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Consumer & Retail Advisor

Retailers, It’s Time to Get Your French Touch

Posted in French, Legislation
Anne-Elisabeth SimardVeronique Wattiez LaroseMartin Thiboutot

As recently announced on November 3, 2016 by the Quebec Minister of Culture and Communications and Minister responsible for the Protection and Promotion of the French Language, Mr. Luc Fortin, the amendments to the Regulation respecting the language of commerce and business of the Charter of the French language (the “Regulation”) were published yesterday in the Gazette Officielle du Québec.

Pursuant to these amendments, a trade mark displayed outside a building only in a language other than French will now request a sufficient presence of French. The presence of French refers to a sign or poster with (i) a generic term or a description of the products or services concerned, (ii) a slogan or (iii) any other term or indication, favouring the display of information pertaining to the products or services to the benefit of consumers or persons frequenting the site.

As a result, any person having as part of its public signage a trade-mark that is only in English will have to add one of the three above-mentioned elements to comply with the new rules. The amendments will enter into force on November 24, 2016. Existing signs and posters will need to be brought into conformity with the Regulation within 3 years after the entry into force of the Regulation.

In order to assist companies with the transition, the Office québécois de la langue française (the “OQLF”) published a guide (only available in French) that will be distributed to all companies in Quebec. Here is a summary of the key points of these guidelines:

The Regulation is applicable to public signage:

  • Displayed outside a building or premises located in a shopping center or in a commercial area;
  • Located inside a building or premises if it is intended to be seen from the outside; and
  • Located on an independent structure, including a totem-style structure.

The Regulation does not apply to:

  • A totem-style structure with more than two trade-marks;
  • An independent structure located near a building or premises when the trade-mark is displayed outside of the building or the premises;
  • A trade-mark displayed on a vehicle or a display stand; and
  • A trade-mark on a product, a catalog, a brochure or a pamphlet.

Do not constitute sufficient presence of French:

  • Opening hours, phone numbers and postal and electronic addresses;
  • Numbers and percentages;
  • Definite articles (“la”, “le”, “les”), indefinite articles (“un”, “une, “des”) and partitive article (“du”, “de”, “d’”, “de la”, “de l’a”, “des”); and
  • A term that is only readable within a distance of 1 meter except if it is also the case for the trade-mark.

To ensure a sufficient presence of French, the terms and messages must be:

  • Always readable and the visibility of the terms and messages must be similar;
  • Readable in the same field of vision as the trade-mark; and
  • Always well-lit if this is also the case for the trade-mark.

These amendments result from a 45-day consultation period that followed the publication of the draft amendment to the Regulation on May 4, 2016. Please see our previous blog for a deeper analysis of the modifications.

Impending BC Franchise Legislation: Are You Ready?

Posted in Franchising
Jordanna CytrynbaumHelen FotinosAdam ShipLindsay Burgess

Effective February 1, 2017 BC will become the 6th Canadian province to enact franchise legislation.

On October 18, 2016, McCarthy Tétrault hosted a seminar that featured highlights of the new BC Franchises Act and Franchises Regulation and issues arising therefrom, including:

  • An overview of the framework of the BC Franchises Act and Franchises Regulation;
  • practice points for preparing compliant national franchise disclosure documents; and
  • other important legal developments to be mindful of, including restrictions on obtaining releases of claims under the act and jurisdictional issues

The presentation can be accessed here.

Feel free to direct any questions to our presenters: Helen Fotinos, Adam Ship or Jordanna Cytrynbaum.

It’s Official! BC Releases Long Awaited BC Franchises Act Regulation!

Posted in Franchising, Legislation
Helen FotinosAdam ShipCatherine M. SamuelJordanna CytrynbaumLindsay Burgess

Further to our previous posts, available here and here, the much anticipated BC Franchises Regulation (the “Regulation”) was released today, and it was proclaimed that the Franchises Act, SBC 2015, c 35 will come into force effective February 1, 2017. The Regulation and order of the Lieutenant Governor in Council can be accessed here. BC is now the sixth province to enact uniform franchise legislation.

The Regulations specify the information to be included in a disclosure document, including information related to: risk warnings, financial statements, and other prescribed information related to the franchisor and the franchise. By regulating a previously unregulated area of law, this new legislation will change the way franchisors do business.

