Court Denies Dunkin’s Cross-Default Termination RemedyIn 2017, I briefed a decision from the same action. See,

In the previously reported summary judgment matter, the 3rd Circuit upheld the District Court’s ruling granting Dunkin’s application and terminating one of three franchise agreements with the defendant. The record established that the Franchisee principal, through his wife’s company, held an interest in a competing franchise (Red Mango), which conducted business immediately next to the Franchisee’s Dunkin unit in a retail mall. In fact, the Franchisee had the original space sub-divided for this purpose.

The Court found that the products sold by Red Mango were substantially similar to the products sold by Dunkin (per the concomitant Baskin-Robbins franchise agreement). The 3rd Circuit agreed.

Returning to the Court, the Franchisor pressed for the enforcement of the cross-default termination remedy relative to two other units owned by the Franchisee in different geographic locations within New Jersey.

The trial Court ruled that Dunkin’s contract remedy was too harsh under the circumstances and refused to grant the relief. The Court noted the following points in support of the denial of further relief to the Franchisor:

  1. No credible evidence of trade secret disclosure between the Franchisee principal and his wife;
  2. No evidence established by Dunkin’ that the Red Mango sales harmed the Dunkin’ unit;
  3. Dunkin’s internal policy concerning the non-compete term was inconsistent with the testifying “managing counsel”;
  4. The internal policy was inconsistently applied, as it allowed some Franchisees to compete due to the recognition that to enforce the provision strictly would “preclude the vast majority of existing operators;”
  5. The internal policy provided lesser penalties for breach, including divestiture from the competing business (as the court pointed out, the wife had already sold the Red Mango shop);
  6. Dunkin’s stated reason for the harsh measure– that it acted as a deterrent on other Franchisees– was satisfied by the termination of the mall unit;
  7. Referring to the defendants as “minority owned franchisees,” the Court held that it would be “unreasonable to crush the two successful small business franchises by virtue of several misrepresentations when the termination of one is sufficient;” and
  8. There were less onerous remedies available, including terminating the Baskin-Robbin’s line of products at a second unit, negotiating a long term dissolution plan for all three businesses, and payment of legal fees/costs.

I look forward to yet another decision from the 3rd Circuit on this interesting case. Stayed tuned.

Citation: Dunkin’ Donuts Franchising LLC, et al. v. C3WAIN Inc., 2018 U.S. Dist. LEXIS 167682. Prior history: 677 Fed. Appx. 779, 2017 U.S. App. LEXIS 2033 (3rd Cir. N.J., February 3, 2017.

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