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Duelin' Dunkin'

Dunkin\' Brands fights franchisees in court


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When news came out that Massachusetts-based Dunkin’ Brands had been suing its Dunkin’ Donuts and Baskin Robbins franchisees for employing illegal workers, the chain solidified its heroic status among many conservatives. “National security never tasted this good,” conservative blogger Michelle Malkin wrote.

Yet the corporation’s immigration-related lawsuits are part of a much broader pattern of litigation: In recent years Dunkin’ has developed one of the toughest franchisee-discipline programs in the country. On top of surprise visits and unannounced inspections the company will frequently sue wayward franchisees for a variety of issues, sometimes without allowing storeowners to correct the problems.

Now there are indications that the company is taking this program one step further. According to attorneys with knowledge of the company’s strategy, Dunkin’ has started requiring at least some franchisees facing a loss of their franchise rights to pay fines for the right to sell their stores. Those fines can run into the hundreds of thousands of dollars and are on top of what the franchisee must pay the company for attorneys’ fees, these lawyers say.

Few argue against the legality of Dunkin’s policy, or against its right to police its franchisees, but critics say Dunkin should give franchisees time to correct the problems or make it easier for them to sell their units. “It’s wrong, it’s immoral, and it’s unethical,” said Robert Zarco, a Miami-based franchisee attorney who has done battle with Dunkin’ on numerous occasions. “It’s outrageous.”

Others disagree, saying the company’s stance has helped strengthen Dunkin’s image, and that it protects the investments of franchisees who keep their stores in good shape. They also contend the chain gives franchisees considerable notice about what is expected of them. “They’re pretty good at giving warnings of what they’re looking for in terms of cleanliness, quality of goods, products and hospitality,” said Martin Bloom, a restaurant veteran who runs a half-dozen Dunkin’ Donuts near Tampa, Fla.

Details of Dunkin’s strategy were discerned using legal filings and interviews with franchise attorneys and others. In a statement, a Dunkin’ spokeswoman said “Dunkin’ Donuts’ top priority is to provide the best possible experience for our customers. Restaurant excellence and customer satisfaction is a goal shared by Dunkin’ Donuts and the dedicated franchisee operators that work diligently each day to build the brand and protect its integrity. Our franchise agreements exist to protect our shared objective of achieving best-in-class operations.”

Dunkin’ Brands has grown rapidly recently, adding 1,000 stores in just the last year while revenues have grown from $4.8 billion two years ago to $6.1 billion last year. A trio of private equity groups, led by Bain Capital, purchased the company from French drink maker Pernod Ricard for $2.425 billion last year. The company oversees Dunkin’ Donuts, Baskin Robbins and Togo’s sandwich restaurants.

The company’s tough policy regarding franchisees could be traced to the late 1990s, when Dunkin had to fend off a reputation for dirty stores. In 1998 the New York Post ran photos of mice scurrying around a New York Dunkin’ Donuts shop, nibbling on the store’s specialty. That episode earned the chain its own “Top 10” list on David Letterman.

These days the chain has a “loss prevention team” that makes unannounced visits to stores to ensure they are kept up to standards. When the company decides to terminate a franchise agreement, it usually moves quickly on the issue, often in court.

In the 18 months between January 1, 2006 and June 30, 2007, Dunkin’ was the plaintiff in 101 federal lawsuits—the vast majority of them against franchisees. Over that same time, by comparison, Subway Restaurants was a plaintiff in five.

Some say the number of lawsuits has actually dropped in recent years, but that frequency remains unusual for a franchisor. Most franchisors pick less public means to discipline wayward franchisees, often sending them repeated notices to correct problems before filing for a less-public arbitration or mediation hearing. “With Dunkin’, there are no requirements for mediation,” said Atlanta attorney Scott Hoopes, who represents franchisees in four cases against Dunkin’. “If you sneeze, they come in and sue you.”

Dunkin’ will give franchisees time to correct certain problems—the company may give franchisees a few days to clean stores not following sanitary guidelines, for instance. But some problems are considered “non-cureable,” meaning that Dunkin’ doesn’t give the franchise owners a chance to fix the problems. Many of these involve legal issues, such as franchises that violate labor or tax laws. Stores may also face a quick termination if they don’t pay franchise royalties—though there is evidence that the company worked with such franchisees in the past to help them make the payments.

Some franchisees may face termination for transferring ownership without the proper approval. Earlier this year, a minority owner of two Dunkin’ Donuts-Baskin Robbins stores in New York City, tried transferring 15 percent of her ownership to a pair of experienced Dunkin’ managers, in the hope that the managers would give the franchise a boost, said Asam Habib, the stores’ majority owner.

Habib said the transfer never officially took place, because the managers never showed up to work: They instead complained to Dunkin’ management, which in June moved to end Habib’s franchise rights—even though he wasn’t involved in the sale. Habib seemed resigned to losing his business. “There’s nothing I can do,” he said. “You can’t fight Dunkin’ Donuts.”

Immigration issues are apparently a more recent violation attracting Dunkin’s attention. The company in the past has seen some franchisees scrutinized for hiring illegal immigrants. Last year, Dunkin became the most well known corporation to join the federal government’s Basic Pilot Program, which gives companies access to a federal database to check on workers’ status.

In a statement, a Dunkin’ spokeswoman said the company started using the program to resolve any questions about the employee’s eligibility. “We believe this is the right thing to do for our franchisees, for Dunkin’ Brands, and most of all, for our franchisees’ workers.”

Since the end of last year Dunkin’ has taken action against at least five franchisees for allegedly hiring illegal immigrants, including stores in Florida, Atlanta, New Jersey, New York and Massachusetts. Calls to those franchisees either weren’t returned or requests for comment were turned down.

Attorneys say that franchisees facing a termination lawsuit don’t often fight because they risk losing, which means they could lose their business. “It destroys them,” Hoopes said. “That’s all they know is the system. All they know is the brand. They’ve given everything they have for this brand and they suddenly lose it.”

Franchisees choose to settle instead so they can sell their stores—though the termination often lowers the price, attorneys say. The addition of the fines in the company’s settlement demands diminishes even further what the franchisee is left with when all is said and done.

Zarco said the fine demand is rare. “I have never in 24 years in this business seen any other franchisor that has ever imposed a fine or penalty on a franchisee to either resell or reinstate beyond the franchisor’s attorney’s fees,” he said.

Yet, for Bloom, the franchisee with stores in Florida, Dunkin’s toughness is a corporate asset. One bad franchisee can cause problems for the entire system. “We’re all painted by the same brush,” he said. “I want them to be tough.

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