Dunkin’ Donuts ordered to pay $16.4M to Quebec franchisees

“In this case, you have a very large franchisor with a successful chain and it’s facing a competitive threat by another large chain, i.e. Tim Hortons,” said Toronto-based franchise lawyer David Sterns of Sotos LLP. “And the judge’s view is that the franchisor couldn’t just cede the territory to the competitor, that it was incumbent on the franchisor to hold the ground for the system.”

There are currently 11 Dunkin’ Donuts stores left in Quebec, from a high of more than 200 in 1998.

Financial Post
June 25, 2012

Dunkin’ Donuts ordered to pay $16.4M to Quebec franchisees
Julia Johnson

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Quebec Superior Court ruled that Dunkin Donuts Canada Ltd. failed to protect and enhance its brand at the cost of the 21 franchisees and misled owners to get them to buy into a new strategy that ultimately failed. Emile Wamsteker/Bloomberg

TORONTO — Former Dunkin’ Donuts franchisees have been awarded a total of $16.4-million in damages from the company for losses suffered because of the “Tim Hortons phenomenon,” in which the donut shop saw almost all of its Quebec stores close in less than a decade as it lost market share, according to a superior court decision released Thursday.

The Quebec Superior Court ruled that Dunkin Donuts Canada Ltd. failed to protect and enhance its brand at the cost of the 21 franchisees and misled owners to get them to buy into a new strategy that ultimately failed.

“In this case, you have a very large franchisor with a successful chain and it’s facing a competitive threat by another large chain, i.e. Tim Hortons,” said Toronto-based franchise lawyer David Sterns of Sotos LLP. “And the judge’s view is that the franchisor couldn’t just cede the territory to the competitor, that it was incumbent on the franchisor to hold the ground for the system.”

There are currently 11 Dunkin’ Donuts stores left in Quebec, from a high of more than 200 in 1998.

In 2003 the franchisees launched the suit against Dunkin’ Brands — formerly Allied Domecq Retailing International Canada Ltd. — claiming they were induced under false pretenses to join a remodelling program that would boost sales by 15% in the first year and several subsequent years, which never happened.

The company also failed to live up to a promise to invest $40-million, half of which would come from franchise fees.

Justice Daniel Tingley rejected Dunkin’ Donuts’ argument that the franchisees were responsible for their own demise.

“A successful brand is crucial to the maintenance of franchise. However, when the brand falls out of bed, collapses, so too do those who rely on it,” wrote Justice Tingley.

The judge said damages would cover lost opportunity since all of the plaintiffs’ stores were closed or sold for a fraction of their traditional value.

The court awarded damages equivalent to lost profits during 2000-2005, as well as the typical sale price of a store, roughly 50% of projected annual sales.

Jacques Doyon and his wife Monic Huard operated two stores in Saint-Georges-de-Beauce and are set to receive almost $1.16-million.

“We are very satisfied, we believe justice was rendered in this case,” Mr. Doyon said in French through a translator.

They say the decision ends a long saga, dating to 1996 when they first notified Dunkin’ Donuts of problems at the franchisee level. “It was a difficult endeavour, both financially also on the personal side, it was a very heavy burden for franchisees.”

Another Toronto franchise lawyer said this case is unique in that the court seemed to find a fundamental breach of the franchise agreement.

“The court, to my knowledge, the court has not [previously] found that there has been a fundamental breach because really the franchisee has been still able to use the system, and the brand, and the trademark,” said Jennifer Dolman, litigation partner at Osler.

Karen Raskopf, Dunkin’ Brands senior vice-president of corporate communications, said in a statement, the company intends to appeal Thursday’s ruling.

“This lawsuit has been about issues that for the most part, occurred 10-15 years ago,” Ms. Raskopf said. “We strongly disagree with the decision reached by the court and believe the damages awarded were unwarranted.”

http://business.financialpost.com/2012/06/25/dunkin-donuts-ordered-to-pay-16-4m-to-quebec-franchisees/


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