By Kate Byers, Carly Cohen, Stefanie Holland, Christopher Horkins, Noah Leszcz, Eric Mayzel, Alexandra Murphy, Colin Pendrith, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Stéphane Teasdale, Larry M. Weinberg
In This Issue
Are You Ready for British Columbia’s New Franchise Law? Does Your Canadian Franchise Disclosure Document Need Annual Updating?
Whether it is a new calendar year and/or a new fiscal year, franchisors should now be considering updates to their Canadian franchise disclosure document (FDD). If you plan to offer franchises in any of the six Canadian provinces requiring disclosure, or will have renewals or resales coming up, you need to ensure that your FDD complies with the requirements of each applicable provincial franchise law and that the contents of your FDD are consistently accurate and up-to-date. That includes updating of all prescribed disclosure items (some of which require updating every new calendar year, some on the change of a franchisor’s fiscal year, and others which require more frequent updating), and ensuring the FDD always includes all material facts.
A relatively small amount of effort by counsel and the franchisor can yield a form of FDD that can greatly minimize your risk of a claim based on non-compliance.
While franchisors should frequently turn their minds to updating and maintaining their Canadian FDDs, the start of a new calendar year marks a time when franchisors should begin the process of updating the contents of their franchise documentation and/or ensuring such documentation is compliant with the existing franchise laws.
Provinces that now have a franchise law are: Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island. The province of British Columbia’s franchise law comes into force on February 1, 2017, so it is necessary to ensure that you have prepared disclosure for franchises in that province.
If you would like assistance updating your FDD, please contact a member of our Franchise Law Group.
Introducing Our Newest Partner, Stéphane Teasdale
The Cassels Brock Franchise Law Group is pleased to welcome Stéphane Teasdale as its newest partner. Stéphane is the leading lawyer on franchise law in the Province of Québec, an honour recognized by Chambers Canada, Lexpert, Who’s Who Legal and Best Lawyers in Canada. Stéphane represents a wide variety of clients expanding in Québec and Canada and also assists clients wishing to expand abroad. With the addition of Stéphane to its team, Cassels Brock now offers its clients expertise in Canada’s most important franchise markets.
The Countdown is Over: Ontario’s Healthy Menu Choices Act is in Force
On January 1, 2017, the Healthy Menu Choices Act came into force in Ontario. The Act mandates that food service chains with 20 or more locations in Ontario post caloric content for most food and drink items. We published articles on the Act in November 2016, April 2016, October 2015 and May 2015, discussing the contents, requirements and exemptions under the Act and its accompanying regulations. As we recently noted, the Ontario Ministry of Health and Long Term Care amended and finalized the regulations for the legislation.
The Act applies to regulated food service premises (RFSPs) with 20 or more locations. RFSPs are defined as any food premise where meals or meal portions are prepared for immediate consumption or sold or served in a form that will permit immediate consumption on the premises or elsewhere. The Act is vague on the potential liability of franchisors for non-compliance by their franchisees. So franchisors with more than 20 locations in Ontario should take note.
Licence to Pill: Québec Superior Court Rules On Pharmacist-Franchisee Royalty Issue
In Michel Quesnel v. Le Groupe Jean Coutu (PJC) Inc. (Jean Coutu) and the Ordre des Pharmaciens du Québec, the Superior Court of Québec held that the royalties paid by pharmacist-franchisees to Jean Coutu, a pharmacy franchisor, did not breach the Code of Ethics of Pharmacists in the province.
In Québec, the Code of Ethics of Pharmacists (the Code) strictly forbids pharmacists from sharing profits made on the sale of medication with non-pharmacists. However, certain contractual provisions in the franchise agreements between Jean Coutu and its pharmacist-franchisees stipulate that the franchisees are required to pay royalties based on the revenues of the pharmacy, which includes revenues derived from the sale of medication.
The plaintiff, who had operated several Jean Coutu pharmacies for a number of years, had received several complaints from the Ordre des Pharmaciens du Québec alleging that the payment of royalties to Jean Coutu, a non-pharmacist, represented a violation of the Code. After having unsuccessfully tried to amend the relevant provisions of the franchise agreements with Jean Coutu, the plaintiff pleaded guilty to the complaints in 2008 in order to reduce his sentence and avoid losing his pharmacist’s licence. He then sued Jean Coutu to have those provisions declared invalid and to obtain the reimbursement of the royalties paid. In response, Jean Coutu argued that the contractual provisions were valid and compliant with the law.
