Corbin Williston reports at Blue MauMau that a federal judge has ruled that franchisees may explore Dunkin’s ulterior motive in terminating their franchise agreements.

For the past decade, Dunkin’ has faced allegations of spying, intrusions into franchisee’s love lives, and assorted bare-knuckles tactics in terminating franchisees. One of the most famous franchise journalists was threatened with a lawsuit if she wrote about the tactics.

Now a federal judge has ruled that Dunkin’ must disclose documents which may shed more light on the controversial practices followed by the Dunkin’ attorneys.

Dunkin’ Donuts Franchised Restaurants LLC v. Grand Central Donuts Inc (19 July 2009) is a set of allegations familiar to franchise industry observers.

  • Between 2003-2005, the franchisees opened 5 locations.
  • In February 2006, they allege that Dunkin told them that Dunkin would be buying their stores.
  • The franchisees refused.
  • Dunkin commenced an audit in June 2006.
  • On September 24, Dunkin told the zees that they had filed inaccurate W-2 forms and transferred an interest in the franchises.
  • Dunkin told the franchisees that their franchises were terminated.
  • On September 26, Dunkin brought suit in federal court.

A steady stream of franchisees from Detroit to Brooklyn to Ohio have told similar tales of being pushed out by Dunkin’ at fire-sale prices, many losing their life savings when they refused the Dunkin’ offer.

In many cases, Dunkin’ alleges underreporting, and the Dunkin’ personnel charged with audits are paid based in part on how much they claim the franchisee underreported sales. Since December 2001, Dunkin’ has inserted a clause into franchise agreements stating that failure to comply with tax laws is grounds for termination, and routinely “audits” the franchisee’s tax returns and reports to the IRS; one franchisee who sued Dunkin in 1999 got hit with four dozen counts of a criminal tax fraud.

Customarliy, the allegations are that Dunkin’ wants to force small operators to sell to favored operators at below-market prices: the Brooklyn case involved stores which were coveted by mega-franchisee Konstantino Skrivanos, known as “The Greek.”

Although on June 19, 2009 Magistrate Judge Marilyn D. Go ordered the production of Dunkin’ emails, it is unlikely that many recent emails will turn up. On Ocober 4, 2007, Dunkin’ Director of Operations Len Hohmann had warned fellow Dunkin’ execs: “moving forward, please do not email… and let’s communicate by phone.”

Although past efforts to claim pretextual termination and violation of the implied covenant of good faith and fair dealing have generally been unavailing for franchisees, in this case the franchisee attorney pointed out that Massachusetts law applied, and the court held that:

Under Massachusetts law, a party may breach the implied covenant of good faith and fair dealing without breaching the express terms of the contract… notwithstanding an express contractual right to terminate, including the termination of a franchise agreement, ‘under some circumstances a party to a contract is not free to terminate it according to its terms’…

Even if [Dunkin’] had objectively reasonable grounds for terminating the franchise agreements, whether [Dunkin’] had an ulterior motive for terminating the agreements may be relevant to [franchisee’s] counterclaims… The [franchisees] could have fairly expected that Dunkin would exercise its rights to terminate and reject new stores in good faith, rather than for the purpose of profiting from a transfer of ownership or favoring other franchisees.

Blue MauMau