Dunkin' Donuts to appeal verdict giving ex-Quebec franchisees $16.4 million

MONTREAL – Dunkin’ Donuts plans to appeal a Quebec Superior Court ruling that forces it to pay $16.4 million to some of its former franchisees in the province who alleged the chain cost them money through management errors.

The decision, which came down late last week, was made public on Monday.

Frederic Gilbert, one of the lawyers representing the franchisees, said the decision will have a major impact on the rights of franchisees and how their responsibilities are defined.

“This decision will become a reference tool for setting basic guidelines governing contractual relations between parties,” he said in a statement.

Dunkin’ Donuts, which is headquartered in Canton, Mass., plans to appeal the ruling, which came after nine years of legal proceedings.

“Dunkin’ Brands strongly disagrees with the decision reached by the Court and believes the damages awarded were unwarranted,” the company said in a statement.

“Dunkin’ Brands is proud of its efforts to support all of its franchisees in Quebec and around the world and the company intends to vigorously appeal the decision.”

The award goes to 21 franchisees that held 32 stores when the suit was launched in 2003.

In the original lawsuit, the franchisees claimed that Dunkin’ Brands Canada Ltd., which was known as Allied Domecq Retailing International (Canada) Ltd. when the suit started, had made marketing, advertising and management errors that damaged the chain’s brand.

The operators argued that inferior advertising campaigns had been launched by the chain in the face of competition and that it had an unsuitable product offering for the Quebec market.

They also blamed an ineffective marketing strategy and unstable administration for causing a decline that saw the number of Dunkin’ Donuts outlets in Quebec drop to 115 in January 2003 from 250 in 1995.

Dunkin’ Donuts responded at the time that it had invested millions of dollars to support and expand growth in the Quebec market, which has since been dominated by Tim Hortons (TSX:THI).

In his ruling, Justice Daniel Tingley described the case as “a sad saga … of how a once successful franchise operation, a leader in its field — the donut/coffee fast food market in Quebec — fell from grace in less than a decade; literally a case study of how industry leaders can become followers in free market economies.”

He noted the company took primary responsibility for protecting and enhancing its brand.

“It failed to do so, thereby breaching the most important obligation it had assumed in its contracts. It must accept the consequences of such a failure. … Franchisees cannot succeed where the system has failed.”

The judge rejected any idea the franchisees were poor operators and said they were active and among the most successful in the province’s network of stores.

Gilbert said the determination of the franchisees played a key role in the outcome of the court case.

“They valiantly confronted the countless financial and human pressures that are often seen in battles pitting David against Goliath. Even at their weakest moment, they never gave up the fight.”