Detroit Mom and Pop Franchisees Sue Dunkin' over Illicit Business Practices

The franchisees filing the litigation include two seasoned franchisees—Salim Ali, a 24-year veteran operator of four stores and Bhikhabhai Patel, a 10 plus-year owner and operator of five stores. But also named is the Detroit Dunkin' Donut Franchisee Association (DDFA) comprised of approximately 18 franchisees who own a total of 45 to 48 shops in that market. The primary purpose of the DDFA is to serve as the official voice of the Detroit franchisees, focusing on improving the Dunkin' brand and brand awareness.

According to Marks, Salim Ali has been an award-winning franchisee. He was a member of the Detroit Dunkin' Advisory Council and then was elected to the Regional Advisory Council, which included Detroit, Chicago, Ohio, Indiana and Wisconsin. Three years ago he went on to be the elected official of the Brand Advisory Committee and a board member of their distribution system of products, and served as chair of the Motown Central Production Location, supplying 65 Dunkin' Donuts/Baskin-Robbins in the Detroit area.

Franchisees' Opinions Valuable in Sale to Private Equity Firms

In March 2006, three private equity firms, Bain Capital Partners, The Carlyle Group and Thomas H. Lee Partners LP, acquired Dunkin' Brands, Inc. for $2.4 billion. While going through the acquisition, Dunkin' paraded some of its top franchisees in front of the group.

In an interview with Salim Ali, he tells of how Dunkin' used him in that process. He said he and two other franchisees had been picked out of thousands of operators to stay home on a certain day. "Will Kussell, the president of Dunkin', told us that we would receive phone calls from each of the three private equity firms looking to buy Dunkin'." Ali said, "We were told to vouch for the company on how well it was doing, how we were operating as franchisees, and the type of relationship we had with Dunkin'." As each call came in, Ali said they gave the equity firms the information Dunkin' had asked them to give, while Kussell was on the phone with them.

"My opinion was valuable to Dunkin' in selling its business for $2.4 billion," said Ali. But after the sale was a done deal, he said he and other franchisees started having problems with the operations. "But then the company didn't want to hear from us. I tried to get in touch with my local director, the regional vice president, and even with Will Kussell. I eventually wrote a letter to CEO and Chairman John Luther which I hand delivered to him at our meeting in Detroit last November. But I got no response from anyone."

Marks said, "You see how his loyalty was repaid. They use their top franchisees to get what they want and then discard them."

Dunkin's Expansion Plans Detrimental to Franchisees

The complaint states that Dunkin' has undertaken a well-publicized, rapid system-wide expansion plan which is working to the detriment of many existing mom and pop operators. In Detroit, Dunkin' has announced plans to increase its presence by 100 new locations. But as part of its national growth program, the company is requiring new franchisees to own and operate a minimum of five new restaurants in the Detroit market.

In releasing its new plan, Dunkin's VP of franchising announced the company was looking for strong developers that could manage multiple restaurants, and that Dunkin' would satisfy a growing demand for top quality shops offering coffee, bakery goods and other products.

But Dunkin' failed to disclose, according to the lawsuit, that in light of the overwhelming failure rate of existing Dunkin' stores in the Detroit market, "its own analysts have declared Detroit an economically depressed market." And given the dismal market, Dunkin' has placed every single existing franchisee in the Detroit market on an "expansion hold," prohibiting them from expanding.

In their lawsuit, the franchise operators allege that with Dunkin' pushing for 100 new restaurants in the depressed area and not allowing existing franchisees to expand or sell their businesses, Dunkin' is clearly forcing out the mom and pop operators.

The complaint alleges three counts against Dunkin'—breach of contract, violation of covenant of good faith and fair dealing and tortious interference with a prospective business advantage. It also asks for injunctive relief stating that because money damages are inadequate to fully compensate the Detroit franchisees under the Dunkin' Donuts Franchisee Association to prevent future violations, preliminary and permanent injunctive relief is warranted. They ask that Dunkin' be prohibited from carrying out its expansion plan in Detroit.

The franchisees individually named in the lawsuit request that the Court grant them damages on all counts and attorney fees and costs.

In assessing the recently filed lawsuit, lead attorney Jerry Marks states,"When you look at what made Dunkin' what it is today, it's the mom and pop operators. Now they are changing the rules by pushing the small franchisees out in favor of the large multi-unit developers."

Stephen J. Caldeira, Dunkin's Chief Global Communications & Public Affairs Officer, stated, "We have no comment at this current time regarding this complaint filed by Detroit area franchisees except to say that it is without merit."

Related reading:

• Dunkin' Donuts Mom and Pops Squeezed Out by Private Equity Firms
• Smoking Gun Emails Billow Dark Cloud over Dunkin' Brands
• Reuters: Dunkin’ Expansion in Detroit