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Canadian Judge Rules Against Dunkin Donuts for Failure to Protect Franchisees

By Mario Herman, Esq.

Dunkin Donuts loses ruling for failing to protect its franchisees against competition. Judge rules franchisees not at fault.

On June 21, 2012, the Honorable Daniel H. Tingle, J.S.C., of     the Superior Court of Canada, Province of Quebec, District of Montreal, in     the matter of Bertico Inc. et al v. Dunkin’ Brands Canada Ltd., held that the franchisor, Dunkin’ fundamentally breached its     franchise agreements with its Quebec franchisees by Dunkin’s failure     to protect the brand.  Justice Tingle held that brand protection is “an ongoing, continuing and successive obligation” of the     franchisor.”

Twenty-one Dunkin’ franchisees that collectively operated thirty-two Dunkin’ Donuts franchises     in Quebec brought this action against the franchisor. In 1998 Dunkin’ had a strong brand in Quebec with 210 stores. In 1995, Dunkin’ had 12.5% market share in the     Quebec market.  This slipped to 4.6% by 2003, after a competitor came into the area, Tim Horton’s.  From 1995 to 2005, Tim Horton’s grew from a 65 stores in 1995 to 308 stores in Quebec by 2005.  Plaintiffs claimed that while they had voiced their concerns to Dunkin’ about rejuvenating the Dunkin’ brand as early as 1996, they believed Dunkin’ was unsupportive and unresponsive to their     concerns.  The plaintiffs sought termination of their leases and franchise agreements and damages in the sum of $16.4 million.  Plaintiffs were awarded all relief requested. 

There are no statutory protections specifically aimed at the franchisee-franchisor relationship in Quebec.  However, franchisors are required to perform their contractual arrangements in good faith and are bound by a duty of loyalty to their franchisees.  Justice Tingley specifically referred to these obligations in the Judgment, and held that same are implicit to the franchise agreement. Justice Tingley further held that the breach of these obligations constitutes a civil fault and gives rise to remedies available in the Quebec Civil Code, including termination     and/or damages. Moreover, Justice Tingley held that far and away the most explicit obligation of the franchisor under these franchise agreements was wherein the franchisor promised to protect and enhance both its reputation and the demand for the products of the Dunkin’ system. For example in Paragraph 3 C of the 1990 Agreement, Dunkin agreed to: “continue its efforts to maintain high and uniform standards of quality, cleanliness, appearance and service to all DUNKIN DONUTS SHOPS, thus protecting and enhancing the reputation of DUNKIN DONUTS CANADA, DUNKIN DONUTS OF AMERICA, INC. and the demand for the products of the DUNKIN DONUTS SYSTEM and, to that end, to make reasonable efforts to disseminate its     standards and specifications to potential suppliers of the FRANCHISEE upon the written request of the FRANCHISEE.”

Justice Tingley  rejected the franchisor’s defense that the franchisee’s had only themselves to blame for their demise, as they were poor franchisees. The court found that the franchisees were not poor operators, but were amongst the best and most successful in Quebec, their owners were among the most active committee members and several of them chaired     committees.     

Mr. Herman, licensed in Washington, D.C., represents franchisees domestically and internationally in negotiation, mediation, arbitration, and litigation with their franchisors.

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