Should franchisors be obligated to protect strength of brand?

Although Dunkin’ argued that the decline of the brand in Quebec was ultimately the franchisees’ fault, Mr. Justice Tingley stated, “this was a defense utterly devoid of substance”

The Globe and Mail
July 3, 2012

Should franchisors be obligated to protect strength of brand?
Tony Wilson


Dunkin' Donuts products are displayed Wednesday, July 27, 2011 in Montpelier, Vt. (Toby Talbot/AP)

Canadian Franchisors were busy with their lawyers last week trying to weigh the ramifications of a new decision by the Quebec Superior Court that ordered Dunkin’ Brands, owner of the Dunkin’ Donuts franchise system, to pay 21 of its former Quebec franchisees which operated 32 outlets, $16.4-million plus legal costs, for negligence, incompetence, lack of assistance and support and breach of the franchise agreement that amounted to a failure by the Franchisor to protect and enhance the brand the franchisees had acquired through those agreements.

In 1998, there were 200 Dunkin’ Donut locations in Quebec. By 2012, that number had been reduced to 11. Twenty-one franchisees commenced an action that began in 2003. In the Court’s view, Dunkin Donuts did not respond adequately to the threat to its franchise system and its Quebec franchisees from the expansion by Tim Hortons into Quebec, despite warnings by the franchisees that Tim’s was aggressively expanding into Quebec as early as 1998. In short, Dunkin’ was “rolled over” by Tim’s and the court said Dunkin’ did little to assist franchisees or protect the investment franchises had made in Dunkin’ in response to the threat.

Agreeing with the franchisees, Mr. Justice Daniel H. Tingley stated, “it was a sad saga … of how a once successful franchise operation, a leader in its field — the donut/coffee fast food market in Quebec — fell precipitously from grace in less than a decade; literally, a case study of how industry leaders can become followers in free market economies”.

He went on to say, “the greatest failing of all was [the franchisor’s] failure to protect its brand in the Quebec market. No doubt the host of failings chronicled by the Franchisees contributed to the collapse of the Dunkin' Donuts' brand in Quebec. A successful brand is crucial to the maintenance of healthy franchises. However, when the brand falls out of bed, collapses, so too do those who rely upon it. And this is precisely what has happened in this case.”

Dunkin’, through its Canadian arm at the time, Allied Domecq Retailing International Canada Ltd., dealt with the threat from Tim’s by suggesting franchisees participate in an expensive remodeling program for their stores that was supposed to have boosted sales by 15 per cent, and an advertising campaign. As well, Dunkin was to have invested an additional $40-million in the Quebec market; half of which would have come from new franchise fees. But the $40-million investment wasn’t made, the advertising campaign wasn’t effective, and the remodeling program, for those who remodeled, didn’t result in a sales increase.

Although Dunkin’ argued that the decline of the brand in Quebec was ultimately the franchisees’ fault, Mr. Justice Tingley stated, “this was a defense utterly devoid of substance”

Dunkin’ Brands is appealing the ruling, stating in a press release that it “strongly disagrees with the decision reached by the Court and believes the damages awarded were unwarranted…Dunkin' Brands is proud of its efforts to support all of its franchisees in Quebec and around the world and the company intends to vigorously appeal the decision”

Certainly, the case will be scrutinized carefully by franchisors and their lawyers in all provinces, as a “failure to protect the brand from competition” isn’t something that franchisors have really had to consider as being legally actionable before. It wouldn’t be surprising if franchise agreements are re-written to “draft around” the Dunkin’ decision and the possibility of another court determining that a franchisor can be held liable for a failure to protect the strength of its brand.

A second point to note is this case was not heard in a jurisdiction where any franchise law governed, such as Ontario’s Arthur Wishart Act, where courts have looked at the Wishart Act through the lens of consumer protection law.

Another aspect to note is the length of time the matter took to get to trial. An action that started in 2003 and which resulted in a decision nine years later is not something that the average Canadian franchisee with a legitimate claim against its franchisor could withstand; both in terms of time and in terms of legal costs.

Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, is an adjunct professor at Simon Fraser University, and is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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