News Briefs

“Franchisors and franchisees are legally distinct entities, and we are concerned that the district court's ruling reflects a fundamental misunderstanding of the nature of the franchisor-franchisee relationship,” said IFA Vice President of Government Relations David French. “Specifically, we are seeking clarification that the relationship between a franchisor and franchisee is defined entirely by contract, and therefore has less relevance to a diversity jurisdiction analysis than does the relationship between parent and subsidiary corporations.”

Dunkin' Donuts Franchisees Racking Up Bankruptcies

In the last few months, several multi-unit Dunkin' Donuts franchisees have declared bankruptcy, possibly signaling problems with the company's rapid-growth strategy launched several years ago. But a representative of many long-time franchisees says that the bankruptcies of those three franchisees do not suggest that the brand is in trouble.

“It's important to put the bankruptcies in context,” said Jim Coen, executive director of the Dunkin' Donuts Independent Franchise Owners Association (“DDIFO”). “They represented the new growth of the franchise. The established franchise owners, the ones who built their units with sweat equity, store-by-store, are weathering the recession reasonably well. That's an oversimplification ' maybe ' but it reflects how the established franchises see it.”

DDIFO is comprised of franchises solely in New England and upstate New York, and almost all of them are seasoned operators. They have a distinctly different perspective than a new Dunkin' Donuts franchise owner who perhaps borrowed heavily to open several outlets in rapid succession ' buying into Dunkin's vision of an immense national chain. “The established franchise owners will make it through this [recession], unless they are severely over-leveraged and they can't meet the covenants on their bank loans,” said Coen. “You can't say that about all of the newer franchisees.”

The three Chapter 11 bankruptcies declared in June and July 2009 were new franchise operators who owned stores mostly outside of Dunkin' Donuts' home base in the Northeast and Mid-Atlantic United States:

• Kainos Partners, 56 units located in Buffalo, NY, Greenville, SC, and Las Vegas;
• AlphaRock, LLC, 18 units in western Florida; and
• Current River Capital, LLC, seven units in Nashville, TN.

Regardless of the bankruptcies, Dunkin' Donuts has not given any indication that it is rethinking its expansion strategy. A company representative wrote to FBLA in an e-mail that “we want to assure our customers that we remain committed to the Buffalo, Greenville, and Las Vegas markets.”

Overall, Dunkin' Donuts' global system-wide sales were up 5% in 2008, and more than 1,300 new stores worldwide, the company representative wrote. “With approximately 8,000 Dunkin' Donuts stores worldwide, our system overall continues to grow,” he added. “We are committed to doing the right things to manage the realities of the present economic situation, even as we continue to look ahead with optimism at the future and the long runway for growth ahead of us, both domestically and internationally.”

Given the difficult economic environment, Dunkin' Donuts is working with its franchisees and supply chain partners to reduce costs, and it is working with its lenders to try to facilitate financing for franchisees, the representative added.

According to Coen, Dunkin' Donuts also eased the burden on its operators this year by declaring a moratorium on required store remodeling in 2009. “It was a well-timed and strategic decision,” he said. “They also offered a modest incentive to remodel this year. The incentive, plus the lower costs of contractors and materials, has encouraged some operators to go ahead this year.”

Yet, Coen suggested that Dunkin' Donuts would gain valuable perspective by operating some stores, so that it would have a better understanding of the on-the-ground situation, especially during tough times. “If they operated stores, if they were on the front lines, they would know [about problems] much quicker and have a better sense of what to do,” he said.

The only stores Dunkin' Donuts operates are four locations in Dallas. Those company-ops are the result of a decision in May 2009 by the local franchisee, Donald Zale, to abandon the units. Citing the inability to find financing for opening stores in his territory, Zale gave up his, though he did not declare bankruptcy. Dunkin' Donuts has not indicated that it will operate the stores long-term.

IFA Asks Appellate Court to Protect Franchising's Legal Distinction

The International Franchise Association filed an amicus curiae brief in June with the U.S. Court of Appeals for the Ninth Circuit in Ganezer v. DirectBuy, asking the court “to note the legal distinction between franchisees and franchisors, particularly that the business activities of franchisees are irrelevant to determining the principal place of business of franchisors,” according to a statement released by IFA.

Ganezer v. DirectBuy involves a ruling by a Los Angeles federal judge to remand to state court a consumer class action that DirectBuy had removed to federal court in accordance with the provisions of the Class Action Fairness Act. The ruling at the district court was based on a diversity jurisdiction analysis that determined that DirectBuy failed to account for the activities of its franchisees in California in asserting that its principal place of business is Indiana.

“Franchisors and franchisees are legally distinct entities, and we are concerned that the district court's ruling reflects a fundamental misunderstanding of the nature of the franchisor-franchisee relationship,” said IFA Vice President of Government Relations David French. “Specifically, we are seeking clarification that the relationship between a franchisor and franchisee is defined entirely by contract, and therefore has less relevance to a diversity jurisdiction analysis than does the relationship between parent and subsidiary corporations.”