Canadian franchise law has always been a matter of juggling two chainsaws of vastly unequal weight. The bigger, older, heavier saw is the time-honoured freedom to contract. The newer, lighter model is franchise law, with its perceived need to balance the unequal power of large franchisors over small franchisees.
One expert in franchise law frames the dilemma simply enough. Are franchisees the “children” of their network, entitled to be saved from all harm by the “parent” company? Now, landmark cases in Quebec and Ontario appear to have answered this question resoundingly — and in absolute conflict.
In Bertico Inc. v Dunkin' Brands Canada Ltd., Justice Daniel Tingley, of the Quebec Superior Court, says it is “an underlying assumption of all franchise agreements that the brand will support a viable commerce.” Nearly simultaneously, in Fairview Donuts Inc. and Brule Foods Ltd. v. TDL Group Corp. and Tim Horton's Inc. Justice GR Strathy of the Ontario Superior Court, says, “There is nothing in the plaintiffs' franchise agreements that entitles them to make a profit on their franchises….”
In the wake of these rulings, leading franchise lawyers are divided on whether Tim Horton's represents a fundamental rebalancing of franchise case law and, indeed, whether the two cases are really at odds.
Franchise law Franchise law in Canada has been a food fight for nearly two decades, with case law shaped to a large degree by battles in the fast-food industry.
It started with the Pizza Pizza case and an $821,495 arbitration award to franchisees in 1994. The franchisor then terminated several dissident licensees and Ontario's provincial government was moved to place controls on franchising through the Arthur Wishart Act of 2000. Since then the franchise wars have slogged on through Timothy's Coffees and Country Style Food Services rulings, recently reaching a crescendo with the Dunkin Donuts and Tim Horton's decisions in 2012.
It's perhaps not surprising that four of those five cases have been seen as victories for franchisees. After all, franchise laws that exist in Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba are classed as “remedial” legislation, aimed at redressing the power imbalance between corporate franchisors and small, entrepreneurial franchisees.
Broadly similar, the five statutes define franchise businesses as any that share a single brand or trade-mark, require an upfront or ongoing franchise fee and involve substantial central control of operations. On this basis, General Motors lawyers recently conceded before a class action proceeding that their client, with its network of automotive dealers, is a franchisor under Ontario law.
Provincial statutes establish three basic legal principles: (1) the franchisor's obligation to disclose all relevant and material facts in a single document prior to signing an agreement; (2) a mutual duty of good faith and fair dealing; and (3) the right of association among franchisees, independent of the franchisor.
The effect of these laws has been to “impose on franchisors a very high standard of performance,” says Larry Weinberg, franchise specialist with Cassels Brock & Blackwell LLP in Toronto and adjunct professor at the University of Western Ontario, where he teaches what has hitherto been the only franchise law course in Canada. Additionally, Weinberg says, “the courts have gone out of their way to give franchisees relief.”
Lawyers on both sides say that, over the years, franchisees have enjoyed the benefit of the doubt before the courts. In Alberta's Hi Hotels decision of 2007, a single missing signature on the franchisor's disclosure document was deemed sufficient to grant relief to the franchisee and unwind the franchise agreement. And, just last year, Justice Tingley's decision sent shockwaves through franchisors across North America when it awarded 21 defunct Dunkin Donuts franchisees $16.4 million, plus costs, for breach of contract and failure of the franchisor to act in good faith.
Now, with the Tim Horton's decision, some observers say they see movement of the legal pendulum more in favour of the brand owner.
“We're certainly seeing some franchisor-friendly decisions,” says Jennifer Dolman, a franchise specialist and litigator with Osler, Hoskin & Harcourt LLP in Toronto, whose clients are primarily corporate franchisors. She says franchisees have “overreached” in a couple of recent class actions and franchisors have won summary dismissals that carry important messages for the franchising business in Canada.
Dolman says she's made five bound copies of the judgment. “It's my good-faith Bible,” she says. Leave to appeal that decision was denied by the Ontario Court of Appeal last December and by the Supreme Court of Canada in May.
Christine Kilby, a litigator on behalf of franchisors with Norton Rose Fulbright in Toronto, says the Tim Horton's decision “gives franchisors permission to run their businesses,” upholds the importance of franchise contract language and shows that “Wishart doesn't stand alone.”
“Franchisors are entitled to tell [franchisees] what to sell and where to get supplies,” Kilby says of the Tim Horton's case. “That's kind of a big deal.”
Tim Horton's Plaintiffs in Tim Horton's sought to certify a $2-billion class action around allegations that system-wide changes to menu and food-production methods imposed by the company were a breach of their franchise agreements, unjustly enriched the company, contravened the Competition Act and breached the duty of good faith and fair dealing in Wishart.
Defendants responded with a motion for summary judgment, arguing that language in Tim Horton's franchise agreements gave them discretion to make system changes, that they had thoroughly communicated their plans and considered franchisee interests and that they had acted in a commercially reasonable fashion.
On February 24, 2012, in a 163-page judgment, Justice Strathy dismissed the plaintiff's case and painstakingly spelled out the reasons for his ruling. Justice Strathy found no evidence of anti-competitive behaviour by the franchisor. He said the Tim Horton's contract clearly delineated the right of the franchisor to make changes and set prices for supplies to franchisees. He added that the franchisor is entitled to insist on uniformity throughout the retail network and he said, “The party's conduct must be considered in the context of and in conjunction with the contract. … It [good faith] is not a stand-alone duty that trumps all other contractual provisions.”
