Legal Brief: Dunkin' Donuts Part Two—Delinquent payments, squabbles and sanitation
Contents
Two-store franchise agreement
Failed to make payments
Finger-pointing ensues
Sanitation violations cited by Dunkin' and local gov't
Refusal to cease operations
Dunkin' sues, wins on tradename use
Substandard sanitation, missed payments over franchise and advertising fees and an antagonistic relationship with franchiser Dunkin' Donuts didn't win this two-store franchisee any points in court. End result: One shop was closed, the other's still in legal limbo.
Dunkin' Donuts recently took a franchisee to court over a substandard health/sanitation and delinquency in the payment of fees.
Dunkin' Donuts, a subsidiary of Randolph, Massachusetts-based quick-serve restaurant parent company Allied Domeq, has maintained the exclusive license to use and license its trademarks, service marks, and trade name since 1960. Standards in doing business as well as branding products are of prime importance to the franchiser and are naturally sold at a cost to franchisees.
Two-store franchise agreement
Dipak Bhayani purchased a Dunkin' Donuts franchise in Homewood, Illinois in 1980 under the name, Donuts, Inc. Bhayani subleased the Homewood store building from Third Dunkin' Donuts Realty, Inc.
Bhayani also opened a Dunkin' franchise in Harvey, Illinois in 1994 under the name J.P. Donuts, Inc. Unlike the Homewood store, Bhayani owned the Harvey store building. The Franchise Agreements entered into by the Dunkin and Bhayani licensed Bhayani to operate doughnut shops at the Homewood and Harvey locations utilizing Dunkin's marks and trade name.
Under the franchise agreements, Bhayani agreed to pay a franchise fee of 4.9% of gross sales to Dunkin and an advertising fee of five percent of gross sales to the Franchise Owners Advertising and Sales promotion fund.
Under the sublease, Bhayani was required to pay fixed rent and percentage rent on a monthly basis. Failure of Bhayani to make payments when due constituted a material default under the Franchise Agreements and sublease, which if not cured within the specified time frame, provided cause for termination of the agreements and/or sublease.
Also under the Franchise Agreement for the Homewood shop, if the sublease for that location was terminated, the Homewood Franchise Agreement could also be terminated without an opportunity to cure. Likewise, if the Homewood Franchise was terminated, the sublease for the building could also be terminated.
Failed to make payments
Bhayani fell behind on financial payments on numerous occasions. Dunkin sent notices of default and notices to cure relating to the failures to make timely payments. As of January 4, 1999, Dunkin contended that Bhayani owed $12,744.20 in delinquent fees for the Homewood shop; $14,946.16 in delinquent rent and tax escrow payments for the Homewood shop building; and $5,499.02 in delinquent fees for the Harvey shop.
According to Dunkin', Bhayani failed to cure the financial defaults, and, therefore, Dunkin sent legal Notices of Termination on February 5, 1999, informing Bhayani that his Franchise Agreements and sublease were terminated.
Dunkin's demands that Bhayani vacate the building and cease operation as Dunkin' Donuts shops went unheeded. As of June 26, 2000, Bhayani's financial delinquencies had allegedly grown to $ 180,657.23 under the Homewood shop Franchise Agreement and sublease and $ 29,005.32 under the Harvey Franchise Agreement.
Bhayani conceded that he had failed to make timely payments to Dunkin on several occasions. He argued, however, that he paid the rents due under the sublease in a timely manner, and provided copies of deposited checks in support.
Finger-pointing ensues
Bhayani acknowledged being delinquent on franchise and advertising fees owed to Dunkin, but maintained that because of Dunkin's unwillingness to support a branded products program, he faced "severe financial losses, including lost sales and lost profits," forcing him "to sell off assets, mortgage real estate and issue promissory notes" to meet his obligations.
The resulting cash flow strain was allegedly "a direct cause of the problems for which Dunkin now seeks to terminate [his] franchise agreements," said Bhayani. He also argued that Dunkin failed to make capital improvements to the Homewood building, requiring him to pay $ 35,759 on various repairs, further reducing his cash flow.
