Dunkin's Stalking Scheme Plagues Franchisees in Court
CANTON, Mass. (Blue MauMau) - Dunkin' Brands' onslaught of litigation against its mom and pop franchisees over the past eight years was foreshadowed by a presentation given by its chief counsel in 2000. The spying techniques it advocates has been a growing plague on its franchisees. At the American Bar Association's Forum on Franchising in New Orleans, Stephen Horn presented to fellow franchise industry attorneys his company's approach in catching franchise operators in acts of underreporting sales as related to royalty payments, and other related issues. At that time Horn was general counsel to Allied Domecq, the umbrella organization over Dunkin' Donuts, Baskin-Robbins and Togo's Eateries, having left his position at Schmeltzer, Aptaker & Shepard in Washington D.C. Two of his partners at that firm, Robert Zisk and David Worthan, now with Gray Plant Mooty, act as outside litigation counsel to Dunkin' Brands.
In Horn's written materials for the 2000 ABA Forum "Franchising without Borders" Volume II (click to see larger cover page pictured on right), co-authored with franchisee attorney Jeff Haff, he instructs the audience, "One of the best ways to gather evidence that will potentially have some impact in court is to conduct surveillance of the franchise." He explained that the best surveillance is not necessarily to generate evidence for court, but to provide ammunition for a confrontation meeting with the franchisee. "If the case goes to court, the franchisor can always use subpoenas to gather all the evidence, of which surveillance will provide but a snapshot."
According to Horn, "There are quite a few former federal agents who now make a living as private investigators, and they certainly are the best at obtaining good results." But he said surveillance can be expensive and has its limitations, in that investigators can be found out. He explained, ". . . this will put the franchisee on his guard, possibly preventing the franchisor from getting the evidence it needs to confirm its suspicions."
Horn's co-presenter seemed to take offense to that. In the written materials of their presentation a footnote was published: "Mr. Haff notes that surveillance also may adversely affect franchisee morale and trust of the franchisor. If the basis for terminating an underreporting franchisee is breach of trust, hasn't the franchisor breached the trust of an innocent franchisee by putting him under surveillance?"
Haff said in an interview with Blue MauMau that he remembers Horn taking a very aggressive stance on franchisee underreporters. "There's no question about that." Haff said Horn took a poll during his speech asking how many in the audience had a rule that business owners get one warning, but on the second time they tell them they are out. He said quite a few people raised their hands. "But It was Horn's opinion that that was an unacceptable position for a franchisor to take. Horn advised, 'The first time a franchisee was caught, they were done. Period. They got no warning, no explanation.'”
Horn elaborated on some of Dunkin's hardball tactics in his written materials. "Investigators are fairly ingenious at figuring out ways to get the job done." He adds, "Some are known to use small video cameras that can fit inside a briefcase. . .and investigator posing as a customer can shoot footage while eating on line or sitting at a table . . .an investigator can pose as a potential buyer if the franchisee has the business on the market."
Dunkin' Views All Franchisees as Suspect
Dunkin's investigations go beyond that of the franchisee's business. Horn expressed that their lifestyles and attitudes should also be investigated. "Everyone knows which franchisee just built a beach house and which one drives a late model Mercedes Benz." He feels every franchisee is suspect, happy or unhappy (ABA forum material, Common Signs of Underreporting, pg. 3). He said, "The franchisee who is happy and wants to expand should be asked, 'Has anyone checked to see how much he claims to earn from the business?' If his P&Ls look so bad that you would expect him to be begging to get out of the system, you have probably discovered another underreporter."
But then Horn presents the opposite scenario of those who are unhappy, explaining, "A franchisee who feels the system has not worked for him may decide to use a little 'self-help' by underreporting sales."
A Look Back at Dunkin's Litigation Pattern
Dunkin's litigation history shows an aggressive pattern that has been destructive for many small operators since 2000. Nation's Restaurant News and the Boston Business Journal reported that 350 suits were filed by Dunkin' between January 2000 and September 2002, compared to 12 filed by McDonald's for the same time period. And during the 18-month span between January 2006 to June 2007, Dunkin' filed 157 lawsuits compared to Subway's 5.