A significant part of the context of the case, Strathy noted more than once, was the fact that the plaintiffs' operations remained profitable despite changes made by the franchisor. “[The plaintiffs'] real complaint is not that they don't make a reasonable profit as Tim Horton's franchisees — but rather that they don't make more profit,” Justice Strathy said.
For Kilby, Justice Strathy's message is summed up very simply. “The franchisee is not your child that you [the franchisor] must protect from every possible harm.” To Weinberg, the Tim Horton's decision means “franchisees can't rewrite the contract through litigation.” Dolman reckons the overall impact of Tim Horton's is to make franchise case law “more balanced.”
Franchisors also won summary dismissal in TA&K Enterprises v. Suncor Energy Products Inc., though Dolman notes it was on “a very narrow issue.” In Suncor, 300 former Sunoco service-station operators in Ontario mounted a class action to oppose their termination after Suncor acquired Petro-Canada Inc., including its huge retail network. The plaintiffs alleged Suncor failed in its disclosure duty when it did not provide a new disclosure document to each retailer prior to completing its most recent franchise agreement with them.
By alleging a failure to disclose, Sunoco franchisees were going for a kill shot. Wishart, and similar laws in the other four provinces, specify that any serious violation of the franchisor's obligation to disclose material facts prior to signing a franchise agreement entitles affected franchisees to be made whole. This includes reimbursement for franchise fees, equipment and inventory costs and professional fees. Finally, and most importantly, it gives the franchisees compensation for any business losses — all provided they act within two years of signing the agreement.
“Disclosure is a get-out-of-jail-free card for the franchisee,” says Kilby. “It's the ultimate undo.” But in Suncor the franchisees' disclosure claim failed.
Justice Paul Perell of the Ontario Superior Court ruled that no disclosure document was required since Suncor franchise agreements worked through a series of one-year renewals not controlled by Wishart. The Ontario Court of Appeal later upheld Justice Perell's ruling. As with Tim Horton's, Dolman says, the Suncor plaintiffs outran the facts and the court rejected their claims. This, she says, contributes to a measure of rebalancing in franchise case law.
Good Faith Many see Tim Horton's as a landmark in terms of its comprehensive treatment of contract and good-faith issues in franchising. But some also say the case was strictly fact-based in its findings and, in that way, no great turning point.
“The court looked at franchisor conduct,” says John Sotos, a Toronto litigator who acts for franchisees with Sotos LLP. Among other things, Sotos is known for his ongoing class action against General Motors, which so far has established that the auto giant is indeed a franchise. Sotos says the court in Tim Horton's found the company was not high-handed or oppressive in its dealings with franchisees, that it had consulted widely with franchisees and that they were profitable. “The court said it would look at good-faith claims in their entire context” and found that there was “no claim in contract, in common law or in good faith,” Sotos says.
Ned Levitt, with Aird & Berlis LLP in Toronto, is generally accorded the title of éminence grise in Canadian franchise practice, having specialized in the area for more than 20 years before Wishart was proclaimed. Like Sotos, he says he sees a gradual maturation of franchise case law, rather than any recent turning point. “If franchisors do the right things … [the courts] are going to rule in favour of the franchisor, and vice versa,” Levitt says.
Profit Levitt notes, however, that there appears to be one area where the Tim Horton's decision may have moved beyond fact-finding toward declaring “black-letter law.” “Profitability was an influencing factor” in the decision, Levitt says, where the court's findings “are coming really, really close to a legal proposition.”
After Tim Horton's, Weinberg says, “profitability is an interesting question.” He says Justice Strathy found that the franchisor basically did everything right, “and by the way, [the franchisees] were successful. Well, what if they weren't successful? Would the court make the same decision if franchisees weren't profitable?”
Levitt adds, however, that in the context of Strathy's ruling, profitability of franchisees is still not a “hall pass” for franchisors. Good contract language, good operations and good communications are still required.
Dolman at Oslers says Tim Horton's “gets the gold star” for contract language as well as overall operations and, thus, becomes the case study in how franchisors can meet legal requirements.
Dunkin Donuts Dunkin Donuts, meanwhile, has come to stand for the opposite proposition, though the decision is now under appeal.
In 2003, 21 Dunkin Donuts franchisees alleged negligence, breach of contract and lack of good-faith dealings in the decade-long collapse of Dunkin Donuts' business in Quebec, as well as in the failures of their own franchise operations. For this they sought $16.4 million in damages. Dunkin Donuts, operating in Quebec under Allied Domecq Retailing International (Canada) Ltd. (ADRIC), counterclaimed that the plaintiffs were poor operators whose own bad practices were the cause of their demise.
Proceedings lasted nine years, including a 71-day trial in which evidence showed that Dunkin Donuts' Quebec network declined from 210 outlets to 13 in the face of competition from Tim Horton's. In his June 2012 ruling, Justice Tingley found the defendant's accusations of poor performance on the part of the plaintiff franchisees “utterly devoid of substance,” noting that the plaintiffs had been leaders of various franchise committees and, in other ways, “exemplary” operators.
In his ruling, Justice Tingley emphasizes that the franchisor is neither “the insurer of the franchisees nor a guarantor of their success.” But he found that Dunkin Donuts had failed to meet its obligations under the franchise agreement, in which it clearly and explicitly “assigned to itself the principal obligation of protecting and enhancing the brand.” He also found that the franchisor had failed in its commitments to pay 50 per cent of the costs of a renovation program aimed at upgrading Dunkin Donuts' image in Quebec.
Damages “When the brand falls out of bed, collapses, so too do those who rely on it.” Tingley says in his judgment. “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. Their losses follow hard upon the heels of ADRIC's failures, as night follows day.” The court awarded damages “to the dollar” of the plaintiff's total claim, plus legal interest and expert witness costs.
