The Franchise Memorandum

In Dunkin’ Donuts Franchising LLC v. Oza Brothers, Inc., 2012 U.S. Dist. LEXIS 140595 (E.D. Mich. Sept. 28, 2012), a Michigan federal court granted summary judgment in favor of the franchisors (represented by Gray Plant Mooty) in a case against their former franchisees for breach of contract based on the underreporting of sales, tax fraud, and tax evasion. Oza Brothers owned a Dunkin’ Donuts/Baskin Robbins combination franchise in Michigan. Dunkin’ began an investigation after receiving a tip that Oza Brothers was not reporting sales made to auto dealerships. The investigation also uncovered various inconsistencies in Oza Brothers’ corporate tax returns. Dunkin’ terminated the franchise agreement based on these actions, which were material breaches of the agreement, and brought suit against Oza Brothers to enforce the termination. Oza Brothers filed counterclaims alleging fraud, innocent misrepresentation, breach of contract, promissory estoppel, and defamation. Dunkin’ amended its complaint to bring a claim for breach of contract based on Oza Brothers’ failure to pay rent and brought a motion for a preliminary injunction in order to enjoin its continued use of Dunkin’s trademarks. Both Dunkin’ and Oza Brothers filed cross motions for summary judgment.

In granting Dunkin’s motion for summary judgment, the court found that the franchise agreement allowed Dunkin’ to terminate the agreement in the event that the franchisees intentionally underreported gross sales. The court noted that Oza Brothers’ president gave conflicting testimony regarding whether the sales were reported to Dunkin’, and decided this was evidence of intentional underreporting. The court also found the corporate tax returns showed underreporting of income to the IRS, which constituted a material breach of the franchise agreement warranting termination. In rejecting Oza Brothers’ assertion that no taxing authority had determined that a tax deficiency existed, the court held that Dunkin’ did not have to wait for the franchisees to be indicted before terminating the franchise agreement. The court then granted Dunkin’s motion for a preliminary injunction. In addition, the court dismissed Oza Brothers’ counterclaims because it failed to provide any argument supporting its claims.