The Court held that the royalty provisions contained in the franchise agreements were indeed valid and compliant with the Code because the royalties paid by the plaintiff corresponded to the fair market value of services received from Jean Coutu, which included the right to use the name and trademarks of the well-known brand as well as many other services such as marketing, human resources, and management support services. Furthermore, following recent case law of the Professions Tribunal of the Province of Québec, the Court found that there was nothing to prevent a pharmacist from paying for operational expenses out of the revenues derived from the sale of medication on the condition that the pharmacist preserves his professional independence.
This case should serve to end the long-standing debate in Québec over the payment of royalties by professionals to non-professionals such as franchisors. However, the case also potentially suggests that franchisors should determine the reasonable fair market value of its franchise-related services in order to ensure that the royalty rate is within the limits set out by the Court.
Ontario Court Upholds Franchisee’s Obligation to Pay Percentage Rent
By Derek Ronde
In Mr. Lube Canada Limited Partnership v. 2070778 Ontario Ltd., the Ontario Superior Court of Justice examined whether a franchisor was entitled to charge percentage rent to its franchisee under the terms of renewal of the parties’ franchise agreement. The Court ultimately held that the obligation to pay percentage rent had been properly disclosed and was permissible under the terms of the parties’ contracts, and required the franchisee to pay the amounts owed to the franchisor.
In this case, the parties, Mr. Lube (the franchisor) and 207 (the franchisee) originally entered into a franchise agreement in 2005 in respect of the operation of an automotive maintenance franchise. As part of the arrangement, the parties executed a capital asset purchase agreement wherein Mr. Lube was not permitted to charge 207 “any additional franchise licence fee on account of a renewal” for 20 years. The sublease and the franchise agreement extended to September 2014.
In 2014, the franchise agreement and sublease were up for renewal. Mr. Lube provided a franchise disclosure package, which included a new franchise agreement and sublease. The new agreement and sublease were executed in September 2014. The franchise agreement did not impose a franchise renewal fee in accordance with the capital asset purchase agreement. However, the sublease included the imposition a new rent rate, which included an amount that was 2% of the franchisee’s gross sales (or “percentage rent”).
Subsequent to executing the lease and franchise agreement, the franchisee refused to pay the percentage rent and sought to have the declaration from the court that it was entitled to ignore the provision. In response, Mr. Lube sought to compel the franchisee to pay the amounts owed.
207 attempted to argue that there had been a breach of section 5 of Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act) in that the requirement to pay percentage rent was not disclosed in the franchise disclosure package. The Court dismissed this allegation outright, finding that the Franchise Disclosure Document “clearly disclosed” the requirement for percentage rent.
207 also submitted that the percentage rate was a sort of franchise fee and thus prohibited under the capital asset purchase agreement. The Court, relying on earlier Ontario Court of Appeal jurisprudence, held that “an ongoing payment in the nature of percentage rent is ... not a franchise fee.”
The Court dismissed an allegation that there had been previous representations from Mr. Lube regarding percentage rent, noting that the franchise agreement between the parties had contained an effective entire agreement clause. Lastly, given that the franchisee had executed the sublease without reading the franchise disclosure document or the sublease, the Court held that the franchisee was not permitted to rely on the legal principle of non est factum as a means of escaping its contractual obligations as there was no fundamental misunderstanding between the parties.
The decision is a helpful example of Ontario courts obliging franchisees to stand by their contractual obligations and taking a practical approach to franchisors’ statutory disclosure obligations. Further, the holding that percentage rent is not a franchise fee will likely be a helpful precedent for future franchise litigation in the province.
The End of A Saab Story?: The Ontario Court of Appeal Upholds Lower Court Decision on Jurisdiction Over a Franchise Dispute
In our previous newsletter, we discussed the Ontario Superior Court of Justice’s decision in Stuart Budd & Sons Limited v. IFS Vehicle Distributors ULC (Budd), wherein the Court held that Ontario was an appropriate forum to hear an automotive dealer dispute. (A copy of our discussion can be found here.)
