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Franchise Law

Franchise Law e-COMMUNIQUÉ - May 2011

Published: 05/12/2011

By Robert Kligman, Julianne Rawson, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Larry M. Weinberg

In This Issue

1. Supreme Court of Canada Denies Leave to Appeal, Upholds Ontario Court of Appeal’s Decision Confirming the Applicability of an Arbitration Provision in a Franchise Agreement
2. Ontario Superior Court of Justice Recognizes that a Franchisor’s Duty of Good Faith Often Involves the Balancing of Competing Interests
3. Ontario Court Refuses to Grant Summary Judgment Against Franchisor Regarding Non-Competition Provision in Franchise Agreement
4. A Canadian Perspective on the U.S. Supreme Court’s Recent Ruling on Class Arbitrations
5. What We’re Up To (Spring 2011 - Summer 2011)

Supreme Court of Canada Denies Leave to Appeal, Upholds Ontario Court of Appeal’s Decision Confirming the Applicability of an Arbitration Provision in a Franchise Agreement

By Julianne Rawson

The Supreme Court of Canada recently dismissed the franchisee plaintiffs’ application for leave to appeal an Ontario Court of Appeal decision upholding the applicability of an arbitration provision in a franchise agreement including where the issue in dispute was whether the franchise agreement itself was valid. The Cassels Brock franchise litigation team were counsel to the successful franchisor in this application.

In Nazarinia Holdings Inc. v. 2049080 Ontario Inc. (Ont.)(Civil) (By Leave), a franchisee, Nazarinia, attempted to bring an action in the Ontario Superior Court of Justice seeking remedies under the Arthur Wishart Act, including rescission and damages against the franchisor. 

The franchisor brought a motion to stay the action on the grounds that the dispute fell squarely within the arbitration clause in the franchise agreement. The motions judge granted the stay of the court proceedings, finding that the arbitration clause was valid within the meaning of Ontario’s Arbitration Act, and the dispute fell within the broad scope of its terms.

Nazarinia appealed this decision to the Court of Appeal, which unanimously rejected the franchisee’s claim that the franchise agreement was void which would render the arbitration clause inoperable. The Court of Appeal’s decision was supportive of the reasoning of the motions judge, particularly his finding that “the arbitration agreement is very broad and a clear indication that the parties intended their disputes, including disputes as to the validity of the Franchise Agreement itself, should be heard by an arbitrator and not by the courts.”

The Supreme Court of Canada rejected the franchisee’s application for leave to appeal the Court of Appeal decision.

This case provides further encouragement for franchisors seeking to rely on arbitration agreements for the purposes of addressing disputes and avoiding litigation with their franchisees, and comes on heels of a similarly helpful decision of the Ontario Court of Appeal in MDG Kingston Inc. v. MDG Computers Canada Inc. (2008), 92 O.R. (3d) 4 (C.A.). The Cassels Brock franchise litigation team were also counsel to the successful franchisor in the MDG Computers case.

Read the JW Car Care decision here.

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Ontario Superior Court of Justice Recognizes that a Franchisor’s Duty of Good Faith Often Involves the Balancing of Competing Interests

By Derek Ronde

In a recent decision of the Ontario Superior Court of Justice, a franchisee whose business had the potential of being impacted by an injunction brought by another franchisee against their franchisor was successful in its motion to be added as a party in respect of the injunction. In allowing this third party franchisee to participate in the injunction, the Court made interesting and helpful pronouncements concerning the scope of the duty of good faith between franchise parties. 

In the case, Paul Sadlon Motors Inc. v. General Motors of Canada Ltd., 2011 ONSC 1603, Sadlon Motors, a franchisee, sought an injunction to prevent General Motors (“GM”), the franchisor, from revising Sadlon Motors’ market area in Barrie, Ontario and from appointing an “additional dealer” to sell Chevrolet vehicles in the Barrie marketplace. The “additional dealer” was Georgian Pontiac Buick GMC Inc. (“Georgian”). Georgian brought a motion to be added as a party defendant to the action, which was supported by GM but resisted by Sadlon Motors.

