On March 17, 2016, the Supreme Court of Canada ("SCC") dismissed Dunkin' Brands Canada Ltd.'s ("Dunkin' Brands") application for leave to appeal the judgment rendered almost a year ago by the Court of Appeal of Québec ("CAQ"), thus putting an end to the most significant franchising court case in Québec's history — 13 years after proceedings were instituted by a group of former Dunkin Donuts franchisees.
On April 15, 2015, the CAQ upheld the judgment rendered by the Superior Court of Québec ("SCQ") in 2012 with respect to the liability of the franchisor, Dunkin' Brands, but reduced the damages awarded to the franchisees from $16.4 million to $11 million. After interest and various fees, Dunkin' Brands will pay a sum of more than $18 million, to be divided among the franchisees.
What emerged from the CAQ judgment is that the franchisor's obligation to protect and enhance the brand in its network of franchisees is far-reaching, ongoing and successive.
Procedural highlights
2003: The proceedings, which were not a class action, were instituted before the SCQ by a group of 21 franchisees representing 32 franchises. The events and circumstances that eventuated the franchisees' proceedings occurred between 1995 and 2005.
2012: After a 71-day hearing before the trial judge, the SCQ rendered its judgment. The trial judge first concluded that the franchisor was liable and then asked the parties to present additional evidence to assess the damages to be awarded.
2015: The CAQ issued its judgment confirming the franchisor's liability, but reduced the damages awarded to the franchisees. The hearing before the CAQ occurred at the beginning of 2014. The bench of three judges took 14 months to render its much-awaited decision.
2016: The SCC dismissed the Dunkin' Brands' application for leave to appeal. The SCC thus determined that it would not review the CAQ decision.
Lessons for franchisors
Lesson #1: Franchisors, no need to panic!
Franchise law in Québec is developed by case law. This means that each case, including the Dunkin case, clarifies, specifies and analyzes what in civil law is known as the "obligational content" of the franchise agreement. This includes not only the obligations clearly stipulated in the agreement, but also the implied obligations stemming from the agreement. However, the implied obligations incumbent upon franchisors largely depend on each specific franchise agreement, as well as the nature and context of each franchise network.
The Dunkin case is factually without precedent in Québec; the breakup of this huge franchise network took place under exceptional circumstances. These circumstances were taken into account in the Québec Courts' analysis of the implied obligations bearing upon the franchisor, Dunkin' Brands.
Furthermore, the Court confirmed that the evidence presented in the Dunkin case was clear and abundant, and showed that the franchisor's actions in support of its franchisees were insufficient and not executed in a timely manner, despite numerous requests for support by the franchisees. The damages awarded to the franchisees also reflect the exceptional circumstances of the Dunkin case.
Should franchisors panic in light of the Dunkin case end result? We do not believe so. The CAQ is clear that the obligation of the franchisor to protect and enhance the brand of its network is an obligation of means and not of results. The obligation of the franchisor in this respect is "to take reasonable steps" to protect the brand and to support its network.
Lesson #2: Have clear and extensive franchise agreements
The obligation of the franchisor to support and protect its brand has always existed. However, the Dunkin case is the first time that Québec Courts have gone so far in analyzing and specifying the scope and content of this obligation in terms of the particular actions that franchisors must take when franchisees face fierce market competition. In its judgment, the CAQ noted that — considering the powers and role of the franchisor established in the franchise agreement (i.e. monitoring the network and enforcing uniform standards) — the franchisor's obligation to protect and enhance the brand is a necessary complement to the franchise agreement.
After the Dunkin case, the obligation to enhance and protect the brand may be implied in most franchise agreements, even if the scope of this obligation is still undefined. That being said,franchisors should review their franchise agreements with their legal counsel to reduce and/or prevent potential liability arising from implied obligations and, to the extent possible, add commercial predictability to their relationship with franchisees. With that in mind, we believe it is important for franchisors to draft franchise agreements that clearly define their obligations toward each franchisee, as well as to the franchise network as a whole. This will ensure that franchisees have a better understanding of what to expect from their franchisor before entering into the franchise agreement.
Lesson #3: Adapt and improve your day-to-day practices
Even though there is no reason for the franchising industry to panic in light of the Dunkin case, franchisors should take note of the Court's findings in order to adapt and improve their day-to-day practices. For instance, franchisors could work to (a) develop and implement legal compliance programs, (b) take and enforce measures against underperforming or non-compliant franchisees and, (c) document the steps taken to support franchisees and the franchise network.
- Develop and implement legal compliance
programs
The Dunkin case demonstrates that in determining whether a franchisor has met its obligation to enhance and protect the brand, the franchisor's actions will be closely analyzed. Thus, in addition to having a clear and extensive franchise agreement, franchisors should develop legal compliance programs with their legal counsel to clarify their role as franchisor in the franchise network. Depending on the circumstances of each franchise network, such legal compliance programs may focus on different fields, including monitoring franchisees' activities to better understand the market, following the competition and ensuring that uniform standards of quality are applied throughout the network. As well, franchisors should consult and communicate with franchisees regularly to establish and implement clear strategies.
- Take and enforce measures against underperforming or
non-compliant franchisees
The Dunkin case could justify earlier actions by franchisors against non-compliant franchisees. Franchisors should, without delay, take actions to improve the performance of any underperforming or non-compliant franchisees
- Document the steps taken to support franchisees and the
franchise network
The Dunkin case establishes the franchisor's obligation to make ongoing and successive efforts to protect and enhance the brand and reputation of its franchise network by enforcing uniform high-quality standards. This obligation was defined as the very essence of the franchise agreement. To prevent and/or contest any legal dispute regarding compliance with this obligation, franchisors should carefully document the steps, actions and efforts taken to support the franchisees and the franchise network as a whole.
Many markets face increasingly fierce competition, with the arrival of a new player or the rise or regrouping of existing players. Franchisors will need to actively protect and enhance their network's brand to fend off competitors, and given the result of the Dunkin case, their actions will most likely be under close scrutiny by franchisees and other industry players. The end of the Dunkin case opens the door to franchisees instituting legal proceedings against their franchisor for breaches of similar implied obligations stemming from the franchise agreement. Indeed, shortly after the SCC's decision, other proceedings have been instituted by groups of franchisees from well-known franchise networks in Québec claiming damages from the breach of similar obligations than those analysed in the Dunkin case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