To learn more about your obligations under BC’s new franchise legislation and how to ensure your business is complying, stay tuned for future posts which will examine the new law in greater detail, and register for our upcoming seminar on the topic scheduled for October 18th, 2016, which will be available live in Vancouver and via webinar for your convenience.

To confirm your attendance to this seminar please register here.

Not So Fast! Ontario Court Finds Franchise Grant “Premature”

Posted in Franchising, Litigation
Helen FotinosAdam ShipSam Presvelos

In the recent decision of Raibex Canada Ltd. v. ASWR Franchising Corp., the Ontario Superior Court of Justice allowed a franchisee to rescind its franchise agreement on the basis that it signed the agreement at a time when critical information regarding the costs to develop the franchise and leasing obligations had not yet come into existence.  As a result, the Court found that the franchise grant was “premature” and the disclosure document provided to the franchisee deficient.

At issue in this case, was the franchisor’s failure to provide details relating to a sublease and franchise development costs, as required by the Arthur Wishart Act (“AWA”).  The plaintiffs, Raibex Canada Ltd. (“Raibex”), approached the defendant franchisor, ASWR Franchising Corp. (“ASWR”), to discuss franchising an AllStar Wings restaurant. The plaintiffs had a maximum budget of $400,000 for the franchise. The franchisor provided them with a franchise information package. The package explained that restaurants could either be constructed anew, or converted from pre-existing restaurants. The costs associated with each approach were not detailed, although the franchisor advertised that renovating existing restaurants could cut development costs by one third to one half.

The plaintiffs agreed to pursue the franchise. Accordingly, a franchise disclosure document was provided, as required by the AWA. However, the document failed to disclose two points, which the Court found to be material.

First, it did not provide a cost estimate to convert a pre-existing restaurant. It only mentioned that costs could be “significantly less” in comparison to building from scratch, which it estimated would cost between $800,000 to $1,000,000.

Second, the disclosure document failed to specify the location of the proposed restaurant. In fact, the restaurant’s location remained uncertain even at the time the franchise agreement was signed (a common practice in the franchising industry).  Accordingly, no head lease was included with the disclosure document or the subsequent Franchise Agreement signed by the plaintiffs. The Court found these omission were ‘egregious” given that the franchisor’s disclosure document acknowledged costs would “vary dramatically from location to location.”

After signing the franchise agreement, and still without a location, the franchisor entered into a head lease for an existing restaurant. The terms of the head lease were onerous, requiring the franchisee to commit $120,000 in prepaid rent. The franchisee was not aware of this commitment at the time disclosure was made, nor when it signed the franchise agreement. A month before the restaurant’s completion, the franchisor informed the franchisee that development costs exceeded $1,000,000 ­­­- well beyond the development range originally represented to the franchisee and outside the development range represented in the disclosure document. Additionally, the plaintiffs were billed $120,000 for the prepaid rent and a security deposit for the premises which they were, similarly, not previously made aware of. The plaintiffs refused to pay and served a Notice of Recession under the AWA.

The plaintiffs successfully argued that the franchise agreement should have specified a location as well as a draft sublease, that included the head lease, as it involved significant cost consequences. The Court agreed. According to Justice Matheson, “when key information is missing, a properly informed decision is not possible.” As a result, the Court found ASWR’s disclosure document to be incomplete and premature. The fact a lease agreement could not exist without first choosing a location, ignores the statutory requirement for disclosure, said the Court.

There are a number of takeaways from this decision, including the following:

  • The Court’s decision makes it risky for franchisors to grant franchises in Ontario before a location is determined, as the disclosure document may be missing material facts regarding development costs and leasing obligations that would otherwise be disclosable.  In other words, according to the Court, the grant of the franchise may be “premature” if the disclosure document cannot yet be populated with critical material facts.
  • Standard disclaimer language contained in disclosure documents may not protect the franchisor. In Raibex, the Court criticized, and dismissed, qualifications and disclaimers such as “costs are highly site-specific and therefore vary dramatically from location to location” as being sufficient. According to Justice Matheson, these disclaimers were “no answer to the [franchisor’s] statutory disclosure obligations [under the AWA].”

