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Consumer & Retail Advisor

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

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.