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Consumer & Retail Advisor

BC Court Enforces Franchise Termination and Release Agreement

Posted in Franchising, Litigation
Adam ShipHelen FotinosFraser Dickson

Overview

In the recent decision Dairy Queen Canada, Inc. v. M.Y. Sundae Inc., 2017 BCSC 358, the Supreme Court of British Columbia upheld a Mutual Cancellation and Release agreement in the context of a franchisor-franchisee relationship. The decision confirms that, absent evidence of duress or unconscionability, a franchisor is permitted to take advantage of a superior bargaining position, and obtain an enforceable release when a franchisee is in default.  The decision only considered common law principles as opposed to franchise legislation.  The Court also awarded damages for the tort of passing off against a franchisee who refused to cease operations after termination.

Background

The Franchisor entered into a standard franchising agreement with the defendant franchisees. Following several months of unpaid franchise fees, a long history of failed cleanliness inspections, and other breaches of the franchisor’s standards and specifications, the franchisor decided to terminate the franchising relationship.

Instead of terminating immediately, however, the franchisor offered the franchisee the opportunity to enter into a Mutual Cancellation and Release agreement.  Under the agreement, the franchisee was provided with several months in which to sell its franchise to a new buyer.  In exchange the franchisee agreed to continue adhering to the system standards, and released all claims past and future against the franchisor.

However, the franchisee did not find a new buyer in the allotted time and the franchisor proceeded with termination. Notwithstanding this termination, the franchisee continued to operate the branded store for several months before de-branding.

The franchisor commenced litigation, seeking, among other things, damages for the tort of passing off. The franchisee counterclaimed on the basis that, among other things, the franchisor’s termination of the franchise agreement constituted a breach of the duty of good faith and fair dealing, and that the Mutual Cancellation and Release agreement was signed under duress.

Duress, Unconscionability, and Enforcing Franchise Cancellation and Release Agreements

The Court held that the franchisee had validly released the franchisor from all prior claims against it, including the pleaded allegations in the counterclaim. So long as the Mutual Cancellation and Release Agreement was held to be valid, then all of the franchisee’s counterclaims were released.  The Court held that there was no evidence that the franchisee signed the agreement under protest or sought additional time to seek legal advice.  There was no evidence of duress or coercion.

Moreover, drawing on the Supreme Court’s test in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 the Court noted that release and exclusion clauses will be enforced despite inequality of bargaining power, so long as there is no evidence of duress or unconscionability.

The agreement was not unconscionable at the time it was negotiated – not only was the franchisee’ evidence inconsistent, but that evidence did not establish duress or unconscionability. The Mutual Cancellation and Release Agreement actually provided the franchisee with an opportunity to sell its franchise, which put it in a better position than the underlying franchise agreement.  In this sense the provisions were not substantively unfair.

The Tort of Passing Off – Be Careful About Ultimatums

The Court also granted the franchisor’s claim for passing off.

The tort of passing off occurs when (1) the trade name of one entity is distinctive, recognized, and enjoys reputation and goodwill in its relevant field; (2) when a second entity misrepresents itself so as to lead the public into confusion about whether the second entity is connected to the first entity; and (3) the first entity suffers damages regarding lost business opportunity due to the second entity’s misrepresentation.

In the Court’s view, factors 1 and 2 were a foregone conclusion. The franchisor had a recognizable brand and the franchisee had continued to operate using the distinctive features of the brand. Anyone entering the premises would have perceived the store to be part of the franchise system.

However, what is noteworthy is that the Court did not agree with the time period for which the franchisor claimed damages. It was undisputed that the franchisor terminated the franchise agreement a franchise on January 8, 2014 and that the franchisee continued to operate as such until April 8, 2014. However,  because the franchisor sent a letter to the franchisee in early March, advising that the store must be “completely de-identified on or before March 10, 2014”, the court found that the franchisor could not seek damages for the earlier period.

In the Court’s opinion, this was a representation to the franchisee that March 10 was the last possible date for them to cease identifying themselves as a franchise.

