Dispensing Justice: Spina V. Shoppers Drug Mart

A decision on the merits has finally been rendered in one of Canada’s longest-running franchise law cases, Spina v Shoppers Drug Mart Inc., 2023 ONSC 1086. Certified in 2013, this class action raised four claims against the defendants (collectively, “Shoppers”) by “Shoppers Drug Mart” franchisees. This article summarizes those claims and the four corresponding takeaways for franchise lawyers, namely:

Estoppel: If a franchisor provides a service not listed in the franchise agreement, and the franchisees support the provision of that service, the franchisees may be estopped from later disputing the fees charged by the franchisor for that service;
Discretionary Fees: If the franchise agreement gives a franchisor discretion to set fees for services it provides franchisees, the franchisor may set those fees at a level higher than its actual costs of providing those services;
Unwanted Inventory: If a franchisor requires a franchisee to purchase significant unwanted inventory, the franchisor may be in breach of the duty of fair dealing; and
Franchisor’s Revenues: Franchisors may have to disclose sources of revenue obtained because of a franchisee, even if the franchisee has no right to that revenue.

(1) Estoppel

Shoppers operates a loyalty program called “Optimum”. The franchisees were required to participate in the Optimum program. Shoppers charged franchisees a fee to participate in Optimum. This fee was not expressly listed in the franchise agreement. Shoppers relied on a term in the franchise agreement allowing it to charge for “services from time to time rendered”, besides “included services”, to charge the franchisees the fee related to Optimum.

The plaintiff alleged that participation in Optimum was an “included service”. The court rejected that claim. In the alternative, the court endorsed Shoppers’ other argument: even if Optimum was an “included service”, franchisees were estopped from disputing the fee because: (1) they were “eager participants in the Optimum Program” and told Shoppers as much, and (2) Shoppers relied on the franchisees’ words and deeds to incur the huge expenses of underwriting the Optimum program costs (paras 732-736).

From a practical point of view, this finding should be of comfort to responsible franchisors who undertake system changes in consultation with their franchisees. Where the franchisees’ response to a change or new program is positive, and the changes are implemented collaboratively, the franchisor is justified in relying on the franchisees’ positive words and deeds. Franchisees may be estopped from retroactively claiming that changes were improper if they willingly embraced and sought the benefits of such changes.

For franchisees, this finding stands as a reminder to raise concerns promptly and clearly if they perceive changes to be improper or problematic. Acquiescence may be interpreted as endorsement.

(2) Discretionary Fees

The franchise agreement expressly allowed Shoppers to charge fees for loss prevention, training, accounting, and equipment rental. Shoppers was entitled to set the amount of those fees “in the good faith exercise of its judgment”. The court found as a fact that Shoppers set fees at a level higher than Shoppers’ actual costs to provide the related services.

The plaintiff alleged that Shoppers was only allowed to charge its actual costs. The court rejected that argument, noting that it was not connected to any express language in the contract. In contrast, Shoppers relied upon express language that Shoppers Charges “shall be such amount or amounts as [Shoppers] shall, in the good faith exercise of its judgement, determine”. On this basis, the court held that Shoppers was entitled to exercise its contractual discretion to extract profits from those fees (paras 749-760).

For franchise systems, one take-away is the benefit of clear contractual language, reserving rights of discretion and sources of profitability where appropriate. As a corollary, franchisors should consider the extent to which their practices and rights to profit from alternative sources constitute material facts, that must be disclosed in provinces with franchise legislation.

(3) Unwanted Inventory

Shoppers sold inventory to franchisees. The franchise agreement also allowed it to mandate minimum purchases of inventory through mass delivery of products to large groups of stores.

The plaintiff alleged that this practice downloaded the financial risk of inventory management onto the franchisees, in breach of Shoppers’ duty of fair dealing. The court observed that the evidence had not established offloading of unwanted or stale products onto the franchisees and found as a fact that Shoppers’ imposition of mass orders was not a systemic breach of its contracts or breach of the duty of good faith. However, the court also accepted that there may have been breaches of good faith with respect to individual franchisees. Thus, the court sent the franchisees to individual issues trials on this point, among others (paras 375-377, 766-772).