As an update, in late December 2016, the Ontario Court of Appeal upheld this decision, largely relying on the reasons outlined by the motions judge. Subject to any appeal to the Supreme Court of Canada, the Ontario Court of Appeal’s decision is likely the final word on the jurisdiction component of the parties’ dispute.
Ontario Court Examines What Constitutes a Franchise Relationship Under the Wishart Act
By Kate Byers
In Chavdarova v The Staffing Exchange, the Ontario Court of Appeal examined the issue of what constitutes a franchise relationship for the purposes of statutory disclosure obligations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act).
In this case, the appellant, The Staffing Exchange (TSE), appealed the decision by the Ontario Superior Court of Justice granting summary judgment on a statutory rescission claim under the Wishart Act to the plaintiff Chavdarova, a licensee of the defendant, on the ground that TSE was a franchisor pursuant to the Wishart Act.
TSE was a business recruitment company which licensed proprietary software used to connect applicants with employment by virtue of a brokerage licence agreement and a certificate and training agreement. Licensees such as Chavdarova were required to pay a $29,500.00 certification and training fee as a condition to the agreements. The motion judge had agreed with the respondent that this fee constituted a franchise fee.
Partway through the parties’ relationship, TSE sent a ‘notice of default’ indicating that Chavdarova’s conduct was non-compliant with the processes taught during training. It subsequently terminated the agreement. Several months later, Chavdarova purported to rescind the agreement on the basis she was a franchisee and had never received a franchise disclosure document, as required by the Wishart Act.
The Court of Appeal unanimously agreed that the motion judge had correctly found that the parties’ relationship was that of a franchisor and franchisee, and that Chavdarova was therefore entitled to rescind her contract with TSE on the basis of the failure to deliver a disclosure document.
In upholding the motion judge’s decision, the Court of Appeal agreed that the expansive definition of ‘franchise agreement’ under the Wishart Act means that courts should review the substance of the relationship between the parties in order to determine whether they have a franchise relationship, regardless of whether the agreement governing their relationship is characterized as a franchise agreement. In so doing, the Court agreed that so long as the relationship has the following three characteristics, a franchise relationship exists:
(i) Payment of money as a condition of commencing operations, or in the course of operating the business;
The decision reinforces the broad, remedial nature of the Wishart Act, as well as the willingness of courts to look past technical legal arguments relating to the nature of the relationship in favour of a more purposive approach. Companies who license out the use of their proprietary business system and marks should consider whether they might be operating a franchise system in the eyes of the law, and further should examine their obligations to provide disclosure documents in Ontario and other Canadian disclosure jurisdictions.
Court Rejects Plaintiff’s Plan for a Partial Summary Judgment Motion in Franchise Class Proceeding
A recent decision of the Ontario Superior Court of Justice confirms that parties may face an uphill battle when attempting to bifurcate class proceedings by way of partial summary judgment motions.
In this decision, 1291079 Ontario Limited v. Sears Canada Inc., the Court held that the representative plaintiff could not proceed with a motion for partial summary judgment on selected common issues regarding breaches of Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000 (the Wishart Act). The Court held that proceeding with this proposed motion would incur extraneous costs, inefficiencies and the potential for duplicative proceedings and contradictory findings.
The history of the litigation is as follows: previously, in September 2014, the Ontario Superior Court of Justice certified a class proceeding brought by a dealer against Sears Canada in respect of Sears’ Hometown Store Network. A number of common issues were certified, including claims for a) breach of contract, b) unjust enrichment, c) breaches of the Wishart Act duty of good faith, and d) breaches of the disclosure obligations under the Wishart Act.
In February 2015, the parties agreed on a timetable for the hearing of the class proceeding. The parties exchanged documents, and in March 2016, the parties revised the timetable. Neither timetable contemplated a partial summary judgment motion. The timetable called for a common issues trial in September 2017.
In August, 2016, despite the agreed-upon schedule, the plaintiff delivered a notice of motion for partial summary judgment in respect of only the Wishart Act-related common issues. As part of the proposed summary judgment motion, the plaintiff contemplated an order directing individual hearings, inquiries and determinations under the Class Proceedings Act in respect of class members’ disclosure-related claims under the Wishart Act.