Key Takeaways – 7th Annual Consumer Products and Retail Summit

Posted in Events, Legislation, Retailing, Trade
Lara NathansAnne-Marie NaudCharlene SchaferMartin Thiboutot

McCarthy Tetrault’s 7th Annual Consumer Products and Retail Summit was held on February 23, 2017. Here are our key takeaways from the Summit:

Visions of the Changing Retail Industry

Erol Uzumeri, Searchlight Capital Partners

  •  The major trends impacting the consumer sector include: experience economy, digital disintermediation, silver economy, convenience, personalization and authenticity;
  • Successful retailers need to leverage their customer data to address consumers’ changing preferences;
  • Retailers need to carefully consider the investments required to create clear and differentiated positioning and cannot afford to remain stationary with the factors impacting the consumer sector on a daily basis.

Transactional Trends and Issues in the US Retail Market: Implications for Canada

Samuel A. Newman, Gibson, Dunn & Crutcher

  • Considering the challenging trends, retailers in distress can consider a non-bankruptcy asset sale, receivership or assignment for the benefit of creditors; sale of assets can also be conducted through a bankruptcy filing;
  • Sale through a bankruptcy filing reduces certain transaction risks;
  • Retailers should consider value preservation issues such as intellectual property including consumer data, real property and tax attributes.

Opportunities for Retailers and Consumer Products Companies under the new Canada EU Trade Agreement (CETA)

 John Boscariol and Robert Glasgow, McCarthy Tétrault

  • CETA is expected to come into force in Canada and Europe in the next few months – companies should be doing a review of their operations (both sourcing and sales) to be in the best position to take advantage of CETA benefits;
  • For those importing or exporting products between Canada and Europe, check the rules of origin applicable to your products to determine whether you qualify for tariff-free access;
  • CETA does more than any other trade agreement in addressing divergent regulations that apply after importation – the new conformity assessment regime is designed to ensure that products can be tested and certified in one location for purposes of regulatory requirements in both jurisdictions;
  • CETA stands in stark contrast to the faltering US-EU Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations and the growing worldwide backlash against the liberalization of trade and investment rules – if Canada is able to successfully maintain most of its access to US markets under NAFTA and continues to seek expanded trade and investment arrangements in Asia and elsewhere, it will be in a unique and enviable position for attracting investment in the retail and consumer products sector.

Data, Disruption and Regulation in the Retail and Consumer Facing Industries

Jennifer T. Lee, Deloitte

Kirsten Thompson, McCarthy Tétrault

  • Data analytics and artificial intelligence applications are being sought after by retail and consumer facing industries as they seek to drive customer engagement and customer intimacy – and ultimately, profit;
  • If these technologies are used, they should be reviewed for privacy issues; both direct and indirect privacy issues are common with these technologies, particularly those developed in other jurisdictions but used in Canada.

Latest Developments in Competition Law

Donald Houston and Dominic Thérien, McCarthy Tétrault

  • The Competition Bureau continues to focus on online and mobile advertising, and the application of Competition Act (CA) provisions specifically prohibiting false or misleading representations in electronic messages that came into force as part of Canada’s Anti-Spam Legislation (CASL);
  • On July 1, 2017, a new private right of action under CASL will be available for contravention of the CA provisions addressing misleading representations in electronic messages. Penalties include the payment of the amount of the loss or damage suffered and a maximum of $200 for each contravention up to a maximum of $1 million per day of contravention;
  • The Competition Bureau continues to take enforcement action with respect to representations related to price, including false or misleading representations as to the “ordinary selling price” of a product.

