Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mo.: Misrepresenting ownership of corporate franchisee fraudulently induced franchisor to enter agreements, (Jan 6, 2014)

By John W. Arden, J.D., LL.M.

Principals’ knowing misrepresentation of the ownership of their corporate franchisee fraudulently induced Dunkin’ Donuts Franchising to enter franchise agreements, according to the federal district court in St. Louis (Dunkin’ Donuts Franchising LLC v. Sai Food & Hospitality, LLC, December 31, 2013, Fleissig, A.). Thus, termination of the parties’ franchise development agreement was warranted.

On February 5, 2009, Jayant Patel and his wife, Ulka Patel, signed a store development agreement, giving them the exclusive right to open ten Dunkin’ Donut franchises in the St. Louis area, pursuant to a development schedule. The last franchise was scheduled to open in January 2017. Each franchise was to have a 20-year term.

Jayant and Ulka Patel agreed to pay a nonrefundable initial franchise fee of $40,000 for each store—$133,330 upon the execution of the store development agreement and the remainder in installments. They also agreed to sign a unit franchise agreement prior to the construction of each store. The store development agreement provided for a continuing royalty based on a percentage of gross sales; allowed Dunkin’ Donuts to terminate the agreement, without providing an opportunity to cure, if the Patels committed fraud against Dunkin’ Donuts; and required the Patels to obtain written consent from Dunkin’ Donuts before adding or subtracting owners or changing the ownership percentages for a franchise.

In mid-2010, Dunkin’ Donuts offered the Patels the opportunity to open a franchise in Washington, Missouri. On July 31, 2010, the Patels formed Sai Food & Hospitality, LLC to serve as the corporate franchisee of the franchises to be opened under the store development agreement. The ownership percentages were 30 percent for Jayant S. Patel and the Ulkaben Patel Irrevocable Trust; 40 percent for Kamlesh Patel; and 30 percent for Jigar Patel. Dunkin’ Donuts informed Jayant Patel that he would have to remove Kamlesh Patel and Jigar Patel from the entity’s ownership because they were not approved franchisees. Jayant said that he would sign the Washington, Missouri franchise agreement on behalf of Sai Food & Hospitality and drop Kamlesh and Jigar Patel from ownership until they were qualified.

When the Washington franchise agreement was signed, Sai Food & Hospitality paid a franchise fee of $224,000, including $120 for equipment and entered a sublease for franchise premises. The store opened on December 6, 2010.

Jiggar Patel and Kamlesh Patel applied to be franchisees. Dunkin Donuts approved Kamlesh in April 2011. In May 2011, Dunkin’ Donuts began investigating possible underreporting of sales at the Washington franchise. During the investigation, Jayant Patel submitted corporate records showing that Sai Food & Hospitality was owned in 2010 by Jayant Patel (30 percent), Jigar Patel (30 percent), and Kamlesh Patel (40 percent).

That month, Dunkin’ Donuts became aware of a civil forfeiture lawsuit bought by the United States involving $222,000 in confiscated cash and cigarettes, for which Jayant Patel, Jigar Patel, and Sai Enterprises were identified as parties at interest. Dunkin’ Donuts subsequently denied Jigar Patel’s application to become a franchisee for his involvement in the forfeiture action.

The Dunkin’ Donuts investigation of the Washington franchise found that Jayant and Ulka Patel fraudulently induced the franchisor to enter into the franchise agreement by misrepresenting that they were the sole owners of Sai Food & Hospitality. Dunkin’ Donuts decided to terminate the agreements and sent a notice of default and immediate termination of two unit franchise agreements and the store development agreement. The stated cause for termination was fraud in falsely representing that only Jayant and Ulka Patel owned Sai Food & Hospitality.

Dunkin’ Donuts brought an action, claiming that the ownership misrepresentation constituted a breach of contract and that the use of its trademarks constituted trademark infringement, trade dress infringement, and unfair competition. The defendants made counterclaims for wrongful termination under the Missouri Franchise Act, breach of contract, and promissory estoppel. After trial, the district court stated that the defendants had committed fraud in representing that the Jayant and Ulka Pate were the sole owners of Sai Food Hospitality, that this was a material misrepresentation, and that the misrepresentation had fraudulently induced Dunkin Donuts to enter the franchise agreements.

After the parties filed post-trial briefs, the court held as follows:

Breach of contract. Under Massachusetts law, which governed the agreements, the true ownership of the corporate franchisee was a material matter in Dunkin’ Donuts’ decision to enter the agreements. The franchise relationship “was tainted by fraud almost from its very inception,” the court found. Jayant and Ulka Patel’s actions constituted fraud justifying immediate termination under the terms of the franchise agreements.

Trademark and unfair competition. In light of the conclusion that the termination was justified, Dunkin’ Donuts was entitled to the requested injunctive relief, enjoining the defendants from continued use of the franchise trademarks and trade dress.

Missouri Franchise Act. The counterclaim that Dunkin’ Donuts failed to give 90 days’ written notice, in violation of the Missouri Franchise Act, was rejected by the court. The notice requirement was inapplicable “because fraud was the basis for termination of the franchise agreement.”

Promissory estoppel. To prevail on a claim of promissory estoppel under Missouri law, a party must establish a promise made by the defendant; foreseeable, detrimental reliance on the promise; and injustice unless the promise is enforced. The defendants claimed that Dunkin’ Donuts allowed them to continue to operate the Florissant store, during the pendency of the termination litigation, and that they should receive relief from their expenditures in developing that store. However, the defendants failed to submit proper evidence of damages sustained as a result of their detrimental reliance on the franchisor’s allowing them to continue developing the store, the court concluded.

The case is No. 4:11CV01484 AGF.

Attorneys: Eric L. Yaffe (Gray, Plant, Mooty, & Bennett, P.A.) for Dunkin’ Donuts Franchising LLC. and Baskin-Robbins Franchising LLC. Francis X. Duda (Anderson And Gilbert) for SAI Food & Hospitality, LLC

Companies: Dunkin’ Donuts Franchising LLC; Baskin-Robbins Franchising LLC; Sai Food & Hospitality, LLC

Cases: FranchisingDistribution MissouriNews