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Quebec ruling on Dunkin' Donuts case clarifies obligations of franchise owners

At its peak at the end of the 1990s, Dunkin’ Donuts boasted 210 outlets in Quebec. That’s now down to four.

Christinne Muschi/The Globe and Mail

Dunkin' Donuts' pink-and-orange double-D logo was once so ubiquitous in Quebec the U.S. fast food chain was dubbed "The McDonald's of Doughnuts."

At its peak at the end of the 1990s, the maker of Munchkins (Dunkinese for Timbits) boasted 210 outlets in La belle province. That's now down to four. Meanwhile, Tim Hortons Inc., has more than 600 outlets and continues to expand.

The crumbling of the Dunkins empire in Quebec at the hands of Tim Hortons is a cautionary tale about the potential pitfalls of the franchisee-franchisor relationship. In 2003, a group of 21 fed up franchisees operating 32 outlets launched a suit against the franchisor – then owned by Allied Domecq PLC – alleging it let them down by not providing the needed backing to fight the Tim Hortons "juggernaut" in the 1990s, despite repeated warnings over the years, and by generally failing to support the brand in the Quebec market.

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The action wound its way through the courts for more than a decade as the franchisor – now Dunkin' Brands Canada Ltd. – fought back every step of the way. Quebec's three-judge Court of Appeal recently upheld a lower court judgment that Dunkin' Brands breached its duties in failing to protect and enhance the brand. Dunkin' Brands was ordered to pay the franchisees about $11-million for its behaviour and failure to act.

But the fight is not necessarily over. Dunkin' Brands, based in Canton, Mass., said earlier this month it is seeking leave to appeal the decision in the Supreme Court of Canada. The court usually takes about six months to decide whether or not to grant leave to appeal.

Guy Pratte, the lead lawyer for Dunkin' Brands' Supreme Court action, declined to comment on the case. But in its presentation to the appeal court, the franchisor argued that Quebec Superior Court mistakenly imposed upon it "a new unintended obligation to protect and enhance the brand, outperform the competition and maintain indefinitely market share." The judge, Justice Daniel Tingley, ruled it was incumbent on the franchisor to take reasonable measures to defend the brand.

"The collapse of the Dunkin' Donuts chain may well have no match as a financial misfortune in the annals of the quick-service restaurant business in Quebec … but nothing in [Justice Tingley]'s account of the Franchisor's obligations was 'unprecedented' or even demonstrably wrong-headed … " Justice Nicholas Kasirer wrote in the Court of Appeal decision.

Even if the Quebec judgment doesn't make it to the highest court in the land, it remains a landmark decision certain to influence future litigation over the rights and obligations of signatories to franchise agreements, says Toronto-based Ned Levitt, an expert in franchise law.

"Frankly, going after a franchisor and being successful because he didn't support the brand properly is precedent-setting," he said. "This will have an influence outside Quebec and will encourage franchisees to take action; and it will help in creating a body of franchise law."

Toronto-based franchise lawyer Jennifer Dolman plays down the impact the case is likely to have outside Quebec. "This is a Quebec decision and it's not binding on courts outside [the province]," she said, adding that it is entrenched in the province's unique civil law code. "I strongly disagree with the notion this is some radical game changer."

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Quebec lawyer Jean Gagnon said the Dunkin' ruling helps clarify the implied obligations of the franchisor in franchisee-franchisor agreements, which can sometimes be fuzzy.

"This fills some gaps in agreements that can be very clear about the franchisee's obligations but that are less so about what the franchisor's are," said Mr. Gagnon, who has more than 40 years' experience in franchise law.

Counsel for the franchisees, Frédéric Gilbert, says their 12-year saga is a striking illustration of what can happen when those who signed on in good faith and held up their end of the bargain are left hanging by a franchisor.

"They were completely abandoned. This is a case study of a disaster."

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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