Individual to Group to Class Disputes in Franchising – Considerations for Resolution

This paper was originally presented at the OBA 10th Annual Franchise Law Conference, November 4, 2010. [1]

1. Introduction

Though a critical mass of franchise class proceedings in Ontario has been slow to develop, a number of class actions in the franchise context have been certified over the course of the past decade. With the recent certification of another franchise class proceeding, and several additional actions currently at the certification hearing stage, more and more franchisees are seeking to avail themselves of the ability to band together as a class to resolve disputes against their franchisors.

In light of the recent spike in activity in franchise class proceedings and franchise litigation in general, both franchisees and franchisors need to be aware of the procedural advantages and pitfalls of class actions and the various other avenues and fora for resolving franchise-related disputes. This is particularly true in light of provincial legislation, such as Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 that generally requires franchisors to disclose the existence of litigation to prospective franchisees.[2] The disclosure of class proceedings, in particular, may significantly reduce the value of a given franchise, or deter prospective franchisees from joining the franchise system altogether.

With a particular focus on the developing body of case law in the franchise class certification context, the purpose of this paper is to examine approaches to franchise class proceedings from the perspective of both franchisees and the franchisor. In light of the state of the law of franchise class actions, and with regard to the various other available procedural options, this paper will consider whether class actions are the preferable means for resolving franchise disputes.

2. Current State of Franchise Class Proceedings

As mentioned above, though the Arthur Wishart Act was introduced in 2000, there was little immediate class action activity in the franchise context. The 2002 decision of Justice Winkler (as he then was) to certify a class of A&P franchisees against their franchisor in 1176560 Ontario Ltd. v. Great Atlantic & Pacific Company of Canada Ltd. marked the first certification of a franchise class action in the Arthur Wishart Act era.[3] In the years following A&P, there was little activity in terms of franchise class proceedings, with only Landsbridge Auto Corp. v. Midas Canada Inc.,[4] and 2038724 Ontario Ltd. v. Quiznos Canada Restaurant Corp.[5] having been certified in Ontario.  Although the Government of Ontario is exempt from the application of the Arthur Wishart Act, its network of private drivers license issuers have had their claims against Ontario certified as a class proceeding over the compensation paid to them under their forms of agreement in Mayotte v. Ontario.[6] Leave to appeal the certification decision was denied on September 24, 2010.

However, with the very recent certification of a class of franchisees in 578115 Ontario Inc. v. Sears Canada Inc.[7], and five other certification hearings in franchise cases scheduled in the coming months, it would appear that the flood gates have opened.[8] Given that the Ontario Court of Appeal has recently declared that class actions involving hundreds of franchisees suing their franchisor over a common franchise agreement are “exactly the kind of case for a class proceeding,” we must expect that this trend will continue.[9]

3. The Nature of Typical Franchise Disputes

Whether issued pursuant to class proceedings legislation or not, every statement of claim seeks to assert claims that an individual franchisee has against its franchisor or vice versa. The types of claims that a franchisee may assert against its franchisor by way of legal action are broad and varied. As franchising is typically a contractual matter between two parties, franchise disputes cover the gamut of contractual issues. Litigation can arise between a franchisor and a franchisee for various reasons, including: disputes over the very existence of the contract, which can raise all manner of issues relating to the formation of the contract; the performance and enforcement of the contract, including the termination thereof; any claims seeking relief from the forfeiture of the franchise agreement; and statutory claims for breaches of franchise specific legislation, including claims for statutory rescission.

Given the myriad of rights and obligations involved in the typical franchise agreement, it is also common for litigation to arise relating to intellectual property rights, the protection of information disclosed in the context of the franchise relationship, and the enforceability of non-competition and non-solicitation covenants. Lawsuits in the franchise context often involve claims, defences and counterclaims in cases where money is allegedly owed by one party to the other, and often involve claims for prospective damages where one party asserts that the other party has breached the contract and brought it to an end.

Every action, whether commenced by way of intended class proceeding or not, involves individual issues as between a single franchisee and its franchisor. When drafting a new form of franchise agreement to be utilized by a franchisor within its franchise system, prudent counsel will discuss with their franchisor client the advantages and disadvantages of various dispute resolution possibilities that a franchisor may want to consider for use within its franchise agreement and franchise system. Such provisions may include the requirement that the parties engage in good faith mediation before any legal proceedings can be commenced. Similarly, franchisors may prefer to require various disputes to be arbitrated with a view to preserving at least some degree of confidentiality concerning the dispute and to allow the parties to select the individual who will adjudicate their dispute.

At the same time, certain complaints found in a statement of claim may be of a type that goes beyond an individual franchisee. In various cases where issues may apply to one or more franchisees, those issue may be said to exist for a class of franchisees or they may be said to be systemic or system-wide. The resolution of so-called “systemic” issues and disputes may be better suited to group proceedings or to class actions, particularly if there are a large number of affected franchisees.

4. Extra-Judicial Fora for the Resolution of Franchise Disputes

In many franchise systems, either or both of the franchisor or the franchisees may have established organizations specifically intended to consider issues that arise in the context of the relationship between the franchisor and the franchisees as groups or as a whole. For example, franchisors often establish franchisee advisory committees or councils that include franchisees selected by the franchisor from the franchisee body. These councils serve as a means for franchisors and franchisees to address issues that go beyond their individual franchise agreements in the development of the franchise system.

The agenda for such committees or councils may be set by franchisors unilaterally or with the input of franchisees. To the extent that franchisee input is incorporated, it often includes contributions from franchisees who are not members of the committee, and is typically communicated by those franchisees through their designated representatives on such committees.  In addition to and apart from franchisee advisory councils, franchisees often form their own incorporated and unincorporated franchisee associations, providing a forum for franchisees to consider all manner of issues that may be common to more than one franchisee across the franchise system. Moreover, in many franchise systems, apart from having established a formal organization, franchisees often collect as a group through internet communications to discuss issues affecting one or more of the franchisees in the operation of their franchised businesses. As such, although franchising is by its nature a matter of individual contract, parties to the franchise system have recognized the need for and have established processes for dealing with matters that apply to the franchise system, in whole or in part, through a collective of franchisees.