After Dunkin' was acquired in 2006 by three private equity firms, Bain Capital Partners, Thomas H. Lee Partners and The Carlyle Group, Horn took over as chief legal counsel in charge of loss prevention—loss prevention was described by its own operations director as "investigations of underreporting cases and transfer matters, meaning transfers to other franchisees." In the latest barrage of lawsuits, franchisees are alleging that the company is continuing to use the tactic of spying on operators to gather evidence for court in an attempt to terminate small operators—a similar strategy to what Horn described in his 2000 forum presentation.
Most involve allegations of breach of contract issues and a variety of infractions, but also include accusations of violating federal laws such as tax evasion and noncompliance with labor and immigration rules.
In one federal lawsuit still going on, Dunkin' terminated 52 franchisees, accusing many of masking overtime pay by using identities of former employees, violating the Fair Labor Standards Act, engaging in identity theft and failure to pay payroll taxes. But the franchisees represented in the suit allege that Dunkin's bogus threats are all part of its scheme in utilizing a nonnegotiable term of its franchise agreement known as the "obey all laws" provision. They contend that Dunkin' uses noncompliance to any law "in a manner which is unfair and deceptive to coerce unwarranted financial concessions from franchisees," and that they are "victims of a pretextual and malicious scheme" perpetrated by Dunkin' to disenfranchise them from their stores.
The lawsuit goes on to describe Dunkin's scheme as one utilizing "a so-called Loss Prevention" unit . . . which engages in Gestapo-like raids on franchise locations in a threatening and intimidating manner designed to strike fear into current and former employees, and embarrass the franchisee in his community."
The court held that Dunkin' did not have to prove its claims prior to terminating the franchisees in this case. The motion for protective order discloses that in addition Dunkin' eventually wants to gather personal information—including social security numbers and medical files—on the franchisees' employees. At issue is the fact that this sensitive information is being released to people who are not authorized to access or see such private data. Without the consent of the employees their information is given to Dunkin' the franchisor, not the franchisee who is the employer.
Another lawsuit filed for underreporting against a franchisee in Pittsburgh was dismissed in 2003 because the court did not find Dunkin's accounting methodology to be credible. At the same time, Dunkin' dismissed the same charges against a store operator in Florida, although its attorneys continued to litigate other charges of tax evasion and employment law violations.
Horn's Post-Presentation: Ammunition to Negotiate with Owners
At the conclusion of his 2000 ABA Forum presentation, Horn turned on a slide projector and, according to Penn State Law Review's acclaimed Beguiling Heresy: Regulating the Franchise Relationship, authored by eyewitness Paul Steinberg, a frequent contributor to Blue MauMau, and the late Gerald Lescatre, Horn "regaled the assembled attorneys with photographs not of Dunkin' stores, not of Dunkin' franchisee deliveries, not of surveillance inside stores—rather, Horn showed photographs of the personal homes, boats, and cars of Dunkin' franchisees." According to Steinberg, he attended that session and took detailed notes.
The report reveals, "He then made explicit to the attorneys what he meant by "ammunition" for a confrontation meeting: the franchisee would be confronted with photos that the private investigator had taken while lurking around the family home. Dunkin' attorneys would point out that there was an "obey all laws" clause; the family appeared to be living beyond its means, and what would happen if the IRS got these photos? Under such circumstances, Horn stated, the franchisee would normally pay the Dunkin' demand. Franchisees who fight Dunkin' risk exposure of their private lives, as Horn's slide show indicated; one franchisee subsequently said that Dunkin' even makes inquiries into franchisees' "romantic relations." The threat of forfeiting a $500,000 investment and having one's "romantic relations" exposed provide a powerful weapon to ensure franchisee submission to franchisor demands."
