Lessons for Licensors: Keep your Brand Fresh

2012-11-29

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LESSONSFORLICENSORS:KEEPYOURBRANDFRESH

VANESSAUDY*
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AWYERS,PATENTANDTRADE-MARKAGENTS

OnJune21,2012,theSuperiorCourtofQuebecrenderedajudgmentinfavourof
DunkinDonutsfranchiseesoperatinginQuebec,orderingtheirfranchisor,Dunkin’
BrandsCanadaLtd.(formerlyAlliedDomecqRetailingInternational(Canada)Ltd.
“ADRIC”)topaymorethan$16,4millionindamagestothefranchiseesforitsfailure
toprotectandenhancetheDunkin’DonutsbrandinQuebec[Berticoinc.v.Dunkin’
BrandsCanadaLtd.[2012]Q.J.No.4996].

In1996,thefranchiseesalertedADRICtothegradualcrumblingstatusoftheDunkin’
DonutsbrandinQuebecandtheirconcernswithrespecttoTimHortons’increasing
footholdinthemarket.Despitethewarning,littlewasdonebyADRICtoimprovethe
brand’sreputationortocounterTimHortons’competition,otherthantheintroduction
ofaremodelincentiveprogrammeinlate2000designedtorenderthefranchisemore
attractivetoQuebecconsumers.Overall,theremodellingplanwasafailure.Few
franchiseesparticipated,astheprogramrequiredthefranchiseestoincursignificant
expensesintheshortterm.ADRICalsofailedtoinjectthefundsithadpromisedto
improvethebrand’sreputationonthemarket.
Between1998and2008,thenumberofDunkin’Donutsstoresopenintheprovince
ofQuebecplummetedfrom210to41.Atthetimeofjudgment,thatnumberhad
furtherdroppedto13stores.Similarly,Dunkin’Donuts’marketsharedwindledfrom
12.5%in1995to4.6%in2003.Asaresultofthedramaticdeclineinthevalueofthe
Dunkin’Donutsbrand,thefranchiseeslostprofitsandtheopportunitytoselltheir
storesattheirtraditionalvalue.
ThemainissuedebatedbythepartiestothelitigationwaswhetherADRIChad
committedacontractualfault.TheDunkin’Donutsfranchiseagreementscontaineda
clausepursuanttowhichADRICagreedtotakecertainmeasurestoprotectand
enhancethereputationofthebrandandthedemandforitsproducts.

However,theCourtalsofoundthatfranchisecontractscontainanimplicitobligation
onthepartofthefranchisorstoactingoodfaithandloyallytowardtheirfranchisees.
Asanextensionofthisduty,afranchisorhasanimplicitcontractualdutytoprotectits

©CIPS,2012.*FromROBIC,LLP,amultidisciplinaryfirmofLawyers,andPatentandTrade-markAgents.Published
intheFall2012(Vol.16,no.3)Newsletterofthefirm.Publication068.158E.

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brand.Failureofafranchisortodosomayresultincivilliabilitytowardits
franchisees.
ConsideringADRIC’sdelayinrespondingtothedecliningreputationofitsbrand,the
failureoftheremodellingplanandthefailuretocontainDunkin’Donuts’main
competitor,theCourtfoundthatADRIChadindeedfailedtofulfillbothitsexplicitand
implicitobligationsunderthefranchisecontracts.

Unfortunately,thoughthecaseillustratesaseriesoffactswhich,intheaggregate,
maybetakentoconstituteabreach,itdoesnotprovideaprincipledapproachto
determiningwhetherabreachhasoccurred.Thecasealsogivesfewcluesasto
whatpositiveactionsafranchisorcantaketoensureitfulfilsitsobligationtoprotect
thebrand.Isafranchisorobligedtotakeaggressiveactiontodefeatthecompetition?
Ordoesitonlyneedtotakereasonableactionstorespondtoit?HadADRIC
proposedtheremodellingprojectbackin1995,wouldithavebeenfoundliable?
WouldADRICbeinbreachofitsobligationshaditmadetimelybutunsuccessful
effortsingoodfaithtoenhancethebrand’sreputationinQuebec?Towhatextent
mightfranchisorsbeheldliableforpoordecisionsorunsuccessfuleffortsmadein
goodfaithordertoprotectorenhancetheirbrand?

Hopefully,othercourtsmayprovideadditionalanswerstothesequestionsinthe
future.

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