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#Subway exploited immigrants and victimized franchisees: lawsuit

#Subway exploited immigrants and victimized franchisees: lawsuit

Subway’s massive chain of sandwich shops has become a hotbed of financial exploitation for overseas immigrants, victimizing those it has tapped as franchisees and even driving some to ruin, an explosive lawsuit claims.

For years, the fast-food giant has recruited immigrants, mostly from Asia, to expand a US chain that a decade ago had spanned more than 25,000 locations nationwide. While aspiring entrepreneurs believed they were buying into the American Dream, some instead were caught in a loosely managed corporate network that was rife with corruption, according to a suit filed last month in Nevada state court.

In particular, the suit claims that some of Subway’s so-called “business development agents,” or BDAs – typically large franchisees themselves who were also given managerial power to oversee hundreds or even thousands of locations in a given territory – have systematically socked unwitting franchisees with nitpicking rules and costly fees.In some cases, rogue BDAs have used Subway’s overgrown schedule of rules and fees to steal away the stores of other franchisees, according to the suit. Even worse, the BDAs are given access to franchisees’ books, enabling them to determine which locations are ripe for cherry-picking, the suit claims.

Headshot of Raj Mehta
Raj Mehta contends that Subway pressures franchisees into opening more stores.

“Subway is allowing its BDAs to profit off the backs of minorities, Indian Americans and/or Indian immigrants who have oftentimes invested their entire life savings on their franchises,” according to the suit, which was filed last month in Nevada state court.

The incendiary allegations come as Subway is scrambling to get a tighter handle on its 56-year-old chain, which critics say co-founder Fred DeLuca expanded into a nationwide web of regional fiefdoms run by the BDAs. In some cases, BDAs have used intimidation tactics against smaller franchisees who were actively recruited by Subway from abroad, according to the suit.

“Subway was trying to capitalize on the concept of the American dream. They were telling immigrants in other countries to get your cousin here to fund your Subway and that is what happened,” said Mark Shearer, an Ohio-based attorney who has represented Subway franchisees in arbitration cases, and who isn’t involved in the latest suit in Nevada.

Headshot of Chirayu Patel
A lawsuit claims that, as a Subway business development agent, Chirayu Patel hectored franchisees.
LinkedIn

“I know for a time there were ads in the Middle East and India where Subway was targeting these people specifically,” Shearer added. “Subway wants naive franchisees who don’t understand their rights.”

According to the Nevada suit, Subway on average charges $15,000 in fees to open a new store – far less than McDonald’s or Burger King, which charge around $45,000 in franchise startup fees. That smaller up-front fee attracts a less-sophisticated operator – even when it comes to simple English and math skills, according to the suit. About 50 percent of Subway’s locations are owned by minorities, compared to 30 percent of franchises overall, according to International Franchise Association figures cited by the suit.

Asked about the Nevada lawsuit, a Subway spokeswoman said in a written statement that the company “is proud of its diverse franchisee network, many of which are small or minority-owned business owners.” She added that the company’s “current recruitment strategy focuses on experienced franchise operators with strong business acumen” and that applicants “may be required to take a standardized test.”

“Our lower cost of entry makes us an attractive investment opportunity and we then work hand-in-hand with our dedicated franchisees to provide them with the tools and support needed to grow their business and ensure long-term success,” the company said.But for some powerful BDAs, according to the Nevada lawsuit filed by former franchisee Raj Mehta, the strategy was to recruit franchisees who were willing to pay the fees and foot the bill to open an ever-greater number of Subway locations – whether it was in their best interest or not.

Subway “fueled its expansion by ‘encouraging’ its immigrant franchisees to open stores within blocks of existing locations under the subtle threat that if they did not do so, then Subway would recruit another franchisee to open a competing store in the immediate vicinity,” according to the suit.

Subway now has about 22,000 US restaurants – all owned by franchisees, and eclipsing McDonald’s 14,000 and Starbucks’ 15,200 locations for the title of biggest US fast-food chain. Nevertheless, Subway’s number of locations has shrunk by more than 10 percent over the past decade, as opening a restaurant near an existing outlet can cannibalize its sales.

Subway sign
Fifty percent of Subways have minority ownership, according to International Franchise Association figures cited by the suit.
NurPhoto via Getty Images

The story of many of those closures has been brutal, according to critics and multiple lawsuits that have been filed against Subway. The chain for years used a rule book some 350 pages long to evaluate franchisees, with each containing at least 10 compliance points – creating more than 3,000 ways for a store to fall afoul of the rules, the Nevada suit claims.

Examples of petty infractions include smudged windows and improperly sliced cucumbers, according to Mehta’s suit – and the consequences could be dire. A franchisee marked out of compliance by a BDA can be forced to pay a higher royalty rate to Subway – as much as 10.5 percent of gross sales, up from 8 percent, the suit claims.

