The Franchise Memorandum

In Dunkin’ Donuts Franchised Restaurants LLC, et al. v. Strategic Venture Group, Inc., et al., 2010 LEXIS 119417 (D. N.J. Nov. 10, 2010), a case handled by Gray Plant Mooty attorneys, the U.S. District Court for the District of New Jersey entered a declaratory judgment finding that Dunkin’ Donuts had good cause under the New Jersey Franchise Practices Act to terminate the defendants’ franchise agreements for failing to “obey all laws” in connection with the operation of the franchises.

Dunkin’ terminated the defendants’ franchise agreements based on their failure to comply with payroll tax laws, in violation of the “obey all laws” clause of the franchise agreements. The court ruled that the “obey all laws” clause authorized Dunkin’ to terminate without the ability to cure if it had “proof” that the franchisees had violated the law. At trial, Dunkin’ proved that the defendants failed to properly classify as wages payments made on behalf of their employees for things such as rent, travel, car payments, day care expenses, and tuition. Based on the evidence, the court held that the defendants violated the tax laws and failed to pay taxes owed, including payroll taxes, by improperly classifying the expenses. The court also determined that the acts were not inadvertent or isolated mistakes but were part of a calculated effort to disguise the true nature of the payments. Accordingly, the defendants’ noncompliance with tax laws was a material and terminable breach of the franchise agreements’ obey all laws clauses. Furthermore, the violations constituted “good cause” for termination under the New Jersey Franchise Practices Act, which defines “good cause” as the failure to substantially comply with the terms of the franchise agreements.