Subject to an appeal, this case may impact and alter the current disclosure practices of many franchisors. We will monitor this case with interest and report any future developments in this case, including how it is interpreted and applied in future decisions. To learn more about the Raibex case and how to better manage your potential risks, please contact us

Doing Business in Canada 2016: Read the latest updates to our popular guide

Posted in Acquisitions, Competition, Cross-Border Transactions

McT_DBiC_Cover_3D_SEPT2016

McCarthy Tétrault’s Doing Business in Canada provides a user-friendly overview of central aspects of the Canadian political and legal systems that are most likely to affect new and established business in Canada. The newest edition reflects legislative changes including:

  • Changes to the Competition Act and Investment Act Canada;
  • and an updated Mergers and Acquisitions chapter including new rules on takeover bids in Canada.

General guidance is included throughout the publication on a broad range of discussions. We also recommend that you seek the advice of one of our lawyers for any specific legal aspects of your proposed investment or activity.

Download the updated guide

Additional Protection from Suppliers in Patent Infringement Actions

Posted in Intellectual Property, Retailing
Steven Tanner

Overview

Large retailers have been sued for patent infringement in recent years in relation to distributing a supplier’s products that allegedly infringe a third party’s intellectual property.  Though suppliers can sometimes be properly named as defendants in such actions, more often patentees have named only retailers.  More generally, any Canadian business selling products made in whole or in part outside of Canada could itself be subject to a claim for patent infringement.

In these situations it is important for such businesses to have strong indemnities in place to ensure that they will be properly compensated for losses arising as a result of their defence of the lawsuit.  However, even the strongest indemnity provides only a contractual basis to sue the supplier of a product that is the subject of a patent infringement case against the retailer selling the product, in the event that the supplier of the infringing product refuses to compensate covered losses.  In addition, in a subsequent action for breach of contract the supplier of the infringing product may attempt to relitigate the underlying issues relating to the validity of the patent and its infringement, complicating matters and making enforcement of the indemnity more expensive.

This blog post discusses an infrequently used provision of the Federal Courts Rules that may provide additional protection to a retailer in this situation.  Similarly, the options described in this blog may be used by suppliers who are sued directly to ensure that any indemnity to their benefit is respected.

Rule 194(b): Additional Protection

A defendant may commence a third party claim in the Federal Court “against a person who is not a party to the action, who the defendant claims is or may be liable to the defendant for all or part of the plaintiff’s claim.”[1]  Despite this, third party claims against suppliers are uncommon because the Federal Court has only statutory jurisdiction and matters of contract law are typically within the jurisdiction of the Superior Court.[2]  Similarly, third party claims by suppliers against indemnifiers are rare.

Interestingly, a decision of the Federal Court of Appeal earlier this year held that the Federal Court had jurisdiction to determine whether a patent infringement action had been settled by contract, and if so to enforce the settlement.[3]  The Federal Court of Appeal explained that “the Federal Court has jurisdiction when the contract law issue before the Court is part and parcel of a matter over which the Federal Court has statutory jurisdiction, there is federal law essential to the determination of the matter, and that federal law is valid under the constitutional division of powers.” [4]  There is no recent judicial consideration of this issue that would confirm extending the application of this decision to allow a third party claim to recover losses from a supplier in an ordinary situation.  Older cases suggest that the Federal Court does not have jurisdiction to grant that relief.[5]

All of which brings us to Rule 194(b) which gives the Federal Court the power to add another person to the action, who the defendant claims “should be bound by the determination of an issue between the plaintiff and the defendant.”[6]  Retailers may be able to rely on Rule 194(b) to add a supplier as a party, not to seek monetary relief – but rather for the purpose of making an order binding the supplier to the result of the action.  Suppliers may similarly benefit when sued directly by patentees.

From the retailer’s perspective, the potential benefits of such an order are threefold:

  1. The supplier could not later challenge the Federal Court’s order relating to validity or infringement of the patent, which would greatly simply any future proceedings.
  2. Bringing the supplier into the action removes the retailer as the only face of the litigation.  Where public relations are potentially significant, naming the supplier potentially directs attention in a more appropriate direction.
  3. The threat of such a motion could provide leverage necessary to bring the supplier to the table to negotiate more favorable indemnification terms.

