11 Franchisees Slap Schlotzsky’s With Suit
Claimants charge chain with support of substandard operation, encroachment.
By: Ron Ruggless
(Nation's Restaurant News, July17, 1995)
HOUSTON – Eleven Houston-area franchisees of Schlotzsky’s Inc., parent of the 403-unit deli sandwich chain, are suing the company, claiming encroachment on protected areas, misappropriation of advertising payments and wrongful support of a substandard restaurant.
However, the plaintiffs agreed July 7 to mediation although they still had to discuss the parameters of those talks.
Ironically, Austin, Texas-based Schlotzsky’s unwittingly, through a franchise buyback, had been helping indirectly in finance the lawsuit against itself by contributing to the franchisees’ Houston advertising co-operative. The co-op had authorized payments to the plaintiffs’ attorney, Robert Zarco of Zarco & Associates in Miami, according to the company.
John Wooley, president of Schlotzsky’s Inc., in a June 8 letter to the board of directors of the Schlotzsky’s Independent Franchisee Association in Houston, told the group that the company had contracted in March to buy one of the plaintiff’s restaurants before the lawsuit was filed in April. The deal was closed May 1.
“Thus,” he wrote, “Schlotzsky’s Inc. is now a member of the Houston co-op, which is suing Schlotzsky’s Inc.” Wooley added that the former franchisee from whom the company bought that store, Barbara Stiles, remains a plaintiff in the suit although she is no longer a franchisee.
“As a new member of the Houston co-op,” he continued, “Schlotzsky’s Inc. has requested that the co-op spend its funds on advertising and not on legal fees. The Houston co-op has reduced its advertising and is paying approximately $5,000 per month to its attorney. There appears to be severe disagreement among the co-op members on this issue.”
Plaintiffs contacted for comment declined to be quoted.
Schlotzsky’s Inc. had worked to take the dispute into mediation to avoid a costly court battle, said Laura Bernstein, the company spokeswoman. The suit, filed in U.S. District Court, seeks unspecified damages.
“We have offered to mediate this situation,” Bernstein explained. “In an effort to get mediation going, we asked Judge John Hill – a former Texas Supreme Court justice – to be a mediator, and he has agreed.”
Zarco was traveling and unavailable for comment, but the suit he filed in federal district court claims Schlotzsky’s Inc. failed to provide adequate support and service to its franchisees in the Houston area, did not protect the use of the trademark by allowing a Gallery Furniture store to open a Schlotzsky’s branch, encroached on the territory of misappropriated and misapplied money paid by franchisees into a national advertising and marketing fund.
The suit also alleges that the furniture store deli location opened in November 1994 without proper franchise agreements, and that it operates below franchise standards. “The cleanliness, service, food preparation and training [are] below the standards required of the franchisees,” the suit said. “Furthermore, the manner in which the food is used – i.e., as a giveaway item to those who fill out credit applications for Gallery Furniture – negatively impacts the image of a Schlotzsky’s restaurant.”
Bernstein of Schlotzsky’s said the company has had only two prior cases of franchisee litigation over the past 14 years, and both were found in favor of the company.
“We’re trying very hard to work this out,” she said. “Our desire is to mediate.”
She added that the company has 45 restaurants and 37 individual franchisees in the 20-county Houston area.
Court hearings are not yet scheduled in the case.