Adam Ship, a litigator and franchise specialist with McCarthy Tétrault LLP in Toronto, says that while Dunkin Donuts is a product of Quebec's civil-code system and not binding on Canada's nine common-law provinces, it may very well be influential — and the first lesson is clear. “You really, really need to go through your contracts and clean out the blue skies provisions,” Ship says. “Superfluous verbiage needs to come out [because] it's creating hooks for litigation.”
Beyond that, he says Dunkin Donuts is important in expressing the franchisor's duty to protect the brand, though he calls the decision a “strained interpretation” with “a danger of taking on a life of its own. It's the case that's most in the back of my mind when I'm advising franchisors,” he adds.
Bad Behaviour Levitt, however, says he sees no conflict between Tim Horton's and Dunkin Donuts and no great shift in the legal landscape. “We're still where we've always been,” he says. “We have one ruling either way” and he says Dunkin Donuts only shows that “bad behaviour is going to be punished — on the facts.”
Frédéric Gilbert, of Fasken Martineau DuMoulin LLP in Montreal, is a franchise litigator who acted for the plaintiff's in the Dunkin Donuts case, though he most often represents franchisors. “There's a lot of fuss about this judgment, when really there should not be, because it's not new law,” Gilbert says. Dunkin Donuts says two things, in his view. “Whatever you write in your contract, make sure you can stand behind your contract.” But, more importantly, he says, Dunkin Donuts affirms the previous Quebec Court of Appeal decision in Provigo.
In that case, plaintiff franchisees complained in 1998 that the Quebec supermarket chain had established a wholly owned chain called Heritage that competed directly against its Provigo franchisees. The court found that, despite the lack of any contractual commitment that it would not compete against its own franchisees, an implicit obligation existed to co-operate with franchisees and not undermine them. Ruling in favour of the plaintiffs, the court ordered Provigo to pay $3.5 million.
Implied Obligation While franchisors owe an implied obligation of good faith under Quebec's civil code, Gilbert says, it comes from Provigo, not Dunkin Donuts. While Dunkin Donuts has raised awareness of good-faith obligations, and created considerable concern among franchising companies, he cites various Quebec decisions in favour of franchisors to back his claim that case law is balanced and that franchisors don't have to guarantee the success of their licensees.
Gilbert says franchisor clients are asking him, “‘If I invest in Quebec, is the court leaning in one direction or the other?' I have to say, no.” But some observers emphatically disagree with that.
Taken together, Tim Horton's and Dunkin Donuts are apparently enough to confound the proverbial Philadelphia lawyer. James Goniea, with the Philadelphia office of Wiggin and Dana, says he sees the two decisions as being “diametrically opposed.” And he says they're so compelling that he made them his choices as the two most important cases in North American franchise law in 2012, when he presented to the American Bar Association Forum on Franchising in Los Angeles in early October.
To support his contention that the two cases send mixed messages, Goniea quotes the two opposing sentences cited above from the respective rulings about the duty to ensure a franchise is commercially successful. The limits of the good-faith obligation, Goniea says, are less than clear.
He also suggests the Dunkin Donuts saga contains another important issue that was never raised at trial. Dunkin Donuts, he notes, is an American brand that continues to be successful in the US and elsewhere, while in Quebec it was up against “a uniquely Canadian success story” in Tim Horton's. “Maybe that's something that Dunkin can't compete against (in Canada). If that point is true, you have to question whether the judge correctly decided the case.” The Dunkin Donuts case, he says, may be similar to the inability of video-rental franchises to compete against online movie delivery systems. The rental groups failed because their technological environment changed and not because of any fault of the franchisor or franchisees, Goniea says.
Professionalism One clear impact of the Dunkin Donuts decision has been a quickening of demand for expert legal advice, particularly on the part of franchisors. Gilbert says there were several weeks of “panic mode” among franchisor clients in Montreal last summer before things settled down. And he adds that there's still “an appetite on both sides” to understand the meaning of Dunkin Donuts.
A growing body of case law has created a more sophisticated franchise sector across Canada and a requirement for strict professionalism among those who practise in the area, lawyers say. As evidence, they cite an increasing number of lawsuits arising out of franchise actions, typically launched against lawyers who are not specialized in the area. LawPro, provider of insurance to law firms and lawyers in Ontario, confirms the number and cost of franchise-related claims is increasing.
“There are hundreds of thousands of dollars at stake,” case law is becoming far more “nuanced” and important decisions are being issued regularly, Levitt says. “If you're not keeping up on the case law, you're going to make a mistake.”
In addition to Canadian “dabblers,” he says, he's concerned about US franchisors using American lawyers to set up operations in Canada, without sufficient regard for differences in the legal landscape.
Weinberg says cross-border lawyering has reached the point that the Franchise Law Section of the Ontario Bar Association recently wrote a letter to the American Bar Association, calling attention to the issue. He concedes some may see this as self-serving. But he adds, “I wouldn't dream of doing an American disclosure document.”
While franchise law is not yet established as an officially designated specialty by the Law Society of Upper Canada, Ship calls it a rapidly maturing niche, worthy of academic recognition. Accordingly, he's signed on to teach Canada's second franchise law course at the University of Toronto, starting this fall. “I want people coming out of law school thinking this is an area of practice, because it is,” he says.
Growth The case law, the practice area and its continuing growth all spring directly out of franchise statutes, Levitt says. Though he has toiled in the area since the 1970s, he says, his workload has grown “exponentially” since Wishart was proclaimed in 2000. Before that franchise cases simply fell under common law.
“The word ‘franchise' was really of no consequence until the statutes came to be,” Dolman says. Now, she says, some 85 per cent of her time is devoted to franchise cases and Osler is “very committed to this area.”
