Dunkin' Donuts Fights Franchisee's Discrimination Claim

If you walked into one of Walid Elkhatib's Dunkin' Donuts franchises with a hankering for a bacon-filled breakfast sandwich, you'd be out of luck. The Chicago-area franchisee is an Arabic Muslim and refuses to carry pork products in his three stores.

For 18 years Dunkin' Donuts was perfectly content to accommodate Elkhatib's religious beliefs, despite the fact that his contract explicitly said that franchisees must carry Dunkin' Donuts' full product line. In fact the company was so pleased with Elkhatib's service that in 2002 it approached him about moving one of his stores to a more profitable intersection.

Elkhatib quickly jumped at the opportunity. Following Dunkin' Donuts' protocol, he secured a space and sent a letter of intent to sign the lease to the franchisor. Shortly thereafter, he received notice that Dunkin' Donuts would not grant him permission to relocate. At the time the company did not cite a reason.

Three months later Elkhatib received another letter from Dunkin' Donuts, this time from its legal counsel. The letter said that the company was not only refusing his request to relocate, but it would not renew his existing franchise agreements due to his failure to carry pork products.

Elkhatib was frustrated. Dunkin' Donuts had accommodated his beliefs for years. Why were they terminating his contracts now? Elkhatib believed that discrimination based on his Arabic descent was the root of the problem and sued in 2002 alleging racial discrimination. He's asking the court for $500,000 plus attorney's fees.

In July the 7th Circuit ruled Elkhatib's suit can go forward, remanding the case to the lower court for trial.

"This lawsuit is a very good example of an issue that every single franchisor struggles with--consistency," says Amy Cheng, partner at Cheng Cohen, a boutique firm that specializes in franchise law. "Hopefully this case will encourage franchisors to think twice next time they terminate a franchisee's contract."

Keeping Consistent

It was this lack of consistency that hurt Dunkin' Donuts in court. A key piece of evidence in Elkhatib's case is that three other franchisees in the Chicago area don't carry Dunkin' Donuts pork products, but the franchisor took no action against them.

One claimed it had space limitations and could not fit the oven required to cook breakfast sandwiches in its shop. Another was bound by his lease to only sell coffee at his location. The last one didn't carry pork products because the store was located in a predominantly Jewish neighborhood. Regardless of their reasons, by not taking action against them while ending its relationship with Elkhatib, Dunkin' Donuts opened itself up to litigation.

"If you are granting exceptions, the reasons must be clear and consistently applied," says Marcus Chandler, partner at Barnes & Thornburg in Indianapolis. "Once you start making exceptions that are not systemwide, you are always going to open yourself up to discrimination claims."

But not only did Dunkin' Donuts fail to consistently apply its full product line provision across the franchise system, it failed to consistently apply it toward Elkhatib. Back when the company first released its bacon and ham sandwich line in 1984, the company not only allowed Elkhatib to not carry the products, but it went so far as to post a sign in his store that read "Meat Products Not Available." Yet nearly 20 years later, the company suddenly punished him for an action they previously helped facilitate.

"If it's really important to require franchisees to carry a full product line and for whatever reason you don't want to enforce it in a particular instance, you should give that consent in writing and make it clear that under the franchise agreement you're reserving the right to change your mind at any time," says Robert McKinley, partner at Lathrop & Gage.

Rather than granting Elkhatib the exception in the first place, experts agree that Dunkin Donuts could have barred him from becoming a franchisee altogether without running afoul of the law.

"In the employment arena there's this notion of accommodation," Chandler says. "Whether it applies to franchise law is still somewhat unknown. For now you have to decide either there is an exception or there isn't, and if there isn't, you have to stand firm."

Allowing Exceptions

Exceptions occur frequently among restaurant franchises in different geographical regions. For example, McDonald's franchises in Hawaii offer Spam with eggs and rice on their breakfast menus due to regional tastes.

Yet, if a restaurant is willing to grant exceptions that aren't outlined in the franchise agreement, it is important to put these exceptions in writing and charge someone with keeping track of them.

"A franchisor has to put in place a procedure where all management knows where the exceptions are and why there these exceptions exist," Cheng says. "If Dunkin' Donuts just had an Excel spreadsheet that said everybody sells the same products across the country except for these locations and this is why, I suspect this might not have happened."

Also, if a franchisor decides to terminate a franchisee's contract, it should clearly detail the grounds for termination in the standard operating manual--the equivalent of an employee handbook

for franchisees.

"Good employers have employee handbooks," Chandler says. "There's already a dimension to that in franchising. But clearly with this decision there's going to have to be further tightening of the screws on that to make sure franchisors apply policies consistently."

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