Since the merits of this argument were left to individual issues trials, this decision does not establish that franchisors breach their duties of fair dealing if they impose minimum purchase requirements on their franchisees. However, this is now the third Ontario decision suggesting that force-feeding unwanted inventory on franchisees may be a violation of a franchisor’s legal obligations.[1] Hopefully, the individual issues trials will provide more definitive answers on this subject.

As we await further clarity on forced distribution from the courts, it is notable that actions found to be justified on a system-wide basis may be interpreted differently at the unit level. Franchisors may have legitimate cause to impose certain policies on their portfolios but they must also bear in mind the impacts of their decisions on the individual franchisees with whom they have specific contractual relationships.

(4) Franchisor’s Revenues

Shoppers received more than $1 billion in “professional allowance” payments from generic drug manufacturers. These payments were permitted under the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 and the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 because the franchisees were providing “direct patient care services”.

The plaintiff alleged that Shoppers was required to remit the professional allowance payments to the franchisees. Shoppers argued that it was allowed to keep that money under a clause allowing it to keep “all discounts, volume rebates, advertising allowances or other similar advantages”.[2]

The court found that this clause had different effects in the franchise agreement drafted in 2002 and the one drafted 2010. The 2002 franchise agreements predated the creation of the professional allowances regime, so the parties could not have intended that clause to cover these amounts. For such franchisees there had been a breach of contract.[3] Those class members who were not statute-barred by limitation periods were referred to individual issues trials (paras 825-843, 856-863).

In contrast, by 2010, the professional allowance regime was in existence and part of the factual nexus for that group at the time that they signed their contracts. Accordingly, the court found that the 2010 franchise agreements allowed Shoppers to retain professional allowance payments (paras 844-855).

Again, this decision demonstrates that the determination of whether a franchisor or franchisee has breached its duties of good faith and fair dealing is a fact-specific determination requiring an examination of the franchise contract and all the circumstances known to the parties at the time their agreements were executed (paras 709-721).

Another interesting issue raised in Spina was the extent to which the sharing of information may be required as part of the obligation of good faith. Shoppers argued that franchisees were not entitled to information about the professional allowances. The court found that franchisees were aware of the professional allowances, so this argument was moot. But it noted, arguably in obiter, that Shoppers was wrong in saying that the franchisees were not entitled to disclosure (para 855).

It is unclear on what basis Shoppers would have been required to disclose this information. It was arguably required by the statute, but the court made this statement under the heading “Analysis: Professional Allowances and the Duty of Good Faith”, so the court may have been suggesting that disclosure was necessary under the duty of honesty, which is part of the duty of good faith.

Any common law developments finding that franchisors must disclose information on their alternative sources of revenue could be extremely impactful on franchising in Canada. Currently, franchisors disclose the receipt of rebates and other benefits received as a result of purchases of goods and services by franchisees, as prescribed by statute. However, many do not disclose other revenue sources, such as upcharges on products and leases, monetization of data, or other income streams. Franchisors would be expected to strongly resist expansion of the scope of such disclosure requirements, arguing that the information is highly confidential, and does not qualify either as a material fact under statute or as part of the common law duty.

Adil Abdulla, Sotos LLP

Adil is an associate with Sotos LLP in Toronto. He can be reached at 416.572.7325 or aabdulla@sotos.ca.

[1] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at paras 16-17, 21, 49; Spina v Shoppers Drug Mart Inc, 2012 ONSC 5563 at paras 92, 170-171.
[2] This is the language from the 2002 franchise agreement. The 2010 franchise agreement is almost identical: “all discounts, rebates, advertising or other allowances, concessions, or other similar advantages”.
[3] The court found that there had been a breach of contract but not unjust enrichment due to specifics of the Associates’ arrangements, whereby increased revenue might have been claimed by Shoppers under separate revenue streams.