Justice Perell of the Ontario Superior Court of Justice ruled in favour of Georgian and allowed it to be added as a party. The Court determined that the outcome of Sadlon Motors’ dispute with the franchisor impacted on the fates of both Georgian and Sadlon Motors. The Court found that Georgian’s interests were directly engaged by the litigation between Sadlon Motors and GM, and that its interests in the litigation were different than those of GM, which potentially faced litigation from Georgian if it was unsuccessful in resisting Sadlon Motors’ injunction.  

In commenting on the reasons why Georgian should be added as a party, the Court made interesting comments concerning the scope of the duty of good faith between franchise parties. The Court noted that, “...in the context of a dispute between an alleged franchisee and a franchisor, Sadlon Motors cannot compartmentalize the franchisor’s duties of good faith and fair dealing ignoring the fact that those duties arise in the context of franchised operation, which inherently involves other franchisees. In the case at bar, the franchisees whose interests are directly engaged are both Sadlon Motors and Georgian.”

The language in this decision is helpful for franchisors when decisions regarding the operation of their franchise system are being viewed by some franchisees as being made in bad faith. Such franchisors can find some support in the view that the good faith nature of their decisions must be viewed in the context of the entire franchise system, not just with respect to one particular franchisee’s opinion on the decision.

Read the Sadlon Motors decision here.

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Ontario Court Refuses to Grant Summary Judgment Against Franchisor Regarding Non-Competition Provision in Franchise Agreement

By Derek Ronde

A recent decision of the Ontario Superior Court of Justice demonstrated that non-competition provisions in franchise agreements will be examined carefully by the courts and are not prima facie unenforceable as a restraint on trade even if such provisions have significant geographic scope.

In this case, Invescor Restaurants Inc.  v. 3574423 Canada Inc., 2011 ONSC 1609, the franchisee became involved in litigation with the franchisor, the operator of the “Baton Rouge” restaurant chain, over matters involving the operation of the franchisee’s restaurant franchise. The franchisee then began to look for new restaurant opportunities, and sought to develop a new bar and grill to be called “Redwood Grille”. The franchisee commenced steps to open locations of this new concept in Toronto and Orlando, Florida.

The franchisor commenced an action against the franchisee alleging that the franchisee’s activities in respect of the proposed Redwood Grille in both Toronto and Orlando breached the non-competition covenants in the Franchise Agreement. The franchisee brought a motion for summary judgment against the franchisor, seeking a finding from the court that the non-competition covenant between the parties was void and unenforceable due to a) ambiguity, and b) being a restraint of trade.

Justice Wilton-Siegel of the Ontario Superior Court of Justice denied the franchisee’s motion for summary judgment. The Court found that the franchisee did not demonstrate that the non-competition provision was so ambiguous as to be unenforceable, and determined that this was an issue to be resolved at trial. With respect to the non-competition provision being a restraint of trade, the Court found that the franchisees failed establish that the covenant did not accord with the intention or reasonable expectations of the parties at the time of execution of the franchise agreement. The Court also found that the geographic scope of the non-competition covenant was reasonable in the interests of the parties. The non-competition covenant related to the operation of a restaurant that sold similar products to those sold by the existing franchise, which still allowed the franchisee to operate restaurants. The Court found that the national scope of the covenant was fair given the franchise expansion plans of the franchisor. Further, since the covenant only ran for the term of the franchise agreement, the Court commented that “[s]o long as the franchisee is receiving the benefit of the Franchise Agreement, the franchisee should not be able to undermine the value of the franchise.”

The Court also ruled that there was no public interest in striking down the non-competition covenant, stating that there was a public benefit to upholding franchise agreements: “Precisely because there are numerous restaurants based on differing concepts, it is difficult to establish that it is unreasonable in respect of the public interest to enforce a non-competition covenant designed to protect any particular restaurant concept.  This is not a situation in which the effect of the restrictive covenant is to perpetuate a monopoly contrary to the public interest.  Conversely, in a fully competitive industry such as the restaurant industry which is characterized by limited barriers to entry, there is arguably some public benefit to upholding franchise agreements, both in order to allow a franchisor to enjoy the fruits of its efforts in developing a particular concept and to provide an opportunity to prospective franchisees who consider that an investment in a franchise of an operating chain with a recognized name, décor and menu reduces the franchisee’s investment risk.”