Sears Canada opposed the motion, arguing that the entire matter should be allowed to proceed to trial in accordance with the agreed-upon schedule.
The Court reviewed the summary judgment principles from Hryniak v. Mauldin and determined that, in this instance, partial summary judgment would add undue cost, inefficiencies and would run the risk of inconsistent findings of fact.
The Court emphasized the following in rejecting the plaintiff’s motion for summary judgment:
The plaintiff served its notice of motion and motion record for partial summary judgment on August 10, 2016, nearly two years after the Court certified the class proceeding. During that period, the parties had considerable disclosure, attended mediation and incurred significant expenses.
Additionally, the Court viewed the spectre of multiple proceedings as very likely if the parties were to proceed with partial summary judgment; counsel for the plaintiff indicated that the remaining common issues would likely proceed to a common issues trial, regardless of the outcome of the partial summary judgment motion.
The Court commented that if a summary judgment motion had been brought immediately after certification, there might be more justification for it. However, the Court noted that even in these circumstances, it would be difficult, if not impossible, to avoid the problem of two final orders or judgments and two separate appeal routes. Specifically, the Court held: “Instead of advancing the litigation in a proportionate, expeditious and cost-effective way, the bringing of a partial summary judgment motion will do little more than add complexity and cost, and potentially create more than one final order or judgment with different appeal routes.” Such a result would offend the principle of the avoidance of multiplicity of proceedings.
The case serves as a marked warning that late-in-the-day manoeuvring by way of partial summary judgment motions may be rejected by Ontario class action courts if it does not promote the principles of proportionality and efficiency.
Franchisee Ordered to Pay ‘Dough’ to Pizza Franchisor for Outstanding Royalties
By Carly Cohen
In 241 Pizza (2006) Ltd. v Loza, the Ontario Superior Court of Justice granted a franchisor’s summary judgment motion for payment of outstanding royalties and dismissed the franchisee’s claim for equitable set-off.
The plaintiff franchisor, 241 Pizza, entered into a franchise agreement with the defendant corporate franchisee and the individual defendant as guarantor. Under the franchise agreement, the defendants had the right to operate the 241 Pizza franchise for 10 years and were required to make weekly advertising and royalty fees as well as rent payments.
The defendants failed to pay royalties, advertising fees and rent over the course of the franchise agreement. 241 Pizza did not terminate the franchise agreement; rather, the franchisor commenced an action for repayment of the outstanding amounts and moved for summary judgment on these amounts.
The Court considered four issues in granting summary judgment in favour of the franchisor and denying the defendants’ claim to an equitable set-off:
1. Is this a suitable case for summary judgment?
In relying on the Court’s broadened powers to grant summary judgment, the Court found that the case was appropriate for summary judgment. Further, as described below, the Court held that equitable set-off was not available to the defendants and thus the least expensive and most expeditious procedure was to have the counterclaim advanced on a stand-alone basis. The Court also relied on the ‘best foot’ forward principle and assumed that the defendants’ evidence would not improve at trial.
2. Is 241 entitled to the amounts they claim?
The defendants did not dispute the amounts sought by 241 or even suggest that these amounts were not owing.
3. Is the remedy of equitable set-off available?
The Court denied the defendants’ claim for equitable set-off on the basis that the breaches they complained of did not amount to a fundamental breach of the franchise agreement. The alleged breaches included the failure to deal with unauthorized competition; failure to permit turkey pepperoni; use of inferior products; errors in marketing materials and failure to negotiate better lease terms. The complaints were only minor failures and none amounted to the breach of the duty of fair dealing, even cumulatively. Moreover, the defendants put forward no evidence as to the purported damages claimed and simply said the amounts claimed by the franchisor were inappropriate.
4. Should judgment be stayed pending determination of the counterclaim?
The Court refused to stay the judgment pending determination of the counterclaim and rejected the argument that the failure to do so would render the defendants insolvent. The Court found that the test for the granting of a stay was not satisfied, namely the requirement that there be a serious issue to be tried and that there would be irreparable harm to the defendants.
This case provides further support for the view that summary judgment may be an efficient and cost-effective tool for franchisors to enforce their contractual rights against intransigent franchisees.
What We’re Up To (Winter 2016/2017)
(a) What We’ve Done