L. Michael Hankes  |  ATTORNEY AT LAW
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Meineke's Duty to Deliver the Meineke System

This article is one of a series of articles about the Meineke System that the MDA Board of Directors has asked its legal counsel, L. Michael Hankes, to write. Mr. Hankes was lead counsel for the team of Meineke Dealers that negotiated the Meineke FTA in 1999-2000.

Much has changed in the Meineke Corporate office since August, 2012. In the period between August 7, 2012 and October 7, 2013 Meineke released almost every single employee who was employed prior to the December, 2011 acquisition of Driven Brands by Harvest Partners. Moreover, when Meineke Corporate officials were asked during the October 8, 2013 Town Hall session in Boca Raton who remained at Meineke with knowledge of the automotive aftermarket, the response directed the audience to vendors and the Meineke Dealers themselves.

It is an understatement to say that competition in the automotive aftermarket has increased significantly in recent years. The Meineke FTA requires Meineke to deliver to the Meineke Dealers its “System.” However, Meineke’s wholesale firing of its employees and corporate staff may have been so severe that it is incapable of delivery to its franchisees of the contractually required “System.” Meineke itself acknowledged the importance of the “system” when it responded on January 24, 2013 to Town Hall question number 17 which was presented at the October 2, 2012 Town Hall session in New Orleans:

Q17. What exactly do our royalties pay for, and what should we expect in return in terms of support and assistance?

A17. Your royalties pay for brand awareness and a proven business system. These two elements, if properly implemented, generate a market for your business when you choose to exit the system. Your royalties pay for a strong management team whose focus is to make each center more profitable, the brand more revered and sought after, and the system more streamlined and – again, more profitable in a constantly changing environments. Under new leadership, you will be involved in establishing the new strategic direction implementing improved business system and reviewing marketing initiatives.

(Emphasis added).

A number of Dealers, including the one who asked the question at the October 8, 2013 Town Hall have raised concerns that Meineke Corporate's collective knowledge of the industry for which they are supposed to deliver a competitive business “System” is so severely limited that Meineke Corporate is incapable of doing so.

It certainly appears that senior corporate officials are being overworked because Meineke has not retained enough staff to perform the necessary functions of running an automotive aftermarket franchise system.

An interesting Canadian case affecting the Dunkin Donuts franchise system underscores these issues. In that case, the Superior Court for the District of Montreal entered a $16.4 million judgment against Dunkin’ Donuts for failing to take effective measures to protect Dunkin’ Donuts franchisees against the competing Tim Hortons donut chain. Bertico, Inc. v. Dunkin Brands Canada Ltd., [2012] QJ No. 4996 (S.C.). The following excerpt from the 2012 edition of Annual Franchise and Distribution Law Developments is instructive:

The Dunkin’ Donuts brand had a long history in Quebec extending over half a century. As late as the mid-1990s, Dunkin’ Donuts was still the leader in the Quebec fast food coffee and donut market, both by total sales and number of stores. However, in 1996 Quebec franchisees alerted Dunkin’ Donuts to what became known as the “Tim Hortons phenomenon.” Tim Hortons was a growing and successful Canadian-based fast food coffee and donut chain that directly competed with Dunkin’ Donuts stores. By early 2000, the Quebec franchisees were complaining about the “gradual crumbling” of the Dunkin’ Donuts image in Quebec and were demanding that Dunkin’ Donuts develop an action plan to maintain “its leadership position in the market.” Dunkin’ Donuts proposed a incentive program requiring a large capital investment that encouraged Quebec franchisees to remodel their stores. The program never got off the ground and a few Quebec franchisees agreed to incur the remodeling costs. From the period 1995 to 2005, virtually all Quebec franchisees experienced stagnant sales, despite inflation over the decade aggregating approximately 21%, and a growing fast food market. During this period, Tim Hortons captured the lions’ share of growth in the coffee/donut fast food market and more than 200 Dunkin’ Donuts stores in Quebec using the Dunkin’ Donuts System closed their doors.

