Canadian Ruling Against Dunkin' Donuts May Shock U.S. Franchisors Into Action|
As a follow-up to our last article on franchises, this article discusses a recent decision by the Quebec Superior Court that penalized the Dunkin' Donuts franchisor to the tune of $16 million for not adequately dealing with a threat posed by a competitor. In Bertico, Inc. v. Dunkin' Brands Canada Ltd., 2012 QCCS 2809, a group of Dunkin' Donuts franchisees located in Quebec sued the franchisor for losses sustained when Tim Hortons (which merged with Wendy's International, Inc. in 1995) entered the Quebec market. The damages claimed by the franchises spanned a ten-year period from 1995 to 2005.
The franchise agreements contained typical language (some of which is discussed in our last article) granting trademark licenses to the franchisees, requiring the franchisees to follow certain operating procedures, and promising to provide "assistance based on the experience and judgment" of the franchisor in opening the stores. The agreement obligated the franchisor to a "continuing advisory relationship" and committed the franchisor to working with the franchises to maintain "high and uniform standards" of quality, cleanliness, appearance and service.
In response to the franchisees' requests for a plan to recoup business lost to Tim Hortons, Dunkin' Donuts launched a remodel incentive program--but the court found this effort to be too little, too late. Despite the lack of express language in the contract holding the franchisor responsible for losses sustained by competition, the court held that the
franchisor should have done more to support its Quebec franchisees. Specifically, the court reasoned that the franchisor had breached its duty of "good faith and loyalty" toward its franchisees in not doing more to stem the tide of store closings and decreased profits in the wake of Tim Hortons.
In response to the allegations levied against it, Dunkin' Donuts tried to paint the Quebec franchisees as poor operators. The court did not buy this argument, however; it found the Quebec franchisees to be among the best of the Dunkin' Donuts franchisees and noted that they were active on various Dunkin' Donuts committees. The court faulted Dunkin' Donuts for promising increased revenues, which never materialized, as a result of the remodel incentive program.
Although no U.S. court to date has gone quite as far as the Quebec Superior Court in imposing an affirmative obligation on a franchisor to insulate its franchisees from the strains of competition, the lesson for U.S. franchisors is that contract language generally referring to "support" and "assistance" may form the basis for such a ruling. Now might be a good time to review your franchise agreements to ensure that the language clarifies your obligations with respect to assistance and support.
In this author's opinion, no franchise should (and no franchisor should claim to) guarantee success. Rather, the franchisor-franchisee relationship should be based on a mutual shouldering of risk. A properly drafted franchise agreement provides a framework for this relationship and clarifies the respective obligations of the parties in achieving commercial success.