She says franchise practices are growing, in part, because the franchise sector of the Canadian economy is expanding. This comes partly from domestic growth and partly from American franchisors facing stagnant markets at home and discovering Canadian statistics on consumer spending and mall traffic.
For American franchise businesses looking at foreign expansion, Weinberg says, Canada is “International Lite.” With the same language, a similar culture and broadly comparable laws, it's been a comfortable first step for many companies.
Such is the growth of franchising in Canada that the Buffalo, NY-based firm of Hodgson Russ has placed Canadian-born and -educated and New York Bar-certified lawyer George Eydt in their Toronto office, primarily to assist Canadian franchisors looking to expand into the US.
“Having an appreciation of Canadian laws allows me to speak to the differences,” Eydt says. While some Canadian franchisors have encountered setbacks in the fiercely competitive market in the United States, he says others have recently made strong starts, including 1-800-Got-Junk, Boston Pizza, Pita Pit — and, after a rocky start, Tim Horton's now has more than 700 US outlets and its profitability there is looking solid.
Gilbert notes that while Quebec now constitutes 24.4 per cent of the Canadian population, it contains 30 per cent of the franchise businesses. He says Fasken Martineau has a growing franchise practice, even in the absence of any franchise statute in Quebec.
Gold One reason for the recent interest of big law firms in the franchise sector is the advent of high-stakes class actions, says Kilby. “Where there's gold, there will be miners,” she says.
In the Tim Horton's decision, Justice Strathy writes, “The CPA [Class Proceedings Act] has been an effective tool to address concerns that individual franchisees are powerless, vulnerable and lack an effective voice.” But Levitt says the initial rash of big class actions in franchising may now be dwindling.
“Class actions have certainly been a major pain … to franchisors,” he acknowledges. But, while several actions have been certified against franchisors, none has yet come to trial and two have been summarily dismissed. He suggests that class actions are only worth launching against big defendants with deep pockets and the large franchisors are now pushing back, as Tim Horton's and Suncor outcomes demonstrate. Dolman adds that protracted pre-trial wrangling in class actions can also be a deterrent for plaintiffs. She says the Quiznos class action was launched in 2008 and certified in 2011, but “they're nowhere near a trial.”
Dolman says the “draconian” consequences of an adverse ruling on disclosure are another significant business driver for law firms representing franchisors. Or, as Kilby sums up the disclosure issue, “The bad news for everybody else is that it's good news for lawyers.”
There are, Dolman says, no equitable defences in disclosure cases. “The court doesn't care what the franchisees did or didn't do” during a franchise negotiation. “The court only cares what the franchisor didn't do,” she says. If the franchisors fail in any way to fully disclose, the case against them is made. But while disclosure damages can be severe — they can also be substantially mitigated. Where the client has clearly failed on disclosure, she says, her focus is on limiting damage claims. Where a failure of disclosure can be shown to be minor in nature, it can sometimes be subject to a 60-day time limit on legal action, rather than two years, and that can spell the end of the entire claim.
Some observers have said that the existence of five sets of disclosure requirements under five provincial statutes is a legal minefield for franchisors — and a goldmine for lawyers. But others disagree. “If you sow enough fear, you sound like an expert,” Levitt says. It would be better to have one statute across the country, he says, but it's very far from the only area where provinces have different laws.
“We don't believe in using scare tactics as a business-development tool,” Sotos says of the debate over separate provincial franchise laws. Franchisors have to produce a little more paper to meet five disclosure laws, but it's nowhere near as byzantine as some have suggested.
Overall, he says, the Canadian franchise sector has matured remarkably under the influence of Wishart and other statutes. Companies have “taken heed of the consequences” of non-compliance and he predicts fewer class actions in future.
Case law has enhanced this maturation effect, but Sotos says he sees no sudden power shift in recent decisions. “All the cases are doing is saying, where there is bad conduct, there is a remedy.”
Franchise rulings
The following are some key decisions in franchise law from the past few years:
1. Bertico Inc. v Dunkin' Brands Canada Ltd., 2012 QCCS 2809.
> Date of Release: June 21, 2012 > Court: Quebec Superior Court
> Justice Tingley awarded 21 defunct Dunkin Donuts franchisees $16.4 million, plus costs, for breach of contract and failure of the franchisor to act in good faith, writing that “an underlying assumption of all franchise agreements that the brand will support a viable commerce.”
2. Fairview Donuts Inc. and Brule Foods Ltd. v. TDL Group Corp. and Tim Horton's Inc., 2012 ONSC 1252.
> Date of Release: February 24, 2012 > Court: Ontario Superior Court of Justice
> Justice Strathy dismissed the plaintiff's case and found no evidence of anti-competitive behaviour by the franchisor, writing that there “is nothing in the plaintiffs' franchise agreements that entitles them to make a profit on their franchises….”
3. TA&K Enterprises v. Suncor Energy Products Inc., 2010 ONSC 7022.
> Date of Release: December 17, 2010 > Court: Ontario Superior Court of Justice
> Justice Paul Perell ruled that no disclosure document was required since Suncor franchise agreements worked through a series of one-year renewals not controlled by the Arthur Wishart Act. The Ontario Court of Appeal later upheld the ruling.
4. Provigo Distribution inc. c. Supermarché A.R.G. inc., [1998] R.J.Q. 47.
> Date of Release: November 28, 1997 > Court: Quebec Court of Appeal
> The court found that, despite the lack of any contractual commitment that it would not compete against its own franchisees, an implicit obligation existed to co-operate with franchisees and not undermine them. Ruling in favour of the plaintiffs, the court ordered Provigo to pay $3.5 million.
