The Quebec Superior Court recently handed down a major decision in franchise law. This decision may be of interest to all franchisors and franchisees in Quebec. In Bertico Inc. v Dunkin' Brands Canada Ltd.,1 the Court ordered the franchisor to pay a group of franchisees more than $16 million. The Court found that the franchisor had breached its obligations under the franchise agreement by failing to protect and enhance the Dunkin' Donuts brand in Quebec.
Until the mid 1990s, the Dunkin' Donuts franchise network was highly successful in Quebec. However, when Tim Hortons entered the Quebec market, it had a significant impact on the profitability of Dunkin' Donuts franchises.
The franchisees quickly alerted the Dunkin' Donuts franchisor that the Dunkin' Donuts brand was gradually collapsing and was losing ground to Tim Hortons. They demanded that the franchisor come up with a strategy to revive the Dunkin' Donuts brand. The franchisees complained, among other things, about the high level of management turnover, the reduction of services offered and the fact that certain restaurants were in need of major renovations.
The franchisor established an incentive program to deal with competition from Tim Hortons. However, measures under the program proved insufficient, resulting in a string of store closures in the 2000s. In response to this failure, a group of franchisees brought an action against the franchisor to obtain the formal termination of the franchise agreements and damages.
Judgement of the Superior Court
The Superior Court determined that the franchisor had failed to fulfil its obligation to protect and enhance the Dunkin' Donuts brand, an obligation that was explicitly and implicitly imposed by the franchise agreement. The Court accepted the opinion of the franchisees' expert, who had concluded that the franchisor had not properly assessed the Quebec fast food, donut and coffee market and had underestimated the impact that the arrival of Tim Hortons would have on that market.
According to the expert, the franchisor was content to repeat certain practices that had been successful in the past, without adapting to the new market in which the franchisees were operating. The Court emphasized that the Dunkin' Donuts brand was still successful in the United States and elsewhere in the world, but suggested that the franchisor had abandoned the Quebec franchisees to their fate.
The Court also annulled the releases signed by certain franchisees who participated in the incentive program set up by the franchisor, on the grounds that they had been obtained under false representations. The Court consequently terminated the franchise agreements entered into between the franchisor and the franchisees. It also ordered the franchisor to pay more than $16 million in damages representing the loss in value of the Dunkin' Donut restaurants and the loss of expected profits by the franchisees.
Lessons from this ruling
In 1997, the Quebec Court of Appeal ordered Provigo Distribution Inc. to pay damages to some of its franchisees on the grounds that it had failed to provide the technical assistance needed to help them face new competition. The recent ruling in Bertico Inc. v Dunkin' Brands Canada Ltd. shows that that decision is still relevant and that franchisors have an obligation to help their franchisees to compete with new players in the market. This obligation may prove very expensive when competition is fierce and the survival of the brand is at stake.
The Court recognized that the franchisor was not a guarantor of the franchisees' success. However, a franchisor must develop a strategy to preserve the relevance of the franchise agreement. It must be innovative and change its practices if necessary in order to maintain brand strength. A franchisor cannot allow itself to become passive and abandon the franchisees to their fate. Otherwise, it may be ordered to pay damages.
1 2012 QCCS 2809.
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