This decision is helpful to franchisors seeking to uphold non-competition provisions within their franchise agreements, as the Ontario courts have shown an intention to thoughtfully and carefully examine these provisions when determining their enforceability.

Read the Invescor decision here.

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A Canadian Perspective on the U.S. Supreme Court’s Recent Ruling on Class Arbitrations

By Robert Kligman, Derek Ronde, Geoffrey B. Shaw

In A.T.&T. Mobility LLC v. Concepcion (“Concepcion”), a recent decision of the United States Supreme Court, a narrow 5-4 majority held that an individual arbitration clause can operate to defeat a class process. The ruling upheld provisions within an arbitration agreement that provided for individual arbitration in the face of an attempt by Concepcion to have the matter resolved by way of a class arbitration.

The case concerned a California standard form contract for use of a cell phone that provided for individual arbitration of the consumer’s claims. The Court found that a general rule in California that disallowed “no class action” clauses in arbitration provisions as unconscionable was “pre-empted” by the Federal Arbitration Act, which reflects a more liberal policy favouring arbitration, and places arbitration agreements on an equal footing with other agreements, meaning they should be enforced according to their terms. The Court made findings that class arbitration may interfere with the fundamental principles of arbitration, as the class proceeding process may increase cost, length, and procedural complexity for plaintiffs. The Court also noted that the Federal Arbitration Act contained a saving clause that permitted agreements to be invalidated by “generally applicable contract defences”, which would likely include unconscionability.

The decision in Concepcion is interesting for Canadians because the Supreme Court of Canada has not yet ruled definitively on the general enforceability of “no class action” provisions in arbitration agreements. The recent Supreme Court of Canada decision in Seidel v. Telus Communications Inc., which is discussed by Geoffrey Shaw in a previous Franchise Law e-Lert here, held that if a no class action clause is to be enforceable, it cannot be connected to an arbitration clause that otherwise is rendered unenforceable through legislation. In other words, where consumer protection legislation (or other legislation) exists that provides a specific right of access to the court, an arbitration clause will not act as a bar to a class action being certified for claims that emanate out of the specific “court access enabling clause”. However, the Court did not address whether such clauses are generally unenforceable on the basis of unconscionability.

Franchisors in Canada should keep an eye on developments in this area as franchise agreements often contain provisions which require individual arbitrations, and therefore the enforceability of these provisions in the face of attempts by franchisees to seek group arbitration continues to be a live issue.

Read the AT&T and Concepcion decision here.

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What We’re Up To (Spring 2011 - Summer 2011)

The lawyers in the Cassels Brock Franchise Law team are looking forward to a busy spring and summer in 2011. Here is a sample of their recent and upcoming activities:

Speaking Engagements:

1. Geoff Shaw co-chaired the Canadian Franchise Association’s annual Legal Day in Toronto, Ontario on March 2, 2011.
    
2. Derek Ronde was a Facilitator at a Roundtable discussion on “Working With Franchisee Associations and Councils” at the CFA annual Legal Day in Toronto, Ontario on March 2, 2011.
    
3. Geoff Shaw spoke on “The Future of Franchising” at the April 2011 CFA annual convention in Niagara Falls.
    
4. Larry Weinberg moderated a panel at the Canadian Restaurant Investment Summit in Toronto, Ontario on April 13 and 14, 2011.
    
5. Geoff Shaw spoke on “Franchise Law and Class Actions” (and co-wrote a paper with Derek Ronde and Jason Beitchman) at the 8th National Symposium on Class Actions in Toronto, Ontario on April 29, 2011.
     
6. Larry Weinberg will be moderating a plenary panel at the International Franchise Association/International Bar Association’s May 17-18, 2011 annual Legal Symposium in Washington, D.C. on the issue of "Vicarious Liability of Franchisors."
    
7. Derek Ronde will be speaking at the Ontario Bar Association Franchise Law Section Dinner in Toronto, Ontario on June 1, 2011 on the topic of “Live and Undecided: Sub-section 6(6) and Section 7 of the Arthur Wishart Act (Franchise Disclosure), 2000.”

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