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NEW COURT DECISIONS – DUTY TO PROTECT & ENHANCE BRAND?

Bundy Law Firm PLLC June 29, 2012

On June 21, 2012, the Superior Court for the District of Montreal, Quebec, Canada entered a judgment for $16.4 Million against the Canadian Dunkin Donuts franchisor in favor of 21 former franchisees.  The court held, among other things in a new court decision, that the franchisor breached an express or implied contractual obligation to protect and enhance its brand. 

The Court stated:  “A successful brand is crucial to the maintenance of healthy franchises.  However, when the brand falls out of bed, collapses, so too do those who rely upon it. * [The franchisor] had assigned to itself the principal obligation of protecting and enhancing its brand.  It failed to do so, thereby breaching the most important obligation it had assumed in its contracts.”

Obviously every situation is specific to its facts and to the expressed and implied terms in the contract.  However, the Dunkin case helps to frame the question of whether every franchisor has a duty to “protect and enhance” its brand.  If, as in the Dunkin case, there are facts supporting such a failure, the question of appropriate remedies arises.  The Canadian court gave its answer–a $16.4 Million judgment for damages caused by Dunkin’s breach of its obligations. 

Assuming the Superior Court’s decision survives expected appeals, it could become a source of reasoning and persuasive precedent for courts in the United States facing the same or similar facts and circumstances.  Query whether a franchisor that keeps a convicted felon who remains on probation as a director and officer, but somehow neglects to disclose that fact to prospective franchisees is “protecting and enhancing” its brand.  Query whether a franchisor having over 20% of franchises sold-but-not-open, with delays reaching several years in many cases and resultant litigation is “protecting and enhancing” its brand.  As with other new court decisions, Franchisees in those situations might be well advised to consult with their franchise attorney about whether and to what extent the reasoning of the Canadian decision in the Dunkin case might apply in their jurisdiction.