Canada: Top Ten Canadian Franchise Law Cases And Developments Of 2013

As 2013 comes to an end, the Cassels Brock Franchise Group would like to take this opportunity to highlight the ten most significant franchise law cases and developments of the year.

1. 5 of 10 Canadian Provinces Now Have Franchise Laws

With the Manitoba Franchises Act coming into force on October 1, 2012, there is now franchise legislation in effect in five Canadian provinces – Alberta, Ontario, New Brunswick, Prince Edward Island and Manitoba. If you plan to offer franchises in any of these provinces or currently have franchises in these provinces that require renewal, you need to ensure that your franchise disclosure document ("FDD") complies with legal requirements in these jurisdictions. All of these provinces' legislation include the requirement that franchisors provide an FDD to prospective franchisees at least 14 days prior to the prospective franchisee signing any agreement or paying any consideration in respect of the franchise. Most franchisors now have a single form of Canadian FDD intended for use in all five provinces currently mandating pre-sale disclosure. With some small amount of effort by counsel and franchisor, a franchisor can have a form of FDD that is compliant with all five franchise law provinces.

2. British Columbia Considers Becoming the 6th Province With a Franchise Law

In April 2013, the British Columbia Law Institute ("BCLI") issued a Consultation Paper on a Franchise Act for British Columbia (the "Consultation Paper") for the purpose of making a recommendation to the Government of the Province of British Columbia to enact franchise legislation in that province. BCLI has recommended that British Columbia should enact franchise legislation similar to the legislation already in force in five other Canadian provinces: Alberta, Ontario, New Brunswick, Prince Edward Island and Manitoba. The possibility of a British Columbia franchise law in the next few years is a significant development for franchisors with existing franchisees in the province, or franchisors who intend to develop franchises there. A copy of Cassels Brock's original article on the Consultation Paper can be found here.

3. Cassels Brock Successful in Having Class Action Opt-outs Permitted

In a landmark unanimous franchise class action decision, the Ontario Court of Appeal overturned a lower court decision that had invalidated certain opt out notices delivered in a class proceeding between Pet Valu Canada Inc. and its franchisees. The notices had been invalidated by the Ontario Superior Court of Justice due to allegations of misleading information and unfair pressure by a group of class members who opposed the class action. The Court held that the class members' campaign to encourage other franchisees to opt out of the class action was a proper expression of opinion by these franchisees. The Court confirmed that class members have an "unassailable right to speak out in opposition to [a] class proceeding in an attempt to convince other class members to opt out" in the context of "acceptable intra-class debate". Cassels Brock acted for Pet Valu Canada Inc. in this matter. A copy of the decision can be found here.

4. Ontario Set to Introduce Menu Labelling Laws

In October 2013, the Ontario Government advised that it was going to introduce legislation that requires large chain restaurants to place caloric and other nutritional information on their menus and menu boards. The Bill will be introduced in the winter of 2013/14 after consultations with parents and representatives from the food industry and health-care sector. The consultations will determine which restaurant chains should be subject to the proposed requirement to include caloric information alongside the price of the food offered. The Ontario Government has indicated that the legislation will be introduced to help Ontarians make healthy food choices by mandating nutritional information to create a more transparent food industry. This follows a voluntary program launched in the Province of British Columbia. A copy of Cassels Brock's article on this proposed legislation can be found here.

5. Cassels Brock Successfully Obtains Injunction Against Former Franchisee and Non-Parties

In August 2013, Cassels Brock successfully obtained an injunction to enforce non-competition and non-solicitation covenants in a franchise agreement between Pet Valu and a former Pet Valu franchisee. The decision is unique in that the Court granted the injunction against the former franchisee company and its principal, as well as the principal's husband and the new company he had established to ostensibly operate the competing business. Neither the husband nor his new company were party to the franchise agreement containing the restrictive covenant. However, the Court bound them to the injunction order on the basis that the husband had set up the new company to hide the wife's involvement in the competing business and to assist her to compete against Pet Valu. The Court described such activities as "a transparent effort by all of the defendants to avoid the restrictive covenants." As such, Pet Valu was granted all of the injunctive and additional relief it sought against each of the defendants. A copy of the decision can be found here.