Brian Burton is an energy and legal-affairs writer in Calgary.
One expert in franchise law frames the dilemma simply enough. Are franchisees the “children” of their network, entitled to be saved from all harm by the “parent” company? Now, landmark cases in Quebec and Ontario appear to have answered this question resoundingly — and in absolute conflict.
In Bertico Inc. v Dunkin' Brands Canada Ltd., Justice Daniel Tingley, of the Quebec Superior Court, says it is “an underlying assumption of all franchise agreements that the brand will support a viable commerce.” Nearly simultaneously, in Fairview Donuts Inc. and Brule Foods Ltd. v. TDL Group Corp. and Tim Horton's Inc. Justice GR Strathy of the Ontario Superior Court, says, “There is nothing in the plaintiffs' franchise agreements that entitles them to make a profit on their franchises….”
In the wake of these rulings, leading franchise lawyers are divided on whether Tim Horton's represents a fundamental rebalancing of franchise case law and, indeed, whether the two cases are really at odds.
Franchise law Franchise law in Canada has been a food fight for nearly two decades, with case law shaped to a large degree by battles in the fast-food industry.
It started with the Pizza Pizza case and an $821,495 arbitration award to franchisees in 1994. The franchisor then terminated several dissident licensees and Ontario's provincial government was moved to place controls on franchising through the Arthur Wishart Act of 2000. Since then the franchise wars have slogged on through Timothy's Coffees and Country Style Food Services rulings, recently reaching a crescendo with the Dunkin Donuts and Tim Horton's decisions in 2012.
It's perhaps not surprising that four of those five cases have been seen as victories for franchisees. After all, franchise laws that exist in Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba are classed as “remedial” legislation, aimed at redressing the power imbalance between corporate franchisors and small, entrepreneurial franchisees.
Broadly similar, the five statutes define franchise businesses as any that share a single brand or trade-mark, require an upfront or ongoing franchise fee and involve substantial central control of operations. On this basis, General Motors lawyers recently conceded before a class action proceeding that their client, with its network of automotive dealers, is a franchisor under Ontario law.
Provincial statutes establish three basic legal principles: (1) the franchisor's obligation to disclose all relevant and material facts in a single document prior to signing an agreement; (2) a mutual duty of good faith and fair dealing; and (3) the right of association among franchisees, independent of the franchisor.
The effect of these laws has been to “impose on franchisors a very high standard of performance,” says Larry Weinberg, franchise specialist with Cassels Brock & Blackwell LLP in Toronto and adjunct professor at the University of Western Ontario, where he teaches what has hitherto been the only franchise law course in Canada. Additionally, Weinberg says, “the courts have gone out of their way to give franchisees relief.”
Lawyers on both sides say that, over the years, franchisees have enjoyed the benefit of the doubt before the courts. In Alberta's Hi Hotels decision of 2007, a single missing signature on the franchisor's disclosure document was deemed sufficient to grant relief to the franchisee and unwind the franchise agreement. And, just last year, Justice Tingley's decision sent shockwaves through franchisors across North America when it awarded 21 defunct Dunkin Donuts franchisees $16.4 million, plus costs, for breach of contract and failure of the franchisor to act in good faith.
Now, with the Tim Horton's decision, some observers say they see movement of the legal pendulum more in favour of the brand owner.
“We're certainly seeing some franchisor-friendly decisions,” says Jennifer Dolman, a franchise specialist and litigator with Osler, Hoskin & Harcourt LLP in Toronto, whose clients are primarily corporate franchisors. She says franchisees have “overreached” in a couple of recent class actions and franchisors have won summary dismissals that carry important messages for the franchising business in Canada.
Dolman says she's made five bound copies of the judgment. “It's my good-faith Bible,” she says. Leave to appeal that decision was denied by the Ontario Court of Appeal last December and by the Supreme Court of Canada in May.
Christine Kilby, a litigator on behalf of franchisors with Norton Rose Fulbright in Toronto, says the Tim Horton's decision “gives franchisors permission to run their businesses,” upholds the importance of franchise contract language and shows that “Wishart doesn't stand alone.”
“Franchisors are entitled to tell [franchisees] what to sell and where to get supplies,” Kilby says of the Tim Horton's case. “That's kind of a big deal.”
Tim Horton's Plaintiffs in Tim Horton's sought to certify a $2-billion class action around allegations that system-wide changes to menu and food-production methods imposed by the company were a breach of their franchise agreements, unjustly enriched the company, contravened the Competition Act and breached the duty of good faith and fair dealing in Wishart.
Defendants responded with a motion for summary judgment, arguing that language in Tim Horton's franchise agreements gave them discretion to make system changes, that they had thoroughly communicated their plans and considered franchisee interests and that they had acted in a commercially reasonable fashion.
On February 24, 2012, in a 163-page judgment, Justice Strathy dismissed the plaintiff's case and painstakingly spelled out the reasons for his ruling. Justice Strathy found no evidence of anti-competitive behaviour by the franchisor. He said the Tim Horton's contract clearly delineated the right of the franchisor to make changes and set prices for supplies to franchisees. He added that the franchisor is entitled to insist on uniformity throughout the retail network and he said, “The party's conduct must be considered in the context of and in conjunction with the contract. … It [good faith] is not a stand-alone duty that trumps all other contractual provisions.”
A significant part of the context of the case, Strathy noted more than once, was the fact that the plaintiffs' operations remained profitable despite changes made by the franchisor. “[The plaintiffs'] real complaint is not that they don't make a reasonable profit as Tim Horton's franchisees — but rather that they don't make more profit,” Justice Strathy said.
