Former franchisee Irwin Barkan and NY attorney Paul Steinberg testify

BOSTON — Franchisees painted a grim picture of franchisor Dunkin' Donuts for legislators at the Massachusetts State House in Boston. In hearings on June 29 before the Committee on Community and Small Businesses, past owners of Dunkin' Donuts shops and franchisee advocates gathered to testify of a franchisor who in their words has underhandedly managed franchisees by means of extortion and oppression.

Lawmakers were considering a vote on a fair franchising bill, S 1843, introduced by Senator Brian A. Joyce. Franchisees of various brands, their advocates and franchisor lobbyists filled the room.

Small David Outspent by Litigating Goliath

Bostonian Stanley Furash testified that franchisor Dunkin' terminated his store on trumped-up charges, leaving others with the same offense alone. He had turned around two Florida Dunkin' Donuts shops that each went from $1.5 million in annual sales per year to over $2.1 million. The former franchisee thought the growth and success of his stores caught his franchisor's attention and greed took over when they calculated that they could make more by churning the store.

Furash says that his wife wanted his children to return to Massachusetts to finish their schooling. He remained to run the day-to-day operations of the business.

A year later, "They [Dunkin' Brands Inc.] sued us for abandonment," he declared in his testimony. What amazed him is that there are many absentee Dunkin' franchisees who live in one state but have shops elsewhere. Even more puzzling, "There was nothing in the contract that said you had to live in the same state," he declared. Besides, he was actually there working in the shops. "We were then forced to defend ourselves at a great cost for attorneys. We didn't have protection," he stated.

Furash lost his stores.

Contractually there was no problem, he told the panel of representatives. Rather, the problem was a practical one. As a small business owner, he had limited funds to fight a deep-pocketed franchisor. "They used four lawyers in two different states. I had one. It was all I could afford," he said. In the end, his company was broke and unable to make royalty payments, a breach of the franchise agreement.

Where once his original Dunkin' Donut shop stood, there is now a fast-food chicken restaurant. No one won.

Senator Brian A. Joyce, sponsor of fair franchising bill S.1843, told the lawmakers that Furash saw franchising as a safe way to proceed. "He invested his personal savings in two Dunkin' Donuts shops in Bradenton, Florida. He was prepared for the hard work associated in building a business and living the American dream. It turned into a nightmare because the franchise agreement he signed left him vulnerable to the whims of the franchisor," concluded the Canton-based state senator. "It is both good economic policy and a matter of simple fairness to protect hard-working small business owners, who have created jobs and who have honored their franchise agreements, from losing all that they have worked for because some large corporation or hedge fund has a change in ownership or policy."

Franchisee Stan Furash and attorney Robert Zarco testify to lawmakers

Robert Zarco of law firm Zarco Einhorn Salkowski & Brito is one of the industry's most renowned franchisee attorneys. He has spent years defending franchisees against Dunkin', regarded as one of the most litigious franchise chains in the industry. But Zarco thinks that Dunkin' is but a small example of what happens in franchising. "This is not a situation that is unique to Mr. Furash," said the Miami-based franchisee attorney to the panel of Massachusetts lawmakers. "This is a situation that applies throughout the country. Other states have acknowledged that there is a substantial imbalance between franchisor and franchisee." The attorney testified that Massachusetts franchisees need the protection that a fair franchising law would provide.

No Changes to Contracts Allowed

Irwin Barkan, author of Dunk'd, A True Story of How Big Money is Corrupting the Franchising Industry says that he was "seduced" to come on board and "induced" to forego contract negotiations. "All the other franchisees did it, Irwin. Don't worry," said Dunkin' Donuts to the former New England franchisee at the time he signed the contract. "I was one of those people who was not allowed to change a single word in the agreement," Barkan testified to Massachusetts representatives. "I was 50-years old when I sat in a room and signed a franchise agreement in which a million and a half dollars exchanged hands from me to them. I was handed a piece of paper there that I hadn't seen before. At the top of the page was, 'Please write all the conditions that are not encountered in this agreement in writing.' The second was, 'Please acknowledge the other agreements that Dunkin' has made to you.' I looked at it and said, 'Well, ok, you were going to do this, and you were going to do this, and you were going to do this.' A hand came up. 'Irwin, you don't understand. You have to write the word 'none.' That's spelled N-O-N-E. If you do not spell 'none,' the deal is off.' This, of course, was after six months of negotiations. But that's really what it's like. It's hard to describe the pressure that you come under during those moments.'"