One citation from the Penn State Law Review states:
Franchisees who fight Dunkin' risk exposure of their private lives, as Horn's slide show indicated; one franchisee subsequently said that Dunkin' even makes inquiries into franchisee's "romantic relations" --n554. Martin, supra note 148, at 111 (citing fall 2002 interview in Bloomberg Markets magazine).
After the attorneys finished presenting, the Law Review publication reports that several attendees gathered around the two presenters. Several asked Horn about his recent novel, a legal thriller he wrote in 2000, and one asked for his autograph. According to Steinberg, "None asked about the ethics of Dunkin's strategy. When this author [Paul Steinberg] asked if Dunkin's practices did not amount to extortion, Horn hastily said that he had been misunderstood. Some while later, this author had communication with three attorneys about Horn's presentation; two of the attorneys had attended the meeting. One of those who attended noted that his clients had told him about the Dunkin' surveillance, but that he was surprised that Dunkin' was so public about discussing such practices, as well as surprised at the lack of reaction from the attendees."
Steinberg's book also states, "One attorney who had not attended the presentation defended the Dunkin' practice and said it was ethically permissible. That is debatable: an attorney who retired after working for a disciplinary committee in a major east coast state told the authors that the issue was clear-cut: threatening criminal prosecution (tax fraud) in order to gain advantage in a civil matter. (See Code of Professional Responsibility 107:5.) The issue was not, she explained, how artfully the franchisor attorney skirted the letter of any ethics regulation: "he knows precisely what he is doing, why he is doing it, and he knows what the response of the other party will be. It's not even a close call in my mind. It's shocking to get up and boast; it makes you wonder what else they're up to."
Dunkin' Responds with Threats
In April Blue MauMau asked Dunkin' if Stephen Horn had made statements at a meeting implying that " . . . if he saw a franchisee driving a fancy car who owns a Dunkin' shop, he felt that the franchisee wasn't working hard enough or he was stealing." Stephen Caldeira, Dunkin's chief global communications officer, said he had spoken to Steve Horn and he had unequivocally stated that he had never made such a statement. "This incident simply did not happen," insisted Caldeira. He said, "Franchisees that know Horn know he would never think or say such a thing, knowing his strong moral and ethical character. This is pretty shocking news to us."
Caldeira warned that the company had spoken to their outside counsel and without a legitimate basis for running the quote [on Blue MauMau], and without proper documentation, they would consider it as an act with reckless disregard as to whether it was ever said. According to Caldeira, Dunkin' lawyers told him it would give them a strong suit for libel.
He continued saying that they were giving fair warning: "Unless you have some kind of foolproof documentation that Steve Horn made this statement, I've told you what our next steps will be . . . With all due respect, I just hope you have your ducks in a row if this is the way you are going, because we will be prepared to refute and get engaged in short order."
Reporter's Note: Dunkin' Donuts is invited to respond to this article. If Blue MauMau receives a meaningful response it will be published immediately.
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Related reading:
- Franchisee Sentenced amid Dunkin’ Lawsuit Barrage
- Jury Finds Hole in Dunkin' Donuts Case Against Pittsburgh Franchisee
- Dunkin’ Spate Stirs Anger among Franchisees
- FindLaw:Dunkin’Says Stores Skimped on Overtime Pay
- Detroit Mom and Pop Franchisees Sue Dunkin' over Illicit Business Practices
- Smoking Gun Emails Billow Dark Cloud over Dunkin' Brands
- Dunkin' Donuts Mom and Pops Squeezed Out by Private Equity Firms
- Indians allege discrimination by Dunkin’ Donuts company Articles
- Duelin' Dunkin' has "one of the toughest franchisee discipline programs in the country", Franchise Times
- Beguiling Heresy: Dunkin' Donuts' Strong-Arm Approach in Spying on Franchisees
- Regulating the Franchise Relationship (Introductory chapter of the book Beguiling Heresy: Regulating the Franchise Relationship posted online)
- October 2002 issue of Bloomberg Market's magazine, Dunkin' Donuts' Spate of Lawsuits Stirs Anger Among Franchisees