For Kilby, Justice Strathy's message is summed up very simply. “The franchisee is not your child that you [the franchisor] must protect from every possible harm.” To Weinberg, the Tim Horton's decision means “franchisees can't rewrite the contract through litigation.” Dolman reckons the overall impact of Tim Horton's is to make franchise case law “more balanced.”
Franchisors also won summary dismissal in TA&K Enterprises v. Suncor Energy Products Inc., though Dolman notes it was on “a very narrow issue.” In Suncor, 300 former Sunoco service-station operators in Ontario mounted a class action to oppose their termination after Suncor acquired Petro-Canada Inc., including its huge retail network. The plaintiffs alleged Suncor failed in its disclosure duty when it did not provide a new disclosure document to each retailer prior to completing its most recent franchise agreement with them.
By alleging a failure to disclose, Sunoco franchisees were going for a kill shot. Wishart, and similar laws in the other four provinces, specify that any serious violation of the franchisor's obligation to disclose material facts prior to signing a franchise agreement entitles affected franchisees to be made whole. This includes reimbursement for franchise fees, equipment and inventory costs and professional fees. Finally, and most importantly, it gives the franchisees compensation for any business losses — all provided they act within two years of signing the agreement.
“Disclosure is a get-out-of-jail-free card for the franchisee,” says Kilby. “It's the ultimate undo.” But in Suncor the franchisees' disclosure claim failed.
Justice Paul Perell of the Ontario Superior Court ruled that no disclosure document was required since Suncor franchise agreements worked through a series of one-year renewals not controlled by Wishart. The Ontario Court of Appeal later upheld Justice Perell's ruling. As with Tim Horton's, Dolman says, the Suncor plaintiffs outran the facts and the court rejected their claims. This, she says, contributes to a measure of rebalancing in franchise case law.
Good Faith Many see Tim Horton's as a landmark in terms of its comprehensive treatment of contract and good-faith issues in franchising. But some also say the case was strictly fact-based in its findings and, in that way, no great turning point.
“The court looked at franchisor conduct,” says John Sotos, a Toronto litigator who acts for franchisees with Sotos LLP. Among other things, Sotos is known for his ongoing class action against General Motors, which so far has established that the auto giant is indeed a franchise. Sotos says the court in Tim Horton's found the company was not high-handed or oppressive in its dealings with franchisees, that it had consulted widely with franchisees and that they were profitable. “The court said it would look at good-faith claims in their entire context” and found that there was “no claim in contract, in common law or in good faith,” Sotos says.
Ned Levitt, with Aird & Berlis LLP in Toronto, is generally accorded the title of éminence grise in Canadian franchise practice, having specialized in the area for more than 20 years before Wishart was proclaimed. Like Sotos, he says he sees a gradual maturation of franchise case law, rather than any recent turning point. “If franchisors do the right things … [the courts] are going to rule in favour of the franchisor, and vice versa,” Levitt says.
Profit Levitt notes, however, that there appears to be one area where the Tim Horton's decision may have moved beyond fact-finding toward declaring “black-letter law.” “Profitability was an influencing factor” in the decision, Levitt says, where the court's findings “are coming really, really close to a legal proposition.”
After Tim Horton's, Weinberg says, “profitability is an interesting question.” He says Justice Strathy found that the franchisor basically did everything right, “and by the way, [the franchisees] were successful. Well, what if they weren't successful? Would the court make the same decision if franchisees weren't profitable?”
Levitt adds, however, that in the context of Strathy's ruling, profitability of franchisees is still not a “hall pass” for franchisors. Good contract language, good operations and good communications are still required.
Dolman at Oslers says Tim Horton's “gets the gold star” for contract language as well as overall operations and, thus, becomes the case study in how franchisors can meet legal requirements.
Dunkin Donuts Dunkin Donuts, meanwhile, has come to stand for the opposite proposition, though the decision is now under appeal.
In 2003, 21 Dunkin Donuts franchisees alleged negligence, breach of contract and lack of good-faith dealings in the decade-long collapse of Dunkin Donuts' business in Quebec, as well as in the failures of their own franchise operations. For this they sought $16.4 million in damages. Dunkin Donuts, operating in Quebec under Allied Domecq Retailing International (Canada) Ltd. (ADRIC), counterclaimed that the plaintiffs were poor operators whose own bad practices were the cause of their demise.
Proceedings lasted nine years, including a 71-day trial in which evidence showed that Dunkin Donuts' Quebec network declined from 210 outlets to 13 in the face of competition from Tim Horton's. In his June 2012 ruling, Justice Tingley found the defendant's accusations of poor performance on the part of the plaintiff franchisees “utterly devoid of substance,” noting that the plaintiffs had been leaders of various franchise committees and, in other ways, “exemplary” operators.
In his ruling, Justice Tingley emphasizes that the franchisor is neither “the insurer of the franchisees nor a guarantor of their success.” But he found that Dunkin Donuts had failed to meet its obligations under the franchise agreement, in which it clearly and explicitly “assigned to itself the principal obligation of protecting and enhancing the brand.” He also found that the franchisor had failed in its commitments to pay 50 per cent of the costs of a renovation program aimed at upgrading Dunkin Donuts' image in Quebec.
Damages “When the brand falls out of bed, collapses, so too do those who rely on it.” Tingley says in his judgment. “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. Their losses follow hard upon the heels of ADRIC's failures, as night follows day.” The court awarded damages “to the dollar” of the plaintiff's total claim, plus legal interest and expert witness costs.