The Quebec franchisees sued Dunkin’ Donuts, alleging that it had breached its franchise agreement with them. Specifically, the Quebec franchisees alleged that in its franchise agreements Dunkin’ Donuts promised to protect and enhance both its reputation and the “demand for the products of the Dunkin’ Donuts System.” The Quebec franchisees alleged that the collapse of the Dunkin’ Donuts brand in Quebec resulted from Dunkin’ Donuts’ failure to take decisive action to combat the “Tim Hortons Phenomenon.” After a 71-day trial, the court agreed that Dunkin’ Donuts was liable to the Quebec franchisees for civil damages associated with the failure of their Dunkin’ Donuts stores. Specifically, the court found that:

[Dunkin’ Donuts] has assigned to itself the principal obligation of protecting and enhancing its brand. It failed to do so, thereby breaching the most important obligation it had assumed in its contracts. It must accept the consequences of such a failure. As noted above, Franchisees cannot succeed where the System has failed. After sustaining several years of stagnant sales, narrowing profit margins and then losses, the Franchisees have all had to close their stores. There losses follow hard upon the heels of [Dunkin’ Donuts’] failures as night follows day. This particular breach … was a failure over a period of a decade (1995 to 2005) to protect the brand brought by a multiplicity of acts and omissions occurring during the period. Brand protection is an ongoing, continuing and ‘successive’ obligation.

Dunkin’ Donuts primary defense to the breach of contract allegations of the Quebec franchisees was that the franchises failed because the Quebec franchisees were poor operators. The court found this defense to be “utterly devoid of substance.”

In calculating damages arising from Dunkin’ Donuts’ breach of contract, the court held that:

Lost profits flowing from lost sales in a growing market caused by a franchisor that had failed to protect its brand and the loss of investments made to participate in such market fall readily into the category of damages that is an “immediate and direct consequence of the debtor’s default.” Moreover, they were foreseeable at the time the Franchise Agreements were signed by the parties. An underlying assumption of all franchise agreements is that the brand will support a viable commerce.

Having concluded that Dunkin’ Donuts had breached its franchise agreements with the Quebec franchises, the court granted the Quebec franchisees lost profits for the years 2000 to 2005 and lost investment (representing the diminished value of their franchises) in the aggregate amount of $16,407,143 CAD.

To be sure, this Dunkin’ Donuts case caused a stir in the world of franchising. If one were to look at the performance of Harvest Partners and the new entity called Meineke Car Care Centers LLC over the course of the past two years, they would not get high marks.

While Meineke’s senior management team has many years of experience in franchising, the hamburger industry is a universe apart from the automotive aftermarket. A hamburger restaurant can run rather simply and efficiently from an operations standpoint, utilizing high school age and/or retirement age employees. It is not unusual in the hamburger world to see multi-unit operators who can successfully operate scores and even hundreds of restaurants.

People need to eat far more frequently than their cars need to be serviced. It is not logical to expect that an automotive franchise system can establish as many outlets for servicing cars as there are franchised food restaurants. Moreover, people eat in their kitchen, they eat in their living rooms, they eat in their bedrooms, but they only need to have their vehicles serviced periodically. Expanding an automotive repair franchise system is far different from increasing the number of units selling burgers and shakes. Nonetheless, Meineke Corporate’s approach to profitability in the automotive repair industry appears to mirror that of a corporate entity eager to get ahead in the distinct food industry.

Consider the debacle involving the PITCH advertising agency and the significant monies that were spent by Meineke on an advertising entity that was unfamiliar with the automotive aftermarket and could not deliver the promised performance. It seems that Meineke is intent on trying to find quick and easy ways to increase the number of Meineke Centers and increase Meineke Corporate’s revenues. The operation of a Meineke Center requires not only the hiring and management of skilled personnel, but is also subject to complex demographic and distribution factors. A Meineke Dealer who owns two centers in the same market may be servicing two completely different populations driving different types of vehicles within that same market.

Moreover, Meineke has so stripped its support staff that Meineke may not be capable of delivering the System, even if its senior management would be able to delineate what are the components of that System. As Meineke Dealers are painfully aware, there is a serious issue with the availability of advertising for the entire first quarter of 2014. Perhaps that was because Meineke discharged the person responsible for the placement of that advertising without having hired a replacement. As the active members of the MDA are well aware, Meineke received very poor marks from the MDA members who responded to the MDA’s January, 2014 survey on Meineke’s advertising performance.

Now, Meineke has purchased the Merlin 200,000 Mile Car Care service chain which is concentrated in Northern Illinois. Some Meineke Dealers in the Chicago market suddenly have a competitor owned by Driven Brands less than one mile away. To make matters worse, Danny Rivera, Meineke’s Chief Information Officer, has been appointed President of Merlin. Apparently, Meineke and Driven Brands were so eager to expand that they failed to consider the impact on existing Meineke Dealers in Northern Illinois. Perhaps even worse, they completely failed to recognize the conflict of interest represented by the appointment of Danny Rivera as Merlin’s President, which is expressly forbidden by Section 11.7 of the Meineke FTA. And so it goes…

This article is intended for informational purposes only and is not to be relied upon as legal advice, as individual facts and circumstances may vary.