From the supplier’s perspective, the potential benefits of such an order are the same but would apply to any other company that has provided the supplier with an indemnity covering the allegedly infringing activity.

Rule 194(b) is meant to avoid a multiplicity of proceedings and inconsistent findings. The threshold for granting leave under Rule 194(b) is arguably low.  The defendant must simply demonstrate that adding the third party would “not be superfluous or without useful purpose”. Further, A third party’s presence does not have to be “necessary” in order for it to be added under Rule 194(b). There must simply be a “good reason” for adding the third party.[7]

Conclusion

An indemnity agreement provides standard protection for retailers or potentially suppliers when defending against a patent infringement action. Rule 194(b) of the Federal Courts Rules can serve as a useful tool for strengthening that protection.

[1]      Rule 193 of the Federal Courts Rules

[2]      For a recent application of this principle, see Harry Sargeant III v Al-Saleh, 2014 FCA 302 at para. 95

[3]      Apotex Inc. v. Allergan, Inc., 2016 FCA 155 at paras. 11-15

[4]      Apotex Inc. v. Allergan, Inc., 2016 FCA 155 at para. 13

[5]      See, for example, McNamara Construction et al v The Queen, [1977] 2 SCR 654 at page 658

[6]      Rule 194(b)

[7]      Merck & Co. v. Nu-Pharm Inc., 2001 FCT 790 at paras 44-49.

Alberta Extends Mature Franchisor Exemption to 2021

Posted in Consumer Protection, Franchising, Legislation, Retailing
Helen FotinosAdam ShipCatherine M. SamuelJordanna Cytrynbaum

The Alberta government has recently decided to extend its Mature Franchisor Exemption under the Franchises Act until its next review in 2021. Under the Franchises Act Exemption Regulation, large franchisors meeting certain financial thresholds and holding a high level of operational experience are exempt from including financial statements as part of their Franchise Disclosure Document to prospective franchisees. In extending this exemption, the Alberta government has kept its legislation consistent with other provincial franchise legislation. Going forward, this move should help Alberta to remain attractive to franchise system investors.

Post Dunkin in Quebec: What We Have Seen

Posted in Franchising
Pierre-Jerome BouchardAlex Derstenfeld

Franchisors should take note of potential novel allegations being brought against them since the Quebec Court of Appeal’s ruling in Dunkin’ Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624 (“Dunkin”)[1].

Dunkin reiterated the law’s willingness to read certain obligations into franchise agreements based on the duty of good faith and obligations which flow from the general nature of franchise agreements. Franchisors and franchisees alike have been left to speculate where the limits of their respective obligations and rights lie in the face of a legal landscape in flux.

Since Dunkin, two actions of note have been filed which levy relatively novel allegations against franchisors [in Quebec]. In Franchisés v. Groupe Qualinet (“Qualinet”), Plaintiffs are asking the court to recognize novel implied obligations including, amongst others, the duty to provide training.  More recently, in Sopropharm v. Jean Coutu (“Jean Coutu”), the court is being asked to annul franchise agreements because they violate the professional obligations of its franchisees.  Although both cases are still before the court, they bring forth a number of new allegations which franchisors should be alive to in their ongoing relations with franchisees.

(a)            Jean Coutu: franchise agreements versus professional obligations?

The action brought in Jean Coutu involves the tension between the professional obligations imposed on franchisees by law against those outlined in franchise agreements.  The Petitioner Sopropharm (a non-for profit association of pharmacists) filed a putative class action on behalf of all pharmacists operating Jean Coutu franchises on July 15, 2016.  The Petitioner alleges that the franchise agreements are null on the basis that they require pharmacists to violate their professional obligations under the Code of ethics of Pharmacists and the Pharmacy Act.  The Petitioner asks the court to both set aside the franchise agreements and effect restitution in excess of $250 million.  The court’s decision as to which set of obligations, contractual or professional, should prevail will undoubtedly have a serious impact on franchises operating in the professional domain.  The Petitioner alleges the franchise agreement violates pharmacists’ professional obligations in two ways:

(i)              Illegal sharing of profits and fees

The Petitioner claims that Jean Coutu’s franchise agreement requires pharmacists to share their profits and fees illegally with Jean Coutu. Jean Coutu’s franchise agreement requires that franchisees pay Jean Coutu a royalty based on a percentage of their annual sales. However, the Petitioner contends that article 49 of the Code of ethics of Pharmacists (the “Code”) only permits pharmacists to share their profits in proportion to the consideration (of services from Jean Coutu) they receive in exchange. The Petitioner also points to explicit provisions of the franchise agreement which state that it will be exercised in accordance with the Professional obligations of pharmacists, specifically citing obligations under the Code. The Petitioner thus claims that the franchise agreements violate both the implicit and explicit obligation to respect the professional obligations of pharmacist, and must therefore be set aside.

