Business Corporate law Quebec Quebec Superior Court Rulings

Court orders franchisor to pay $16.4 million to franchisees

In a “sad saga” of a once successful franchise operation that fell precipitously from grace in less than a decade, a nine-year legal battle came to a bittersweet end after Quebec Superior Court condemned Dunkin’ Brands Canada Ltd. to pay 21 Quebec franchisees $16.4 million for failing to protect its brand in the Quebec market.

In a 43-page ruling, Justice Daniel Tingley castigated the franchisor, formerly Allied Domecq Retailing International (Canada) Ltd. (ADRIC), for trying to pin the blame of its “stunning fall from grace” to the “Tim Hortons’ phenomenon” and underperforming, even poor, franchisees.

“ADRIC had assigned to itself the principal obligation of protecting and enhancing its brand,” wrote Justice Tingley. “It failed to do so, thereby breaching the most important obligation it had assumed in its contracts.

“This particular breach was not the result of a single act or omission. It was a failure over a period of a decade (1995 to 2005) to protect the brand brought about by a multiplicity of acts and omissions during the period. Brand protection is an ongoing, continuing and ‘successive’ obligation.”

Dunkin Donuts has a long history in Quebec, going back to over half a century. In the mid-nineties it was still the leader in the coffee and donut market in terms of sales and number of stores, numbering 218 in 1998. But between 1995 and 2005, virtually all the franchisees experienced stagnant sales, despite a growing fast food market. The Dunkin Donuts’ market share in Quebec had plummeted from 12.5 per cent in 1995 to 4.6 per cent in 2003. Today, only some 13 stores are still operating.

In stark contrast, Tim Hortons’ stores experienced on average annual sales increases of 7.5 per cent, or over 70 per cent between 1995 and 2005. Tim Hortons’ stores had multiplied five times from 60 stores in 1995 to 308 by 2005, prompting Justice Tingley to observe, “literally, (this is) a case study of how industry leaders can become followers in free market economies.”

The 21 franchisees have closed their stores or sold them for a fraction of their traditional value, noted Justice Tingley. Until the turn of the century, Dunkin Donuts’ stores could be sold for roughly 50 per cent of annual sales, something that was all but impossible in the new century.

“This is not a case where the Court has to estimate future damages,” said Justice Tingley. “The franchisees have suffered the losses they claim. They have lost their business; their livelihoods.”

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