Franchise attorney Eric Karp, partner in the Boston law firm Witmer Karp Warner & Ryan, explained this franchising phenomenon to the committee, "Franchise agreements are generally presented to franchisees on a take or leave it basis, with negotiations usually ruled out.  These agreements are heavily one-sided in favor or the franchisor, usually an out-of-state company. This is a result of the overwhelming imbalance of legal and financial resources between the franchisor and the franchisees."

Dunkin' stressed in a written statement that what two adults have signed, let no state come between. "No one is forced to sign on the dotted line," the company statement said. A franchisee has the liberty to walk away from the deal.

Jim Coen, president of the 2700 franchise members of the Dunkin' Donuts Independent Franchise Owners association, points out the problems with that thinking within Dunkin' Brands. He explains that Dunkin' franchises are often multi-generational businesses that were set up by immigrants. "These one-sided contracts cannot be just take or leave. A take it or leave it renewal of contract is a loaded gun because the alternative to the Dunkin' franchisee is to get out of the business," says Coen. "That would take away the franchisee's livelihood and it would often take away the livelihood for all their family members."

According to the statement, after nine months of franchisees collectively bargaining with Dunkin', the franchisor changed its agreement to allow franchisees to more easily pass on their shops if the franchisee dies. "The recently negotiated franchise agreement also addresses specific situations when the franchisee should be indemnified and transfer rights of the franchisee upon death or other circumstances," declares the company document.

Coen, a former ice cream shop franchise owner himself, acknowledges the change with the franchising company. "I want to thank Dunkin' Brands for the last couple of years in making the relationship between franchisor and franchisee much better than it has been for a long time," he says.

Dunkin' Extortion

Former Subway franchisee Paul Steinberg gave testimony to the panel of legislators about hearing firsthand from Dunkin's chief legal counsel about franchisee extortion while they were both at an American Bar Association workshop. The New York City-based attorney testified, "He [Dunkin's chief legal counsel] described how they [Dunkin'] would deal with someone like Mr. Barkan (a targeted franchisee). They would call Mr. Barkan in for what they called a 'confrontation meeting.' That was Dunkin's term, not mine. They would sit next to someone… that they wanted to get out. They would plop a picture in front of him. They'd say, "That's your wife getting into that $80,000 Mercedes. Here's a picture of that private school that your children attend."

"Are you kidding?" Representative Linda Forry [D] interjected.

"I am not kidding. This is published in my 2004 Penn State Law Review article," said Steinberg.

Steinberg testified that Dunkin's in-house chief legal counsel instructed the team of lawyers on how to keep franchisees in line. In a slideshow, Dunkin's legal counsel had a picture of franchisee homes on the Intracoastal Canal. "You actually have to hire someone in a boat to go over there," to get that photo said Steinberg. According to Steinberg, Dunkin's lawyer said this is how to bring franchisees in line. "Now, we think you are not paying all your royalties to us. We want $80,000 from you."

Steinberg declared about the seminar meeting he attended: "Dunkin' counsel would say, and I quote, 'wouldn't it be a shame if these pictures got to the IRS.' "

Dunkin' Sees No Need for Fair Franchising Legislation

"It has come to our attention that there may be a small group of franchisees supporting this legislation," stated the doughnut shop franchisor. It thinks the fair franchising legislation isn't necessary for the chain since it has bent over backwards for its franchisees. "Dunkin' Brands and our franchisees recently negotiated a new franchise agreement to govern the relationship between the brand and our franchisees," it says as proof that it is listening to its franchisees.

The new law would provide a 90-day cure period for terminations, restrict encroachment, and strengthen good-faith dealings.

"The new agreement deals with many of the provisions and terms included in the legislation," says the company, explaining why the bill isn't necessary.

Attorney Paul Steinberg congratulates Dunkin' for being flexible with parts of its franchise agreement, but points out to Blue MauMau readers that the Massachusetts legislation is meant to set a minimum standard of franchising. "The fact is there are bad actors. That's why you need a minimal level of behavior," explains the attorney.

Dunkin' also emphasizes that it has gone the extra mile for its franchisees. It states that it has "paid for national rallies for our franchisees' restaurant managers," as well as now holds "monthly operational webcasts designed to help improve their business."

Representing Dunkin' franchisees, Mr. Coen is appreciative of recent changes but points out that there are franchisees in the Dunkin' system who have been franchisees for over fifty-years. "Management teams come and go," he says. "This law is about the future and protecting the legacy. It helps encourage franchisees to invest in the state of Massachusetts because they have basic protections that very often franchise agreements have taken away. This law will protect them like other states, such as Wisconsin and Iowa, have protected their franchisees. I believe franchising will flourish in this state as a result of this law."