Cassels Brock represents franchisor Pet Valu in Ontario Court of Appeal decision putting an end to franchisee’s $100 million class action.
Lawyers from Cassels Brock, on behalf of its client Pet Valu Canada Inc., succeeded before the Ontario Court of Appeal in obtaining the final dismissal of a $100 million class action brought against Pet Valu by its former franchisee. The unanimous decision marks the end of over six years of litigation and results in an across-the-board victory by Pet Valu in defence of all of the claims raised by the plaintiff ex-franchisee.
This class action was certified in 2011 with a focus on the issue of whether Pet Valu was contractually obligated to share volume rebates with its franchisees and, if so, whether it breached that duty.
In October 2014, Pet Valu obtained summary judgment dismissing five of the seven certified common issues, dealing primarily with those contractual issues (a summary of the decision can be found here).
The remaining common issues related to (a) whether Pet Valu breached the duty of good faith and fair dealing under section 3 of the Wishart Act by failing to disclose information concerning volume rebates to franchisees (common issue 6) and (b) any damages that would result from this (common issue 7).
In January 2015, the motion judge granted summary judgment in favour of the plaintiff on common issue 6. Pet Valu appealed this decision.
On January 14, 2016, the Ontario Court of Appeal found in favour of Pet Valu on its appeal, and dismissed the action against it.
The Motion Judge Erred by Reading Language Into the Certified Common Issue
The Court of Appeal held that the motion judge’s ruling against Pet Valu effectively “gave judgment on an issue that was never certified” and that doing so was “fundamentally unfair to Pet Valu.”
The certified language of the common issue in question asked, among other things, whether Pet Valu had a duty under common law or section 3 of the Wishart Act (the duty of good faith and fair dealing) to disclose to class members whether Pet Valu or its affiliates received volume rebates from suppliers. The motion judge interpreted the common issue so as to read into it the words “a significant level of” volume rebates.
The Court of Appeal held that the addition of these words was “tantamount to an amendment” of the common issue. Notably, the motion judge recast the common issue after the completion of the summary judgment motion, without advising Pet Valu or affording it the opportunity to make submissions. The Court of Appeal emphasized that parties must have the opportunity to make submissions on a theory of liability, in order to ensure that it is “tested in the crucible of the adversarial process.”
Limitations to the Scope of the Duty of Good Faith and Fair Dealing
The Court held that the information that the motion judge found Pet Valu should have disclosed did not relate to the performance or enforcement of the franchise agreement, which is a requirement under section 3 of the Wishart Act. Rather, it was information that, “if indeed material”, should have been disclosed before the plaintiff became a franchisee. This is different from cases involving deliberate non-disclosure by a franchisor relating to a contractually-provided for renewal right of a franchisee, which, the Court held, “arose squarely within the ‘performance’ of the franchise agreement.”
The Court held that section 3 of the Wishart Act does not include a duty to disclose information necessary for franchisees to verify whether a franchisor is meeting its obligations under a franchise agreement – a “pre-litigation oriented duty of disclosure” – and found that the motion judge erred on that basis.
Further, a franchisor’s failure to include all material facts in a disclosure document does not constitute unfair dealing in the performance of a franchise agreement. The franchisor is required to provide a disclosure document before a prospective franchisee signs a franchise agreement, and the Wishart Act provides specific remedies for a failure to comply with that obligation.
Lastly, there can be no breach of the duty of good faith where an alleged non-disclosure has not adversely affected franchisees. The Court held:
And there was no indication that non-disclosure once the [class members] became franchisees adversely affected them in any way. How, then, can Pet Valu be said to have not dealt fairly or in good faith in the performance of the franchise agreement?
Amendment Motions in a Class Action Require Caution and Restraint
The Court of Appeal also upheld the motion judge’s dismissal of the plaintiff’s motion to amend its statement of claim and add new common issues. At the time the plaintiff brought the motion, Pet Valu was “in a position to obtain complete summary judgment on the common issues as well as a probable cost award.” In the circumstances, allowing the amendment would have caused an injustice to Pet Valu not compensable in costs.
This unanimous decision is a conclusive end to this $100 million class action. Through the evidence produced in its summary judgment motion and considered on the appeal, Pet Valu demonstrated that there was no merit to any of the contractual or bad faith claims made by the plaintiff. The decision also provides procedural and substantive guidance to the class action and franchise law bar on the issues of common issue language and amendments, and clarifies important limits on the scope of the duty of good faith and fair dealing under section 3 of the Wishart Act. It, along with decisions in other successfully-defended class actions against franchisors - such as Quiznos, Tim Hortons and Suncor - demonstrates that, although class actions against franchisors are capable of being certified, it is no easy task for franchisees to obtain judgment on the merits.