In accordance with the Franchise Agreements, Dunkin provided Bhayani with a set of manuals and guidelines which set out the procedures, methodology, and standards applicable to the operation of a Dunkin' Donuts shop. These included the Network Administration Manual, the Production and Distribution Manual, the Customer Service Manual, and the Retail Food Safety System Manual.
Dunkin' maintained that together, these manuals provided detailed and specific guidance and standards for shop maintenance and appearance, food preparation, presentation and service, customer service standards, and cleanliness and sanitation. Under the Franchise Agreements, failure to comply with the health, sanitation, and safety standards constituted a material default.
Sanitation violations cited by Dunkin' and local gov't
According to the franchise relationship, Dunkin' inspected the Homewood and Harvey shops without prior notice on numerous occasions. Since 1996, it had found multiple health, sanitation, and safety standards violations at the Homewood and Harvey shops. Indicated violations include: pests and evidence of pests; improper storage, refrigeration, and cooking temperatures; improper food and chemical storage; unsanitized utensils; faulty faucets; unclean floors, walls, countertops, toilets, and sinks; insufficient employee hygiene; ill-kept trash areas; and various documentation deficiencies. While some of these were cured by the time of the next inspection, many apparently were not.
In addition to Dunkin's own inspections, Michael Nemitz, the Health and Environment Coordinator for the Village of Homewood, also performed several inspections in accordance with the village's municipal health code. After various inspections in 1998 and 1999, Nemitz indicated that the Homewood shop received a "very low score," posed "a significant public health risk," and was "generally [an] unclean establishment." As a result of Nemitz's inspections, the Homewood shop was closed down on three separate occasions in May, July, and October 1999.
After each substandard inspection Dunkin' sent a notice of default and notice to cure. Based on the perceived failure to cure these violations over a substantial period of time, Dunkin sent Bhayani on September 14, 1999, a Supplemental Notice of Termination of both the Homewood and Harvey shop Franchise Agreements as well as the Homewood sublease.
Refusal to cease operations
In the face of Dunkin's attempts to terminate the agreement and sublease, Bhayani refused to cease operations at either store. He contended that the poor structural condition of the Homewood shop building caused the pest problem at that store. He maintained that he had taken reasonable steps in fighting pests, including monthly inspections by an exterminator. He also argued that although the manuals were difficult to read and understand, he had properly trained his employees and managers and "made diligent efforts to comply with all health and sanitation standards and promptly addressed any problems".
Moreover, Bhayani believed that the inspections conducted by Dunkin targeted only the problems and unfairly portrayed the overall condition of the shops.
In response to the closing of his shop by the Village of Homewood on three separate occasions, Bhayani denied that the health and sanitation problems existed or justified closing the shop. Bhayani concluded that throughout the relevant time period, he remained in reasonable compliance with reasonable health and sanitation standards and promptly cured any problems that arose.
Dunkin' sues, wins on tradename use
Eventually Dunkin' sued Bhayani for breach of contract, trademark infringement, trade dress infringement, unfair competition, and trademark dilution. Bhayani counterclaimed for breach of contract, breach of implied covenant of good faith and fair dealing, breach of Illinois Franchise Disclosure Act, and intentional and negligent misrepresentation and omissions.
The case went to the United States District Court For The Northern District Of Illinois which ruled that Bhayani could no longer make use of Dunkin' Donuts proprietary trade and service marks and trade name.
However, the district court was not prepared to order that Bhayani quit the Homewood premises. While Dunkin validly terminated the sublease as of September 1999, the issue of whether Bhayani retained some rights in the premises under Illinois or municipal law had not been adequately addressed at the trial, said the district court.
Accordingly, the district court ordered more proceedings for Dunkin' and Bhayani to state their positions on this question and discuss whether the February 5, 1999, notices were sufficient to terminate franchise and sublease agreements, and to update the calculation of damages.
Source: Dunkin' Donuts, Inc. v. Donuts, Inc., 2000 U.S. Dist. LEXIS 17927 (United States District For The Northern District Of Illinois) (December 6, 2000)
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