By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Franchise Law Attorney

In yet another Dunkin Donuts case a franchisee was licensed to operate two Dunkin Donuts stores in N.J.  The provisions of the franchise agreements for both stores were basically identical.  Under these franchise agreements, the franchisee was allowed to use the Dunkin Donuts name, trademarks, baking and marketing methods, and the technical/management support.  The franchise agreement expressly stated that to remain as a franchisee, the owner had to remain in continuous good standing.  That means that he must always act in a way that is ethical and fair.  Cheating, stealing, and the like are all violations of this provision.

Dunkin Donuts notified its franchisee that his franchise agreements were going to be terminated.  Dunkin stated that he intentionally underreported his gross sales.  Dunkin gave the operator the option of keeping his franchise agreement alive but only if he promptly paid the amounts Dunkin claimed they owed. He refused. At trial, the court held that the franchisee was guilty of substantial, intentional, and long-continued underreporting of gross sales at both Dunkin locations he owned.  He underreported nearly $100,000 in sales.  The court reasoned that the franchise agreement should be terminated not only because of the abovementioned facts, but because the operator failed to keep the records required by the agreement.  This is significant because the owner deliberately underreported the sales which resulted in an underpayment of franchise fees, underpayment of advertising fund fees, underpayment of rental override charges, and an evasion of federal taxes.

The court concluded that the franchisee’s conduct amounted to unconscionable cheating.   This is the sort of conduct that amounts to substantial non-compliance with the terms of the franchise agreements.  With that being said, the court held that the termination of the franchise agreement was proper.

There are a few talking points here.  First, any sort of deliberate, unconscionable act committed by the franchisee that amounts to some form of stealing from the franchisor will result in a termination of a franchise agreement in court.  Second, for a franchisor it affirms the hardline taken by Dunkin against franchisees who acted like the operator because it sets an example among all other franchisees that this sort of conduct will not be tolerated and those who act similarly will get their franchise forfeited.

To discuss your NJ Franchise matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.