Adam Ship, a litigator and franchise specialist with McCarthy Tétrault LLP in Toronto, says that while Dunkin Donuts is a product of Quebec's civil-code system and not binding on Canada's nine common-law provinces, it may very well be influential — and the first lesson is clear. “You really, really need to go through your contracts and clean out the blue skies provisions,” Ship says. “Superfluous verbiage needs to come out [because] it's creating hooks for litigation.”
Beyond that, he says Dunkin Donuts is important in expressing the franchisor's duty to protect the brand, though he calls the decision a “strained interpretation” with “a danger of taking on a life of its own. It's the case that's most in the back of my mind when I'm advising franchisors,” he adds.
Bad Behaviour Levitt, however, says he sees no conflict between Tim Horton's and Dunkin Donuts and no great shift in the legal landscape. “We're still where we've always been,” he says. “We have one ruling either way” and he says Dunkin Donuts only shows that “bad behaviour is going to be punished — on the facts.”
Frédéric Gilbert, of Fasken Martineau DuMoulin LLP in Montreal, is a franchise litigator who acted for the plaintiff's in the Dunkin Donuts case, though he most often represents franchisors. “There's a lot of fuss about this judgment, when really there should not be, because it's not new law,” Gilbert says. Dunkin Donuts says two things, in his view. “Whatever you write in your contract, make sure you can stand behind your contract.” But, more importantly, he says, Dunkin Donuts affirms the previous Quebec Court of Appeal decision in Provigo.
In that case, plaintiff franchisees complained in 1998 that the Quebec supermarket chain had established a wholly owned chain called Heritage that competed directly against its Provigo franchisees. The court found that, despite the lack of any contractual commitment that it would not compete against its own franchisees, an implicit obligation existed to co-operate with franchisees and not undermine them. Ruling in favour of the plaintiffs, the court ordered Provigo to pay $3.5 million.
Implied Obligation While franchisors owe an implied obligation of good faith under Quebec's civil code, Gilbert says, it comes from Provigo, not Dunkin Donuts. While Dunkin Donuts has raised awareness of good-faith obligations, and created considerable concern among franchising companies, he cites various Quebec decisions in favour of franchisors to back his claim that case law is balanced and that franchisors don't have to guarantee the success of their licensees.
Gilbert says franchisor clients are asking him, “‘If I invest in Quebec, is the court leaning in one direction or the other?' I have to say, no.” But some observers emphatically disagree with that.
Taken together, Tim Horton's and Dunkin Donuts are apparently enough to confound the proverbial Philadelphia lawyer. James Goniea, with the Philadelphia office of Wiggin and Dana, says he sees the two decisions as being “diametrically opposed.” And he says they're so compelling that he made them his choices as the two most important cases in North American franchise law in 2012, when he presented to the American Bar Association Forum on Franchising in Los Angeles in early October.
To support his contention that the two cases send mixed messages, Goniea quotes the two opposing sentences cited above from the respective rulings about the duty to ensure a franchise is commercially successful. The limits of the good-faith obligation, Goniea says, are less than clear.
He also suggests the Dunkin Donuts saga contains another important issue that was never raised at trial. Dunkin Donuts, he notes, is an American brand that continues to be successful in the US and elsewhere, while in Quebec it was up against “a uniquely Canadian success story” in Tim Horton's. “Maybe that's something that Dunkin can't compete against (in Canada). If that point is true, you have to question whether the judge correctly decided the case.” The Dunkin Donuts case, he says, may be similar to the inability of video-rental franchises to compete against online movie delivery systems. The rental groups failed because their technological environment changed and not because of any fault of the franchisor or franchisees, Goniea says.
Professionalism One clear impact of the Dunkin Donuts decision has been a quickening of demand for expert legal advice, particularly on the part of franchisors. Gilbert says there were several weeks of “panic mode” among franchisor clients in Montreal last summer before things settled down. And he adds that there's still “an appetite on both sides” to understand the meaning of Dunkin Donuts.
A growing body of case law has created a more sophisticated franchise sector across Canada and a requirement for strict professionalism among those who practise in the area, lawyers say. As evidence, they cite an increasing number of lawsuits arising out of franchise actions, typically launched against lawyers who are not specialized in the area. LawPro, provider of insurance to law firms and lawyers in Ontario, confirms the number and cost of franchise-related claims is increasing.
“There are hundreds of thousands of dollars at stake,” case law is becoming far more “nuanced” and important decisions are being issued regularly, Levitt says. “If you're not keeping up on the case law, you're going to make a mistake.”
In addition to Canadian “dabblers,” he says, he's concerned about US franchisors using American lawyers to set up operations in Canada, without sufficient regard for differences in the legal landscape.
Weinberg says cross-border lawyering has reached the point that the Franchise Law Section of the Ontario Bar Association recently wrote a letter to the American Bar Association, calling attention to the issue. He concedes some may see this as self-serving. But he adds, “I wouldn't dream of doing an American disclosure document.”
While franchise law is not yet established as an officially designated specialty by the Law Society of Upper Canada, Ship calls it a rapidly maturing niche, worthy of academic recognition. Accordingly, he's signed on to teach Canada's second franchise law course at the University of Toronto, starting this fall. “I want people coming out of law school thinking this is an area of practice, because it is,” he says.
Growth The case law, the practice area and its continuing growth all spring directly out of franchise statutes, Levitt says. Though he has toiled in the area since the 1970s, he says, his workload has grown “exponentially” since Wishart was proclaimed in 2000. Before that franchise cases simply fell under common law.
“The word ‘franchise' was really of no consequence until the statutes came to be,” Dolman says. Now, she says, some 85 per cent of her time is devoted to franchise cases and Osler is “very committed to this area.”