“Fireside Chat” With Health Canada – Q&A With Consumer Product Safety

Nora Wang, Health Canada

Christopher Hubbard and Katherine Booth, McCarthy Tétrault

  • Health Canada is currently inspecting companies for compliance with mandatory reporting obligations under the CCPSA. This inspection project includes a review of the processes companies have in place to assess product “events” and ensure “incidents” are reported;
  • Companies are expected to assess product events (e.g., consumer reports) within a reasonable time from learning of the event to determine whether the event constitutes an “incident”. Companies should make this determination using the information available to the company at the time, and taking it at face value;
  • If a company determines that an event does not constitute an “incident”, it is recommended that the company document the rationale for that determination and maintain a record.

BC Court of Appeal: “Immediate” Termination Rights in Dealer Agreements Must be Exercised Promptly

Posted in Case Comment, Distribution, Franchising, Litigation
Adam Ship

In the recent decision of Cellular Baby Cell Phones Accessories Specialist Ltd. v. Fido Solutions Inc., 2017 BCCA 50 the BC Court of Appeal held that the long delay in the exercise of a supplier’s contractual right to terminate a dealership agreement rendered the termination improper.  The court also held that a dealer’s obligation to mitigate its damages upon termination was met, even though the dealer declined to sell the dealership to a third party.

In this case, the supplier terminated the dealership agreement on the basis that the dealer had failed to meet quarterly sales quotas on three occasions in one calendar year.  That calendar year was 2010.  The dealership agreement provided the franchisor with the right to terminate “immediately” in this circumstance.  However, the notice of termination was not delivered until in September, 2011, eight months after the contractual right became effective.

The Court of Appeal held that contractual rights to terminate “immediately” must be exercised within a reasonable period of time. The eight-month delay in exercising the right was fatal to the supplier’s right to terminate.

Had the supplier formally noted the dealer in default at the relevant times, and taken greater steps to preserve its contractual rights, the outcome may have been different.

The case also involved the dealer’s obligation mitigate.  The supplier argued that the dealer failed to mitigate by not accepting an offer to purchase from a third party dealer.  The Court of Appeal disagreed.  According to the court, because the supplier required the dealer to sign a general release as a condition of approving the sale, the dealer acted reasonably in refusing to sell.  Instead, the dealer elected to mitigate its damages by continuing its business as a sub-dealer of another dealer.  While this strategy proved unsuccessful to reduce the dealer’s damages, it was nevertheless a reasonable mitigation choice and met the dealer’s obligation.

Had the supplier not required the dealer to sign a general release as a condition of selling, the result may have been different.

Just Around the Corner! B.C. Franchises Legislation in Force February 1, 2017

Posted in Franchising
Adam ShipHelen FotinosCatherine M. SamuelJordanna CytrynbaumLindsay Burgess

As we reported here, British Columbia’s new Franchises Act, SBC 2015, c 35 (the “Act”) and accompanying Franchises Regulation (the “Regulation”) will come into force effective February 1, 2017. From this date, franchisors granting, renewing or extending franchises in B.C. will be subject to the new legislation. Franchisors should also be aware that some provisions of the Act, such as the right to associate, apply to franchise agreements entered into prior to February 1, 2017.

The most important change for franchisors operating in B.C. will be the comprehensive disclosure regime articulated in s. 5 of the Act and the bulk of the Regulation, the breach of which could lead to considerable consequences. Franchisors operating in BC, including national franchises, should consult with legal counsel in advance of February 1, 2017 to ensure their disclosure documents and practices are compliant with the new regime. We would be pleased to assist with this process. Please feel free to contact the authors in this regard.

Online Price Advertising: Amazon to Pay $1.1 Million to Settle Canadian Competition Bureau Investigation

Posted in Competition, Legislation
Dominic TherienJulia Johnson

The Competition Bureau (Bureau) announced January 11 that Amazon.com.ca, Inc. (Amazon) has agreed to pay a $1 million penalty for contravening the misleading advertising provisions under the Canadian Competition Act including recent provisions that came into force as part of Canada’s Anti-Spam Legislation (CASL). Amazon will also pay $100,000 towards the investigative costs incurred by the Bureau. The fine follows an investigation into Amazon’s pricing practices over two years on Amazon Retail, the platform by which the company sells directly to consumers.

