TV spots and promotion sponsorships, NAASF CEO Jim Hansen said.
The new agreement, which went into effect April 1, asks franchisees to pay 4.5% of their weekly sales to DAI instead of directly to the fund. DAI would then put the money into the trust if franchisees met certain conditions, the lawsuit states. The agreement also gives DAI the ability to divert money from the trust into a different fund if franchisees did not meet the agreement’s terms.
The new franchisee agreement “threatens” control franchisees have over the advertising funds, Hansen said.
“It gives [DAI] more control where before they had none,” he said. “That materially changes the business model that franchisees bought into. It threatens the sanctity of the…agreement we made in 1990.”
The lawsuit seeks to rescind all franchisee agreements and to replace the current agreement with one that doesn’t give DAI further control over advertising spending. The lawsuit further asks that DAI account for all advertising money it collected under the 2006 agreement and put that money into a “constructive trust” for trustees and franchisees.
The lawsuit seeks no monetary damages other than attorney fees.
Subway spokesman Les Winograd said Wednesday the company had not yet received a copy of the lawsuit and could not comment.
In the lawsuit, the NAASF says it wants to prevent DAI from depriving franchises—who are beneficiaries of the trust—of the benefits of their national advertising program.
“It’s about keeping the rights we have and not having them further stripped away in a new franchisee agreement,” Hansen said.
Subway franchisees reported about a 14% increase in system-wide sales last year, Hansen added. “We had a sold year of growth,” he said. “We just don’t understand why the company would want to change things that are doing so well.”
The Subway Franchisee Advertising Fund Trust filed a similar lawsuit in June. That lawsuit also seeks to bar Subway from adding new provisions that could negatively impact franchisees in the new agreement.
