In what will likely become one of the most quoted franchise opinions of the year, a Colorado federal district judge has ruled against Quizno’s in a case the franchisor brought against a terminated former franchisee for injunctive relief and breach of contract. Quizno’s Franchising II LLC v. Zig Zag Rest. Group, LLC, Case No. 06CV10765, Bus. Franchise Guide (CCH) ¶14,046 (D. Colo. Dec. 31, 2008). The court found Quiznos’ “whole charade of ‘terminating’ and ‘defaulting’ franchisees who failed [a] field test was just that—a charade—driven not by Quiznos’ genuine concern about whether its franchisees were making sandwiches to spec, but rather by its overriding public relations desire to be able to proceed with its national advertising campaign targeting Subway.”
In this case, the defendant franchisees, a husband and wife owning a single Quizno’s shop, received an automatic non-curable termination notice after a mystery shopper determined the franchisee’s sandwiches contained less than four ounces of meat when the system standard was five ounces for the new menu item. In what the court called the “Post-Termination Shadow Land,” the franchisee then was invited to continue running the Quizno’s franchise, but was simultaneously removed from the chain’s store locators system and cut off from non-food supplies. The court concluded that “by permitting [the franchisee] to continue to operate as a Quizno’s outlet, when the notice of termination and [the Franchise Agreement] specifically required [the franchisee] to cease operating, Quizno’s waived its right to terminate [the franchisee] and to seek damages for breach, and is in any event estopped from making those claims.” Another interesting tidbit from this case is the court’s determination that it was Quizno’s, and not the franchisee, that should have mitigated damages “over an agonizing period of 14 months of slow kill.”
It is the sensational writing style of this opinion that will likely put it high on “most cited” list, but the lesson here is that the system-wide practices of franchisors need to be well documented in each case and followed carefully, lest they end up the centerpiece of litigation.