6. Midas Franchisee Class Action Settled; Court Comments on "Developments" in the Law Regarding Fair Dealing Claims

Over four years after the certification of the case as a class proceeding, and over six years after the action was commenced, the Ontario Superior Court of Justice approved a settlement of the class action brought on behalf of Midas franchisees against their franchisor regarding 2003 changes to the Midas franchise system. The Court approved a settlement that provides for the franchisor paying franchisee class members a total of $8,500,000, inclusive of interest, legal fees, disbursements, administration expenses and taxes. In approving the settlement, which was for significantly less than the amount originally claimed by the plaintiff ($75,000,000). In approving the settlement, the Court noted the changing landscape in Canadian franchise litigation, particularly in respect of the recent Tim Hortons decisions where the Ontario Court of Appeal outlined the difficulty of proving bad faith and the lack of fair dealing in respect of franchise system changes. A copy of the approval decision can be found here.

7. Ontario Court of Appeal Upholds Decision on Franchise Right of First Refusal

In 3574423 Canada Inc. v. Baton Rouge Restaurants Inc., the Ontario Court of Appeal upheld the judgment of the Ontario Superior Court of Justice dismissing the action of a franchisee who was seeking damages for the alleged failure of a franchisor to properly and fully provide notification in accordance with the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 when it offered the franchisee the opportunity to acquire an additional franchise. A copy of the decision can be found here.

8. Alberta Court Reminds Franchisors of the Importance of a Properly-Signed Disclosure Certificate

1448244 Alberta Inc. v. Asian Concepts Franchising Corporation, a decision of the Court of Queen's Bench of Alberta, provided a reminder of the importance of technical compliance with the disclosure requirements in Canada, particularly those relating to certificates of full disclosure, and of the consequences of failing to properly comply with those obligations. In this case, the plaintiff franchisee alleged that the defendant franchisor, Asian Concepts Franchising Corporation, had provided a significantly deficient disclosure document, and the franchisee sought to obtain partial summary judgment in the form of a declaration that the disclosure document provided was not "substantially complete" within the meaning of the Alberta Franchises Act ("the Act") and its Regulations, as it sought to rescind its franchise agreement. The Court held that an incomplete certificate prevented the disclosure document from being substantially complete as required by the Act, and granted partial summary judgment. A copy of the decision can be found here.

9. Ontario Court Releases Controversial Decision Regarding the Calculation of Rescission Damages

The Ontario Superior Court of Justice decision in 2189205 Ontario Inc. et al. v. Springdale Pizza Depot Ltd. et al., addressed the issue of whether any net profits of a franchisee could be set off against losses for which the franchisee was to be compensated pursuant to section 6(6) of the Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c. 3. The Court ultimately refused to net out profits against section 6(6) damages. A copy of the decision can be found here and an analysis by Cassels Brock of this decision can be found here.

10. Ontario Court of Appeal Upholds Rejection of Claim that Distributor was a Franchisor's Associate

In Zwaniga v. Johnvince Food Distribution, the Ontario Court of Appeal upheld an Ontario Superior Court of Justice decision that a distributor was not a "franchisor's associate" under the Ontario franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000. The Court of Appeal agreed and held that the distributor was neither a partner nor "franchisor's associate" as it did not exercise the requisite degree of control over the franchisor to be considered an "associate," and agreed that summary judgment in favour of the distributor was appropriate. A copy of the decision can be found here.

On behalf of the Cassels Brock Franchise Group, happy holidays to you and your families.

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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Rebecca Hamovitch
Christopher Horkins
Jonathan Wansbrough
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