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Court rules in favour of Dunkin’ Donuts franchisees

In 2003, Allied Domecq, at the time the owner of Dunkin’ Donuts, entered into a master franchisee agreement with convenience store giant Alimentation Couche-Tard Inc.

Francis Vachon/The Canadian Press

For decades, Dunkin Donuts was the undisputed coffee and doughnuts champion of Quebec, with more than 200 stores across the province. But after Tim Hortons stepped up its expansion in the province in the 1990s, the U.S. chain's business fell down a hole, and there are just 11 Dunkin' Donuts left in Quebec.

Now, a Quebec judge has slammed Dunkin' Brands Group Inc., siding with a group of 21 former franchisees who sued the U.S. food service giant, saying it failed to heed their warnings more than 15 years ago about the Tim Hortons juggernaut and what they needed the parent to do to protect the business. The judge awarded the group, which operated 32 outlets, $16.4-million in damages plus legal costs. "The greatest failing of all was [the parent company's] failure to protect its brand in the Quebec market," Quebec Superior Court Justice Daniel Tingley said in a blistering judgment released Friday.

"A successful brand is crucial to the maintenance of healthy franchises. However, when the brand ... collapses, so too do those who rely upon it. And this is precisely what has happened in this case."

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Canton, Mass.-based Dunkin' Brands said in a statement that it "strongly disagrees" with the ruling and plans to appeal. The company also said Monday that will increase its legal reserve from $4-million due to the ruling.

With Tim Hortons stepping up its expansion in Quebec in 1996, Dunkin' Donuts franchisees began alerting then-owner Allied Domecq about what they called the "Tim Horton's phenomenon." At the time, Tim Hortons Inc., which opened its 500th store in Quebec recently, had just 60 outlets in Quebec, while Dunkin Donuts' was coming off an extended period where it faced little competition.

The franchisees continued to press for an action plan, which prompted Allied to reply in 2000 with an incentive program to help franchisees to update their stores. But the refurbishment was costly and few took Allied up on its offer. Meanwhile, a promised 15 per cent boost in sales never materialized for those that did renovate. Conditions deteriorated, sales declined and stores continued to close. Allied entered into a master franchisee agreement with Alimentation Couche-Tard Inc. in 2003, but the relationship was short lived and the convenience store giant bailed in 2008, when there were just 41 stores left in Quebec. "Dunkin' Donuts did not deliver on the business promise they made," said Frédéric Gilbert, a lawyer for the the plaintiffs.

"When we started [in 1984], Dunkin' Donuts was the best in coffee and doughnuts in the world," said Jacques Doyon, a former franchisee. "We worked very hard in this business and we believed in Dunkin' Donuts. But we had many problems" with the company.

In its defence, Dunkin' Brands blamed the franchisees, saying the stores suffered from poor operations, service and upkeep. The judge ruled: "This was a defence utterly devoid of substance."

Jennifer Dolman, a Toronto-based franchise lawyer, said while disputes between franchisees and franchisors are common, "it's rare for a court to find that there was such a devaluation of the brand."

Franchise lawyer David Sterns said "this is the first decision in Canada to go so far as to say there's a duty of a franchisor to ensure the system succeeds against [such] a formidable competitor." He added that courts have been closely reviewing franchise agreements, which typically list many obligations on the part of franchisees – who pay for access to the brand name, trademarks, systems and goodwill – but far fewer for franchisors. "This is one more case that will help us to understand the duties of franchisors," he said.

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