Canada: Ontario Court Examines Franchisee/franchisor Buyback Transactions After Certification Of A Class Action

The intersection between the Arthur Wishart Act (Franchise Disclosure), 2000 (AWA) and the Class Proceedings Act, 1992(CPA) was recently considered by Justice Strathy in 1250264 Ontario Inc. v. Pet Valu Canada Inc. on a motion brought by the defendant franchisor Pet Valu Canada Inc. (Pet Valu).  The motion raised the question about the limits on the contractual relationship between a franchisor and a franchisee in the middle of a certified class action.  Earlier this year, certification of a narrow set of issues in the class action was granted based on allegations that Pet Valu has a duty to share rebates it receives from suppliers with its franchisees.

Eight of the franchisee class members notified Pet Valu that they wanted to leave the business and Pet Valu offered to buy back their businesses on the condition that the franchisees sign a release of the claims made in the class action.  Pet Valu asked the court for a declaration that such a release and any past or future release would be valid and binding on the class members.   At the time of this motion the terms of the certification order had not yet been finalized and notice of certification was deferred.

Background

The issue with respect to the contractual relationship between franchisor and franchisee in the context of the class action arose from several existing and pending "Buyback Transactions"—where Pet Valu repurchases the assets of the franchise from the franchisee.  Franchisees enter into Buyback Transactions for a number of reasons including the inability to find a third party purchaser or the desire for a quick exit from the franchise.

Under the terms of the franchise agreements, franchisees are permitted to sell their franchises but Pet Valu is under no obligation to approve a sale to a third party or to enter into a Buyback Transaction.  However, when Pet Valu decides to enter into a Buyback Transaction it requires a release from the franchisee to ensure that it is not subject to legal claims after the completion of the transaction.  The Buyback Transaction documentation in the transactions at issue included an agreement of purchase and sale of the assets of the franchisee and a release of all claims, including all claims made in the class action. 

On the motion, Pet Valu asked the court for a declaration that would operate both retrospectively and prospectively to affirm the validity of any releases given by franchisees in the context of the Buyback Transactions in the past and during the class proceeding.  Specifically, Pet Valu sought:

  1. a declaration that the releases entered into by class member franchisees as part of transactions wherein Pet Valu purchases the assets of the franchisees are valid and enforceable, including such releases that have been entered into prior to the date of the motion and such releases that may be entered into subsequent to the date of the motion; and
  2. a declaration that the releases entered into with class member franchisees during the notice period, and releases entered into with class member franchisees subsequent to the expiry of the notice period in respect of class member franchisees who do not opt out of the class proceeding, are valid and enforceable.

The Parties' Positions

Pet Valu argued that because it has no legal obligation to enter into a Buyback Transaction there was ample consideration for both the transaction and the release and that the consideration must be regarded as applicable to all claims including the entitlement to share in the class action.  Pet Valu also argued that because the franchisees had the opportunity to receive independent legal advice, had full disclosure concerning the class proceeding and had the opportunity to seek legal advice from class counsel, they should not be restricted from entering into a commercial transaction and release of their rights in the class action if they wished to do so. 

Pet Valu adopted the position that settlement with individual class members is permissible and argued that s. 12 of the C.P.A. and s. 97 of the Courts of Justice Act confer jurisdiction on the court to make a declaratory order of the enforceability of the releases against class members.

In response, the plaintiff's argued that the court did not have jurisdiction to grant the relief, and, even if it had jurisdiction, that the court should decline to make a declaratory order. The plaintiffs relied on the decision of Berry v. Pulley for the proposition that a class member that elects not to opt out of a class proceeding cannot proceed to negotiate an individual settlement. In that case, Justice Perell, concerned that individual settlements would erode the size of the class, held that it is the representative plaintiff that is tasked with responding to settlement offers and that individual class members cannot circumvent the representative plaintiff by individually entering into settlement agreements.

Discussion

Justice Strathy noted that both the AWA and the CPA have, as one of their purposes, the protection of the vulnerable and commented that "the experiences of the franchisees who are being offered Buyback Transactions illustrate that many of them are, in fact, a vulnerable group in the middle of a vulnerable group – they want to get out, cannot find a buyer, and their only hope is a Buyback Transaction."

Based on the record before the court and assuming the court had jurisdiction, His Honour dismissed the motion and declined to grant the declaratory relief sought by Pet Valu.  While the Court distinguished the case from Berry v. Pulley (on the grounds that the offer was to settle all commercial claims, not just the class action claims, that the offer in this case was only made to a fraction of the class, and, there was no evidence that the offers were made to erode the size of the class) he nevertheless determined the motion.

Justice Strathy commented that class proceedings should be flexible enough to accommodate a mutual decision to end a franchisor and franchisee relationship and left open the possibility that a franchisee, with notice to the representative plaintiff and defendant, could apply to the court to extend the opt-out period, however, His Honour declined to grant the relief sought by Pet Valu because:

  1. The individual class members affected by the Buyback Transactions were not before the court and there was no evidence that they had received notice of this motion or that they were aware that their rights may be affected by the motion;
  2. As the class members had not yet been notified of their opt-out rights, the eight franchisees whose Buyback Transactions were in issue, would be entitled to opt out of the class action in due course and should they decide to do so, the issue on the motion would become moot;
  3. Even if some of the franchisees elected not to opt-out of the class action, it was possible that the validity of the releases in the Buyback Transactions could be determined as an individual issue; and
  4. The evidentiary record was insufficient to make a declaration extending to future transactions.

In reaching his decision, Justice Strathy emphasized that declaratory relief is discretionary and that disclosure of material facts may impact the exercise of such discretion.  His Honour commented that one of the issues the court may want to consider on a future motion to extend the opt-out period is whether the franchisee has full knowledge of its rights, including what it is giving up by signing the release in the context of a class action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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