In Pet Valu Canada Inc. v. 1381114 Ontario Limited, the Ontario Superior Court of Justice granted Pet Valu's motion for an interim injunction to prevent the operation of a competing business by a former franchisee, its principal, the principal's husband, and their corporate alter ego. The decision confirms that a former franchisee cannot evade its obligations under a non-competition covenant by operating a competing business through non-arm's length third parties.
The decision involved the expiration of a franchise agreement between Pet Valu and the franchisee company, 1381114 Ontario Limited. The franchise agreement contained a non-competition covenant, non-solicitation covenant and other post-termination obligations, which bound the franchisee company and its principal, Robin Martin. Ms. Martin's husband, Mark Fingarson, was not a signatory to the franchise agreement containing the restrictive covenants. Prior to the expiration of the franchise agreement, Mr. Fingarson established a new company, 2347687 Ontario Limited, which then registered the business name Pet Stuff & Supplies. Unbeknownst to Pet Valu, the competing Pet Stuff & Supplies business was opened, and located only 450 metres away from the closest Pet Valu store.
Pet Valu brought a motion for an interim injunction as against the franchisee, Ms. Martin, Mr. Fingarson and the new numbered company. Justice Backhouse granted the motion on August 15, 2013.
A unique aspect of the decision is that Justice Backhouse enforced the non-competition covenant against non-parties to the franchise agreement, i.e., Mr. Fingarson and his new company. Her Honour did so on the basis that Mr. Fingarson had established the new company to "hide Ms. Martin's involvement" in the competing business and "for the purpose of assisting Ms. Martin to compete with [Pet Valu] when she had undertaken not to do so". Justice Backhouse described this as "a transparent effort by all of the defendants to avoid the restrictive covenants". On that basis, Justice Backhouse also ordered the defendants to pay Pet Valu's costs of the motion on a joint and several basis, in the total amount of $21,340.90 (unreported costs endorsement of Justice Backhouse released September 18, 2013).
In the decision, Justice Backhouse specifically acknowledged that a "fundamental aspect of any franchise system is the protection of its method of operation, goodwill, products and services", and noted that Pet Valu had provided "an abundance of evidence" establishing irreparable harm and the balance of convenience, traditional elements of the injunction test.
The decision represents an important authority for protecting the integrity of a franchise system. It confirms that a departing franchisee cannot evade its post-termination obligations simply by purporting to operate a competing business through a non-arm's length third party – such as a spouse or corporate alter ego. It further confirms that equitable relief may be obtained against such third parties, regardless of whether they are signatories to the franchise agreement containing the restrictive covenant(s).
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