The e-commerce company has entered into a consent agreement with the Bureau to settle the investigation of Amazon’s practices related to comparing its prices to a regular price (or “list price”) to advertise savings for consumers. The Bureau concluded that Amazon had relied on list prices provided by suppliers, without verifying that those prices were prevailing market prices. The Bureau reviewed savings claims with respect to Amazon Retail advertised on amazon.ca, on Amazon mobile applications, in emails sent to consumers, as well as in other online advertisements.

The Bureau’s investigation specifically assessed certain Blu-ray DVD products being sold by Amazon. It found that Amazon frequently used “You Save” claims that specified a dollar amount of savings and a percentage discount. For example, the pricing advertising might indicate:

List Price: CDN$ 39.99

Price: CDN$ 29.99 & FREE Shipping on orders over CDN$ 35

You Save: CDN$ 10.00 (25%)

These representations created the general impression that certain products sold on www.amazon.ca were available for purchase at prices lower than prevailing market prices. The Bureau reviewed Amazon’s pricing practices under the ordinary selling price (OSP) provisions of the Competition Act (subsection 74.01(2)). The Bureau found that other suppliers had not sold the relevant Blu-ray DVDs in substantial volumes at the advertised list prices (or higher) within a reasonable period of time (12 months) before Amazon’s advertising (the “volume test”). Likewise, other suppliers had not offered the Blu-ray DVDs for sale at list prices advertised by Amazon (or higher) in good faith for a substantial period of time (6 months) before Amazon made its pricing representations (the “time test”). Because Amazon’s savings claims did not meet either the “volume test” or “time test”, the claims were found to be misleading.

The Bureau found that Amazon’s pricing practices also contravened subsection 74.011(2) of the Competition Act, which is the general prohibition on misleading representations in electronic messages sent to consumers that was introduced under CASL. The Bureau recently relied on these provisions as part of its investigation into car rental prices and discounts, and the Amazon settlement underlines the Bureau’s focus on online advertising

Amazon has already changed its practices on its Canadian website to accurately represent the savings available to consumers. According to the consent agreement, Amazon has adopted and implemented policies to ensure compliance with the relevant Competition Act provisions.

This price advertising settlement follows the May 2015 consent agreement with retailer Michael’s, in which the company agreed to pay $3.5 million following the Bureau’s concern over price advertising for custom and select ready-made framing.

Ontario Enacts Ban on the Expiry of Rewards Points

Posted in Legislation
Ana BadourJames ArcherClaire GowdyLara Nathans

On December 6, 2016, Bill 47 – Protecting Rewards Points Act (the “Act”), amending Ontario’s Consumer Protection Act, 2002 (the “CPA”), received Royal Assent.  The Act was first introduced on October 20 as a private member’s bill.

The primary effect – and stated purpose – of the Act is to prohibit the expiry of rewards points under consumer agreement due to the passage of time. Any provision to the contrary in any consumer agreement will be rendered void, with retroactive effect to October 1, 2016, such that all points purporting to expire after October 1, 2016, will need to be reinstated. However, subject to what may be provided in the regulations – yet to be issued – a rewards program may still be terminated and accumulated rewards may expire if the agreement so provides.

Now that the definition of “consumer agreements” under the CPA has been broadened to include agreements respecting rewards points, there could be other implications for these types of agreements entered into after the Act comes into force, under other provisions of the CPA. As well, the terms and conditions of such future rewards programs could be impacted as the Act could have much broader reach beyond the reward point expiry bank. In particular, the Act contemplates the issuance of regulations relating to (i) the transfer of rewards points among consumers, including upon death, (ii) inactivity of rewards points, and (iii) the termination of rewards points programs.

The Act is not yet in force, which will follow the issuance of regulations. Consultations are expected to take place in 2017 in respect of the regulations.

Given the national scope of rewards programs, Ontario’s intervention in this area could be very disruptive.

We are monitoring the process of the Act and the regulation. Stay tuned for a summary of developments as they arise.

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