She says franchise practices are growing, in part, because the franchise sector of the Canadian economy is expanding. This comes partly from domestic growth and partly from American franchisors facing stagnant markets at home and discovering Canadian statistics on consumer spending and mall traffic.
For American franchise businesses looking at foreign expansion, Weinberg says, Canada is “International Lite.” With the same language, a similar culture and broadly comparable laws, it's been a comfortable first step for many companies.
Such is the growth of franchising in Canada that the Buffalo, NY-based firm of Hodgson Russ has placed Canadian-born and -educated and New York Bar-certified lawyer George Eydt in their Toronto office, primarily to assist Canadian franchisors looking to expand into the US.
“Having an appreciation of Canadian laws allows me to speak to the differences,” Eydt says. While some Canadian franchisors have encountered setbacks in the fiercely competitive market in the United States, he says others have recently made strong starts, including 1-800-Got-Junk, Boston Pizza, Pita Pit — and, after a rocky start, Tim Horton's now has more than 700 US outlets and its profitability there is looking solid.
Gilbert notes that while Quebec now constitutes 24.4 per cent of the Canadian population, it contains 30 per cent of the franchise businesses. He says Fasken Martineau has a growing franchise practice, even in the absence of any franchise statute in Quebec.
Gold One reason for the recent interest of big law firms in the franchise sector is the advent of high-stakes class actions, says Kilby. “Where there's gold, there will be miners,” she says.
In the Tim Horton's decision, Justice Strathy writes, “The CPA [Class Proceedings Act] has been an effective tool to address concerns that individual franchisees are powerless, vulnerable and lack an effective voice.” But Levitt says the initial rash of big class actions in franchising may now be dwindling.
“Class actions have certainly been a major pain … to franchisors,” he acknowledges. But, while several actions have been certified against franchisors, none has yet come to trial and two have been summarily dismissed. He suggests that class actions are only worth launching against big defendants with deep pockets and the large franchisors are now pushing back, as Tim Horton's and Suncor outcomes demonstrate. Dolman adds that protracted pre-trial wrangling in class actions can also be a deterrent for plaintiffs. She says the Quiznos class action was launched in 2008 and certified in 2011, but “they're nowhere near a trial.”
Dolman says the “draconian” consequences of an adverse ruling on disclosure are another significant business driver for law firms representing franchisors. Or, as Kilby sums up the disclosure issue, “The bad news for everybody else is that it's good news for lawyers.”
There are, Dolman says, no equitable defences in disclosure cases. “The court doesn't care what the franchisees did or didn't do” during a franchise negotiation. “The court only cares what the franchisor didn't do,” she says. If the franchisors fail in any way to fully disclose, the case against them is made. But while disclosure damages can be severe — they can also be substantially mitigated. Where the client has clearly failed on disclosure, she says, her focus is on limiting damage claims. Where a failure of disclosure can be shown to be minor in nature, it can sometimes be subject to a 60-day time limit on legal action, rather than two years, and that can spell the end of the entire claim.
Some observers have said that the existence of five sets of disclosure requirements under five provincial statutes is a legal minefield for franchisors — and a goldmine for lawyers. But others disagree. “If you sow enough fear, you sound like an expert,” Levitt says. It would be better to have one statute across the country, he says, but it's very far from the only area where provinces have different laws.
“We don't believe in using scare tactics as a business-development tool,” Sotos says of the debate over separate provincial franchise laws. Franchisors have to produce a little more paper to meet five disclosure laws, but it's nowhere near as byzantine as some have suggested.
Overall, he says, the Canadian franchise sector has matured remarkably under the influence of Wishart and other statutes. Companies have “taken heed of the consequences” of non-compliance and he predicts fewer class actions in future.
Case law has enhanced this maturation effect, but Sotos says he sees no sudden power shift in recent decisions. “All the cases are doing is saying, where there is bad conduct, there is a remedy.”
Franchise rulings
The following are some key decisions in franchise law from the past few years:
1. Bertico Inc. v Dunkin' Brands Canada Ltd., 2012 QCCS 2809.
> Date of Release: June 21, 2012 > Court: Quebec Superior Court
> Justice Tingley awarded 21 defunct Dunkin Donuts franchisees $16.4 million, plus costs, for breach of contract and failure of the franchisor to act in good faith, writing that “an underlying assumption of all franchise agreements that the brand will support a viable commerce.”
2. Fairview Donuts Inc. and Brule Foods Ltd. v. TDL Group Corp. and Tim Horton's Inc., 2012 ONSC 1252.
> Date of Release: February 24, 2012 > Court: Ontario Superior Court of Justice
> Justice Strathy dismissed the plaintiff's case and found no evidence of anti-competitive behaviour by the franchisor, writing that there “is nothing in the plaintiffs' franchise agreements that entitles them to make a profit on their franchises….”
3. TA&K Enterprises v. Suncor Energy Products Inc., 2010 ONSC 7022.
> Date of Release: December 17, 2010 > Court: Ontario Superior Court of Justice
> Justice Paul Perell ruled that no disclosure document was required since Suncor franchise agreements worked through a series of one-year renewals not controlled by the Arthur Wishart Act. The Ontario Court of Appeal later upheld the ruling.
4. Provigo Distribution inc. c. Supermarché A.R.G. inc., [1998] R.J.Q. 47.
> Date of Release: November 28, 1997 > Court: Quebec Court of Appeal
> The court found that, despite the lack of any contractual commitment that it would not compete against its own franchisees, an implicit obligation existed to co-operate with franchisees and not undermine them. Ruling in favour of the plaintiffs, the court ordered Provigo to pay $3.5 million.
Brian Burton is an energy and legal-affairs writer in Calgary.
