Canada: Ontario Court Strikes Several Franchisee Claims In Shoppers Drug Mart Class Proceeding

In a recent decision of the Ontario Superior Court of Justice, Spina v. Shoppers Drug Mart Inc. 2012 ONSC 5563 ("Spina"), the Honourable Mr. Justice Perell heard a motion for certification of a franchise class action as well as a cross-motion by the defendant under Rule 21 to strike various elements of the plaintiffs' amended statement of claim.  Although the decision deals with a multitude of legal issues concerning the striking of pleadings and certification, it provides helpful guidance to franchisors in respect of typical claims that are brought by franchisees in rebates-related claims. Specifically, Justice Perell held that Ontario courts will take a serious look at boilerplate claims concerning unjust enrichment, breach of fiduciary duty and breach of the duty of good faith to see if such claims pass muster in light of what the parties' franchise agreement actually reads regarding the parties' rights concerning rebates.

The plaintiff franchisees, who were drug store pharmacists, brought a claim that asserted breach of contract claims against the franchisor, Shoppers Drug Mart Inc. ("Shoppers"), arguing that Shoppers had breached the terms of the "Associate Agreements" with their franchisees in various ways.  In addition, the plaintiffs alleged that Shoppers breached the common law duty of good faith and statutory duties of fair dealing under section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000 ("AWA").  The plaintiffs made further claims for breach of fiduciary duties and unjust enrichment. Finally, the plaintiffs alleged that Shoppers had interfered with their right to associate, as prescribed by section 4 of the AWA.

These causes of action made by the franchisees were grounded in various factual allegations, which included: failure by Shoppers to remit professional allowances; failure by Shoppers to share the advantages of bulk purchasing with associates; Shoppers' collection of advertising contribution fees in excess of a 2% cap prescribed by the Associate Agreements; making unauthorized changes to the "Optimum Program"; imposing a budgeting system that was biased against associates; imposing inventory practices that were not reasonable; and failing to provide associates with sufficient disclosure.

Although some of the plaintiffs' claims were permitted to proceed, Justice Perell struck several of them, and the court's reasoning regarding the decision to strike these claims demonstrates that many causes of action must be examined in light of the parties' contractual obligations in determining whether or not they can proceed.

(a) The unjust enrichment claims

Justice Perell determined that it was plain and obvious that the plaintiffs' unjust enrichment claim relating to volume rebates would not succeed.  Although the plaintiffs could establish an economic loss and corresponding enrichment to Shoppers, the franchise agreement provided a juristic reason for the enrichment.  Justice Perell's decision on this point illustrates that when franchisors are faced with an unjust enrichment claim, the governing agreement may provide a full stop to the cause of action.  This highlights the need to conduct a thorough contractual review at the pleadings stage of litigation.

In contrast, Justice Perell held that Shoppers' failure to remit professional allowances might support an unjust enrichment claim because the associate agreement did not provide such juristic reason.  However, he further held that this claim (as well as the plaintiffs' claims for cost recovery fees and inventory practices) was "redundant" or "superfluous" of the claim for breach of contract. 

(b) The breach of fiduciary duty claims

Justice Perell declined to decide the issue of whether Shoppers was in a fiduciary relationship with its franchisees, but intimated that the Associate Agreement might preclude such a finding.  More particularly, Justice Perell referred to the clause in the Associate Agreement which states: "This Agreement shall not be construed so as to constitute the Associate and/or Pharmacist as a partner, employee, joint venture, agent or representative of the Company for any purpose whatsoever, or to create any such relationship or any trust or fiduciary relationship".  Whether dispositive or not, as a practice point for franchisors, including such a clause in franchise agreements will often be prudent.

Rather than focussing on the existence of a fiduciary relationship, Justice Perell considered whether Shoppers had breached a fiduciary duty.  Quoting Justice Keenan in Varcoe v. Sterling (1992), 7 O.R. (3d) 204, Justice Perell noted that "not every wrong done by a fiduciary is a breach of that duty.  It must be a wrong which is a betrayal of that trust component of the relationship".   Ultimately, Justice Perell determined that it was not an "act of disloyalty, breach of confidence or misappropriation of the Associates' property for Shoppers to keep the rebates for itself".  Therefore, even if a fiduciary relationship existed, there was no breach of a fiduciary duty. 

Justice Perell determined that the plaintiffs could still potentially rely on the common law duty of good faith and Shoppers' contractual duties.  Accordingly the claim for breach of fiduciary duty was struck.

(c) The breach of the duty of good faith claims

Justice Perell struck out the plaintiffs' claim for breach of the duty of good faith as it related to volume rebates.  Justice Perell noted that "it is a general principle that good faith is not intended to replace that contract with another or to amend the contract by altering the express terms of the franchise contract".  This comment will be welcomed by franchisors facing attempts by franchisees to dress-up or elevate contractual obligations in the guise of good faith.

Justice Perell further explained that the plaintiffs' claims concerning volume rebates mirrored a claim for beach of an express term of the contract, but as a matter of interpretation, the Associates Agreement authorized Shoppers' conduct.  Accordingly, Justice Perell determined that the claim had to fail. 

(d) The interference with association claims

Lastly, the plaintiffs sought injunctive relief preventing Shoppers from interfering with an independent franchise association.  Justice Perell noted that the plaintiffs "fear but have not actually suffered interference with their right to associate".  In this respect, Justice Perell clarified that franchisees are not entitled to injunctive relief when interference is merely anticipated, but has not actually occurred.

Justice Perell determined that it was plain and obvious that the claim was not a genuine claim, but was an attempt by the plaintiffs to add colour to the amended statement of claim.  However, Justice Perell granted the plaintiffs leave to amend their claim in the event that interference should later occur.

Conclusion

Justice Perell's decision in Spina illustrates the risk involved in pleading a multitude of causes of action, particularly where those claims overlap with breach of contract claims or are being attempted despite clear contractual language that undermines them. It is reassuring to franchisors that Ontario courts will carefully scrutinize franchise claims on motions to strike, as such motions can significantly pare down the claims a franchisor is forced to defend and can simplify matters before the court. This allows the parties to franchise litigation to better focus on the real issues in the lawsuit and to understand the case to be met.

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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