In the event the franchise agreements are set aside, the Petitioner asks the court to effect the restitution of the amount of royalties paid out in excess of fair market value of services provided by Jean Coutu. The Petitioner has alleged that this amount, limited to the past three years, is in excess of $250 million.

(ii)             Violation of the exclusive property rights of pharmacists

Another contention of the Petitioner is that the franchise agreement violates pharmacists’ exclusive right to own a pharmacy and liberally dispose of it. Jean Coutu’s franchise agreement stipulates that pharmacists may not sell, alienate, transfer, mortgage or sublet their pharmacies without the express permission of Jean Coutu.  Furthermore, any permission to sell a pharmacy is conditional on the granting of a full release to Jean Coutu.  The Petitioner contends that this is direct violation of article 27 of the Pharmacy Act states that only a pharmacist may own a pharmacy.  The Petitioner has asked, should it fail to find in its favour regarding violation article 49 of the Code (above), that the court annul all provisions of the Jean Coutu’s franchise agreements which interfere with the exclusive property rights of pharmacists, enshrined at article 27 of the Pharmacy Act.

(b)            Qualinet: novel implied obligations of franchisors?

On March 21, 2016 a number of franchisees (dry cleaners and disaster cleaners), filed a Motion to Institute Proceedings (“MIP”) against Groupe Qualinet and its president (“Defendant”) for damages in excess of $26 million. In addition to claiming the violation of the obligation “not to compete unfairly” and to “protect and enhance its brand” previously recognized in Dunkin, the Plaintiffs ask the court to recognize the existence of the following implied obligations, and their subsequent violation:

(i)              Obligation to provide training

  • The Plaintiffs allege that training provided by the defendant was “unorganized, makeshift in nature, and insufficient.”
  • Although the contract did state that the Plaintiffs would be provided training, it did not contain any specifics with regards to its type, frequency or duration.

(ii)             Obligation to provide meaningful and sustained consultations

  • The Plaintiffs allege that annual meetings held between them and the Plaintiff were not consultative in nature, but rather were used by the Plaintiff to sell its products and promote its services.
  • The Plaintiffs allege that, despite numerous attempts, the Defendant refused to hear their grievances and actively prevented plaintiffs from discussing them with each other.

(iii)            Obligation to provide support and assistance

  • The Plaintiffs called for help in reaching their sales projections as forecasted by the Defendant.
  • The Defendant failed to take any steps to aid the Plaintiffs, and moreover blamed the Plaintiffs behaviour for having failed to reach the projections.

We will be sure to monitor these cases and provide updates

[1] On March 17, 2016, the Supreme Court of Canada dismissed the Dunkin’ Brands Canada Ltd.’s application for leave to appeal from the judgment rendered by the Québec Court of Appeal.

What’s Critical to Succeeding in our Changing Retail Landscape

Posted in Branding, Retailing

*This is a guest post by Mirella Pisciuneri and Katherine Forbes of Richter Advisory Group. The opinions expressed in this article do not necessarily represent the views of McCarthy Tétrault. 

Roughly one decade ago, there was much speculation as to how Canadian retail brands would fare when international fast-fashion chains began opening stores in Canada. In addition, while new chains have made their presence known across the country and with increasing consolidation and emphasis on ecommerce, the retail market has become increasingly interesting to watch.

Large and established fast fashion brands of significant scale are often vertically integrated, with a sophisticated product development system able to supply fresh and interesting products to consumers at exceptional speed as fast as a weekly change in products (i.e. 52 times per year), as opposed to a seasonal revamp (three times per year).

While some brands such as Jacob and Smart Set have been pushed out of the market in recent years[1], others have been able to stay the course.