It was the alleged playbook employed by Chirayu Patel, Mehta’s former BDA, to sign up other Indian Americans to run restaurants in his territory – before he used “hit men” to write up new franchisees for alleged violations of Subway’s rule book, the suit claims. Likewise, franchise agreements pushed by Patel and Subway also force new restaurant owners to buy their sandwich ingredients from pre-picked suppliers at set prices – even if they could find better deals elsewhere, the suit claims.

Bringing franchisees to the brink of bankruptcy with his fees and clampdowns, Patel – who owned his own stable of Subway restaurants, along with overseeing a territory in California and Nevada – would then acquire the distressed locations for a pittance, according to the suit.

“Patel is an Indian American and most of his victims are Indian Americans,” the suit claims. “Stated simply, Patel finds it easiest to prey on those with whom he has the most in common and exploits the relationship of trust instilled between people who come from the same culture and circumstance.”

Subway BDAs typically own restaurants in the territories they oversee – an arrangement the suit claims is an “extreme” conflict of interest. Because of their positions as regional managers, the BDAs can see the books of the Subways in their territories, knowing which restaurants are most profitable, the suit says.

Subway in 2017 terminated the agreements for Mehta’s two stores in Reno, Nev. – allegedly for minor violations of the rule book, the suit claims. Patel then used his power as a business development agent to stop Mehta from selling his two restaurants to a qualified buyer for $472,000, according to the suit.

Patel took one of the restaurants for himself and resold it, keeping the proceeds, the suit claims. The suit claims Mehta is out more than $4 million when including lost opportunity, investment and profits.

Franchisees can’t sue Subway itself because of clauses they sign in their contracts that force them into arbitration. Attorneys for Mehta claim in the suit, which accuses Patel of racketeering, that another co-plaintiff could be named and that they will bring other franchisees as witnesses.

John Chidsey
Under CEO John Chidsey’s leadership, Subway is on a “transformational journey,” the company told The Post.
Getty Images

Patel recently stepped down from his BDA position at Subway corporate amid a separate lawsuit that said he stiffed his workers out of nearly $40 million.

In an e-mail to The Post, Patel said his staff members were “following Subway legal requirements to protect our customers and brand.” He declined to comment further, citing pending litigation.

“Now I can finally spend more evenings home and hopefully learn to play some golf,” he said in an e-mail last month to franchise owners.

Meanwhile, another Subway franchisee, Puneet Kalia, has made similar racketeering charges against Patel in two suits being heard in Nevada and California. Those suits, like Mehta’s, allege Patel’s Letap Group engaged in violations of those states’ racketeer influenced and corrupt organizations acts, also known as RICO laws.

Over the last several years, Subway has begun to phase out its BDA system and has started to run some territories itself. In a second written response to queries by The Post, a Subway spokesperson said the company is “on a multi-year transformational journey” under Chief Executive John Chidsey, a former Burger King executive who took the helm in November 2019.

An employee makes a sandwich in a Subway store
Some franchisees complain of alleged pressure to buy ingredients from certain suppliers whether or not they offer the best deals.
REUTERS

“To ensure we’re delivering a gold standard of support for our franchisees, we also evolved the business developer model. In certain markets across North America, a traditional franchisor/franchisee model was adopted with the introduction of Subway Market Operations (SMO),” the spokesperson said. “Both the SMO teams and business developer roles have evolved to be more focused on training and operations support to our franchisees.”

But much of the country is still covered by BDAs, some of whom have allegedly done a lot of damage – and not only among new immigrants.Jack El Turk, a franchisee in the Cleveland area who was represented by Shearer, the Ohio attorney, sued his development agents for allegedly abusing their positions, terminating him, and not allowing him to sell his restaurant. He was forced by the courts into arbitration with Subway and in 2018 reached an agreement where he left the Subway system in exchange for being allowed to sell his restaurant.

The lighted interior of a Starbucks at night
Subway has more stores than either Starbucks or McDonald’s.
Bloomberg via Getty Images

Charles Fritschler in Massachusetts sued Subway and his development agents for allegedly inducing him to buy restaurants they knew would fail. In 2020, he was also forced by the courts into arbitration.

Such arbitrations show the contentious relations Subway has with its franchisees: Subway initiated 702 arbitration actions against US franchisees in 2017, said John Gordon of Pacific Management Consulting Group, citing documents filed with the Federal Trade Commission. That compares to one by McDonald’s, two by Dunkin’ and none by Pizza Hut, Burger King or Wendy’s.

Aggressive tactics against franchisees are gaining some national critics. Franchisee Advocacy Consulting, a group that lobbies for franchisee rights, in late September asked the FTC to investigate alleged abusive practices at Subway, as well as several other chains, including 7-11.

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