Antitrust Law Daily Wrap Up, ANTITRUST—EDMo: Former Dunkin’ Donuts Franchisee Fails to State Tying Claim , (Apr 19, 2013)

By Tobias J. Gillett, J.D., LL.M.

A former franchisee has failed to state federal and state antitrust counterclaims against various Dunkin’ Donuts corporate entities for tying the sale of Dunkin’ Donuts restaurant franchises to the sale of equipment required to operate the franchises, the federal district court in St. Louis has ruled. However, the court declined to dismiss state tort law counterclaims for promissory estoppel, willful termination, and misrepresentation (Dunkin’ Donuts Franchising LLC v. Sai Food & Hospitality, LLC, April 18. 2013, Fleissig, A.).

According to the complaint, on February 5, 2009, Jayant and Ulka Patel entered into a Store Development Agreement (SDA) with Dunkin’ Donuts to open ten stores in the St. Louis area. On July 31, 2010, the Patels joined with Kamlesh and Jigar Patel to form Sai Food & Hospitality, LLC (SFH), with Jayant and Ulka Patel owning 30 percent of SFH and Kamlesh and Jigar Patel owning a total of 70 percent.

However, in the process of securing a franchise in Washington, Missouri, Jayant and Ulka Patel allegedly submitted documents to Dunkin’ Donuts and the Internal Revenue Service indicating that they each owned 50 percent of SFH, with no mention of Kamlesh and Jigar Patel. Jayant and Ulka Patel also signed on SFH’s behalf in subleasing property in Florissant, Missouri. Franchise agreements between SFH and Dunkin’ Donuts for the Washington and Florissant locations specified that fraud or violation of a law were grounds for default, and that Dunkin’ Donuts could determine the equipment to be used in the stores.

On August 24, 2011, Dunkin’ Donuts sent SFH a notice of default and termination with respect to the two franchise agreements, the sublease, and the SDA. The notice stated that the grounds for termination were fraud and violations of the law committed by falsely representing that only Jayant and Ulka Patel owned SFH when Kamlesh and Jigar Patel actually owned the majority share, and in making the same false statement to the IRS.

On August 25, 2011, Dunkin’ Donuts brought suit against SFH and Jayant and Ulka Patel, alleging that they had breached the franchise agreements, the sublease, and the SDA and had committed trademark infringement, trade dress infringement, and unfair competition by continuing to use Dunkin’ Donuts’ trademarks following termination.

The defendants filed counterclaims alleging that the changes to SFH’s operating agreement and ownership interests were made with the knowledge and approval of Dunkin’ Donuts, and that they did not commit fraud or violate any laws. They asserted counterclaims for wrongful termination of the franchise agreements under Missouri’s Merchandising Practices Act (MMPA); breach of the SDA and the franchise agreements; promissory estoppel; willful termination; and misrepresentations to defendants to change SFH’s business structure, resulting in the terminations.

They also asserted counterclaims for alleged unlawful tying. They alleged that Dunkin’ Donuts exercised market power over the market for the sale of the donut restaurant franchises. Dunkin’ Donuts filed a motion to dismiss the counterclaims.

The court agreed with Dunkin’ Donuts that the antitrust counterclaims were subject to dismissal. The court explained that the party asserting a tying claim "has the burden of defining a relevant market in which the defendant’s power can be assessed." The court observed that court generally reject antitrust claims based on a purported relevant market of the alleged tying of the sale of franchises to the subsequent sale of goods and services for operating the franchise. The court concluded that the defendants had "failed to state antitrust claims that are plausible on their face."

State tort claims. The court declined to dismiss the state tort claims, concluding that the defendants "allege[d] sufficient facts as to the state tort counts to raise a right to relief above the speculative level." Dunkin’ Donuts had contended that the defendants could not recover on a promissory estoppel theory because a valid contract existed between the parties, that they could not pursue a claim of prima facie tort because they had other adequate remedies available to them, and that the defendants had failed to state a claim of misrepresentation because they had not alleged that they relied on false information from Dunkin’ Donuts. The court found that these arguments "challenge[d], to a large extent, the factual basis" for the claims, and were thus "more appropriate in a motion for summary judgment."

The case is No. 4:11CV01484 AGF.

Attorneys: David E. Worthen (Gray and Plant) for Dunkin' Donuts Franchising LLC. Francis X. Duda (Anderson & Gilbert) for Sai Food & Hospitality, LLC.

Companies: Dunkin’ Donuts Franchising LLC; DD IP Holder LLC; Baskin-Robbins Franchising LLC; BR IP Holder LLC; Dunkin’ Brands Group Inc.; Dunkin’ Brands Inc.; Sai Food Hospitality, LLC

Cases: Antitrust FranchisingDistribution MissouriNews