In addition to these pressures, financial realities are adding pressure to Canadian retailers. The foreign exchange rate of the USD experienced a greater than 10% swing in the year, reaching a monthly average high of $1.37 in December, 2015[2]. Canadian companies that were not positioned well to hedge against these fluctuations have had limited ability to pass the cost saving along to their customers. Additionally, there have been heightened discussions to raise the minimum wage in some provinces across the country[3]. Store payroll accounts for a significant portion of the cost on traditional retailers. Substantial increases to the minimum wage may impact profitability – although whether this will be the case for sure, is still to be seen.

The following are some steps that Canadian retailers can take to address these pressures in a changing landscape shaped by increased variety and susceptibility to foreign exchange rate fluctuations.

Merchandise planning and inventory control (“OTB”)

These processes are one of the biggest contributors to cash control in tough times. Tighter controls and comprehensive planning help ensure you are getting the best ‘bang for your buck’. Richter has observed that, unfortunately in many of the cases of underperforming companies, they are either not at the right place, or these processes have been implemented too late to be effective or make up for lost ground.

Product development & Vertical Integration

The need to keep up with the increased cadence of new products coming from fast-fashion retailers creates a challenge for inventory controls, and places pressure on production and design teams (particularly those of smaller brands). However, this also creates an opportunity for such retailers to market their products as being more exclusive in nature, versus readily available to any and all buyers. Highlighting this angle as part of your retail strategy could be beneficial.

 Occupancy costs

Rent or leasing costs are one of the most significant expenses for retailers with physical store spaces. Retailers should consider their physical store footprint and how it is being used. A strategic retailer should look at all cost areas and make decisions based on the current situation, but also projections long term.

Outsourcing non-core competencies

Outsourcing non-core competencies or even distribution functions, and evaluating cost centre process improvements often allows for an increased or renewed focus on the core business and can also convert fixed costs into variable costs, which make it easier to scale costs to fluctuations in sales volume. A diagnostic into various cost centres can result in previously unseen areas for cost savings, especially for consumer-facing businesses.

It’s important to monitor sales, profitability and costs, proactively. Consider vertical integration as an important element in achieving acceptable profit levels, and think lean. These suggestions for process improvement can help Canadian retailers stay successful in the current landscape and beyond.

Richter compiles a Weekly Retail Sales Summary which provides further insights into the sales and comparative rates of leading retailers.

Mirella Pisciuneri is a partner with Richter Advisory Group, based in Montreal. Her extensive experience in insolvency and restructuring, litigation support, mergers and acquisitions and analysis of operating performance and benchmarking has helped clients in a variety of different sectors.

Katherine Forbes is a vice president with Richter Advisory Group, based in Toronto. She has been involved in numerous complex engagements in the consumer products, distribution, women’s apparel and other retail industries for both private and public companies. She specializes in financial advisory, insolvency consulting, and cash flow forecasting.

Richter is a financial advisory firm with offices in Montreal, Toronto, and Chicago. Founded in 1926, the firm offers a breadth of services including accounting and assurance, tax, and wealth management, as well as organizational restructuring and insolvency, business valuation, corporate finance, litigation support, risk management and forensic accounting.

[1] “Canada’s Retail Exodus.” Financial Post. 15 January 2015. http://business.financialpost.com/news/retail-marketing/canadas-retail-exodus-heres-whos-closed-up-shop-in-canada

[2] http://www.bankofcanada.ca/rates/exchange/exchange-rates-in-pdf/

[3] “Minimum wage increases reignite livable income debate.” The Globe & Mail. 1 October 2015.  http://www.theglobeandmail.com/report-on-business/economy/five-provinces-hike-minimum-wage/article26618941/

The Ongoing Pursuit of Accessibility in Ontario – Amendments to the AODA Effective July 1, 2016

Posted in Employment and HR, Legislation
Martin Thiboutot

On McCarthy Tétrault LLP’s Ontario Employer Blog, Kate McNeill-Keller published an article highlighting the recent amendments to the Accessibility for Ontarians with Disabilities Act, 2005, which may be of interest to readers of the Consumer & Retail Advisor blog. These amendments intend, in particular, to align the requirements of the Customer Service Standards with those set out in the Integrated Accessibility Standards.