Ask any Dunkin’ Donuts franchise owner who was in the system ten years ago about the level of trust that existed between franchisee and franchisor, and he or she will have a story to tell. At that time, Dunkin’ Brands had more lawsuits pending against its franchisees than any other quick service restaurant system. And, while relations improved dramatically when Nigel Travis and his team came on board, the release of the 2016 franchise agreement has made some within the Dunkin’ franchisee community stop and take pause.
The turbulence that existed at the end of Jon Luther’s reign as CEO in the latter years of the 2000s highlighted for many franchise owners – especially second generation operators who were assuming a larger role in their family’s operations – the need to better protect their rights to harvest and transfer wealth derived from their hard work. The distrust that existed at the time gave franchisees the resolve to push back. They leaned heavily on their independent franchisee association and, as a result, Dunkin’ agreed to a more collaborative process.
“When Nigel came in there were pending lawsuits and bad feelings. He went on his listening tour and heard loud and clear that we needed improvement in the [franchise] agreement,” says DDIFO attorney Carl Lisa, of the Providence law firm Lisa & Sousa. “2011 was a turning point and we were able to negotiate many substantive changes to the agreement.”
Perhaps that is why Lisa was so surprised by the provisions he found in Dunkin’s new franchise agreement. DDIFO engages Lisa to regularly review all new Dunkin’ franchise agreements and report any changes or irregularities. After looking through the 2016 version, he characterized it as “a step backwards,” because in prior years changes had been minimal. “No one expected this,” he says.
The 2014 joint-employer ruling from the National Labor Relations Board sent shockwaves throughout the franchise industry, and caused wholesale rewrites to many franchise agreements. When he sat down to review Dunkin’s new agreement, Lisa says he expected to see language reflecting the brand’s hands-off approach to labor issues, but not provisions involving issues of wealth transfer or real estate ownership.
“They put conditions you would expect to see in a franchise agreement into these ancillary documents that you are required to sign,” like the Rider to Contract for Sale and the Four Party Assumption, Lisa notes.
“We are talking about franchisee value here,” he says. “Dunkin’ is trying to say that the value really belongs to the brand and not to the franchisee. It’s a further encroachment onto franchisee value.”
“This is exactly why DDIFO exists,” reminds the association’s Executive Director Ed Shanahan. “We are the only truly independent voice for Dunkin’ franchisees with the resources capable of representing this group of owners and operators in the face of regulatory, legal or, most importantly, corporate threats.”
In the case of the new form franchise agreement, Shanahan says perhaps the most troubling fact is that Dunkin’ went ahead and made the changes unilaterally, without seeking franchisee input.
“They inserted some pretty extreme language and then said, ‘OK, here it is,’ as if there would be no alternative point of view.”
“It was clear the process put in place to alert [franchisees] to franchise agreement changes didn’t work,” states Rob Branca, who is active on the Brand Advisory Council (BAC) and is a longtime chairman of the Northeast Regional Advisory Council (RAC). He says Dunkin’ emailed their new franchise agreement to BAC co-chair Perry Shah, with a “misleading subject title,” which didn’t stand out amid his flood of daily emails, and sent no subsequent emails to follow up.
Shah did not respond to our request for an interview.
The BAC had Branca and the Baltimore-Washington RAC co-chair Ram Javia meet with Dunkin’s lawyers and express the council’s opposition to a number of the changes. “We understand [Dunkin’s] legal team’s rationale for the changes that they made, and they understand where we believe a certain number of the changes don’t work for us and why they don’t,” says Branca.
Working independently of the BAC, DDIFO attorney Lisa obtained a copy of the new agreement and began poring over the document. He highlighted the multitude of important changes Dunkin’ made to the agreement, including language “that distances [Dunkin’] from the business operations of franchisees in an attempt to limit the court’s and legislative body’s ability to determine that an employer/employee or other agency relationship exists, thereby limiting Dunkin’s liability and responsibility for the acts of its franchisees, and employees,” he wrote in his memo to DDIFO.
Additionally, he points out that the proposed language attempts to require franchisees to insure and indemnify the brand against its own liability. It is language he calls, “far reaching and onerous,” and notes franchisees received nothing in exchange for the inclusion of these and other provisions.
But, while those changes – prompted by the joint-employer ruling – were expected, others stood out. Among the most egregious: Requirements and conditions affecting renewing the franchise term; the transfer provisions covering and extending Dunkin’s right of first refusal to include real estate transfers: and the formula the brand uses to determine what it will pay for the assets of a franchisee who is in default.
“The process was one sided and in some cases changed provisions previously included through negotiations with the brand” Lisa says.
According to Branca, Dunkin’ and the BAC have now agreed to “restart the process.” In the meantime, the brand has reverted back to the 2015 franchise agreement as the document franchisees must sign to join the system or renew existing term, but it continues to enforce the changes to the ancillary documents related to transfers and assets.
“Dunkin’s legal department is protecting its interests; that’s what lawyers do, but changes to the franchise agreement should be subject to the BAC process so all interests are protected and we can come up with a mutual compromise that protects the equity of franchisees. Something this important should never just be rolled out to meet an arbitrary deadline.” Branca expects the brand will also come up with “more robust notification process,” for franchisee leaders.
This incident underscores the fact that franchisors and franchisees are not always on the same page. Shanahan says even though the BAC is elected by franchise owners to watch out for their interests, the franchisees need more protection. “We must remember that, as its name states, the Brand Advisory Council is an advisory panel, created by Dunkin’ to advise the brand on those issues where it wants its advice and input. It exists only as long as Dunkin’ wants it to exist.”
“Throughout its history, DDIFO has been there to ensure franchisees don’t get the short end of the stick. While brand relations have been good, this situation reminds us that even in the best of times, the brand can act unilaterally in its own interests—without consideration of its franchise owners and what might be best for them,” Shanahan says. •
“It is critical that we have an independent resource like DDIFO,” says Branca. “Those franchisees in systems without independent associations get onerous terms shoved down their throats. Those which have them, like Dunkin’ and Burger King, seem to get more constructive relationships with their franchisors.”
Lisa, who has seen it all in his years advocating on behalf of Dunkin’ Donuts franchise owners has just one question to ask as this process moves forward: “Will franchisees be able to address issues that are important to them through good-faith negotiations?”