Individual to Group to Class Disputes in Franchising – Considerations for Resolution
5. Resources Available to Pursue Litigation
In the typical franchise situation, the resources available to a franchisor to litigate a dispute usually exceed those available to a franchisee by many multiples. In addition, franchisors may be able to utilize numerous rights and powers that they have imposed under their franchise agreements and attempt to influence the manner in which a franchisee raises a dispute against the franchisor.
Given the power usually reserved to a franchisor within a franchise agreement, franchisors often have a broad ability to impose terms and conditions in the operation of a franchise after the parties have entered the franchise agreement itself. Franchisors will often have no obligation to inform their franchisees of the reason for any imposition of certain terms and conditions or changes to the franchise system. Further, it is inherent in most franchise agreements that the franchisor has the right to make changes to the franchise system that can seriously alter the nature of the franchise relationship from when it was initially established at the time of the entering into of the franchise agreement. It is therefore very rare for franchisees to raise these issues with the franchisor without first consulting with one another.
6. Effectiveness of Franchisee Advisory Councils, Franchisee Associations and other Informal Fora for the Discussion and Resolution of Issues within a Franchise System
Franchisor management constantly debate among themselves and with their legal counsel the extent to which franchisees should be involved in what is typically seen to be the business of the franchisor. It is the franchisor who typically reserves for itself the right to establish and make changes to its franchise system. Yet it is often recognized that franchisee input regarding the franchise system can have various degrees of value. Whether that value should be crystallized into a right of the franchisee to participate in decision making affecting the franchise system is a matter that each franchisor must consider in the establishment and development of its franchise system.
The choices a franchisor makes in designing this aspect of its franchise system have a significant impact on how issues are ultimately addressed when those issues might affect more than one franchisee. Franchise systems are inherently well positioned to prevent franchise litigation, given that franchising represents a form of relationship that usually involves constant communication between a franchisor and its franchisees, individually and collectively. This is particularly true if litigation is properly viewed as a last resort for resolving issues between a franchisor and its franchisees. All parties have the ability to determine the effectiveness of their relationship in this regard, and within a context where the law imposes an overriding duty on those parties to carry out their contractual obligations in good faith.
Franchise systems usually include mechanisms for the distribution of information as between a franchisor and its franchisees, both individually and collectively. The ability to inform one another can provide a valuable tool in the prevention or resolution of misunderstandings or disputes outside of any legal process.
7. Intervention of Legal Counsel into a Dispute Between a Franchisor and a Franchisee
Both franchisors and franchisees typically have access to legal advice with respect to issues that may give rise to disputes and ultimately to litigation. For most franchisors, communications with their legal counsel, including the potential existence of in-house counsel, is an everyday occurrence. In the case of franchisees, a relationship with legal counsel is usually established at the time a contractual relationship with the franchisor is formed. Typically, when a franchisee raises issues it has experienced in dealing with its franchisor or within the franchise system, the franchisee’s counsel will inquire as to whether those issues or concerns are shared by other franchisees within the franchise system. This inquiry will assist counsel to assess one factor that may contribute to the franchisee’s ability to have the matter resolved in its favour.
In this regard, the various provincial legislatures that have passed franchise legislation have seen it advisable and necessary to protect the ability of franchisees to associate with one another. In so doing, legislatures have recognized that it may be of significant value for franchisees to come together to address issues and concerns that they may have in common, and to form groups for the advantage of not only the group but of each individual within the group.
8. Relationship between Franchisor and Franchisees
Many franchisees are vulnerable as individuals given the imbalance in the powers and resources available to franchisors. However, the fact of vulnerability does not automatically result in the misuse of powers and resources by the franchisor in order to impose its will upon a franchisee in the resolution of any potential or existing dispute with the franchisee. Indeed, many franchisors are sensitive to this vulnerability, and will attempt to work with franchisees to reach equitable resolutions of issues and disputes. Further, it is important to recognize that many franchisees are highly sophisticated businesspeople who may own dozens of franchise locations and have access to significant resources to pursue litigation. In these situations, a single franchisee can bring significant leverage to bear in a dispute with a franchisor.
Nevertheless, the ability of the franchisee to participate in a group is considered an important means for franchisees to level the playing field in many cases. When considering whether to introduce class proceedings legislation in Ontario, Ontario’s Law Reform Commission undertook and published a report. Released in 1982, the Law Reform Commission made the following statement:
Even small businesses may be reluctant to sue more powerful companies where, for example, in a franchisor-franchisee situation, they must deal continuously with such companies on a basis of dependence. [10]
Franchisees’ lack of financial wherewithal to commence a major lawsuit, combined with their general reluctance to antagonize a much larger corporation, have been recognized as important reasons for ensuring the availability of class proceedings to franchisees.
9. Group versus Class Proceedings
Apart from the class proceedings process, the various provincial rules of civil procedure provide for parties to be able to combine in single proceedings in order to pursue claims or issues that they share in common. Therefore, it is generally possible for multiple franchisees to join together to commence group litigation, rather than proceed by way of a class action, against their franchisor.[11]
There are a number of differences between the litigation of an action by a group of plaintiffs and the litigation of an action as a class proceeding. The most obvious difference is the requirement that, in order for an action to proceed as a class proceeding, an individual or group of individuals must initiate the action pursuant to class proceedings legislation. The action will then require certification as a class proceeding at a later date. The exception to that process is in the province of Quebec, where a potential plaintiff to a class action must obtain the court’s initial consent to proceed by way of class proceedings before the claim is served.
By contrast, no special procedure through the Ontario Class Proceedings Act or similar legislation is required to proceed in a group action.[12] A group of plaintiff franchisees who join together to sue their franchisor do not have to battle to be certified at a certification hearing, and any challenge to the legitimacy of the joinder of the plaintiff group must be initiated by the defendant. Once the statement of claim has been issued and served, the litigation proceeds normally, pursuant to the provincial procedural rules.
Expediency is therefore one of the key advantages to proceeding by group action, rather than by a class proceeding. When a statement of claim is issued pursuant to class proceedings legislation, the litigation is effectively at a standstill until the class proceeding is certified. In the vast majority of cases, the defendant franchisor will not deliver its statement of defence until after the certification decision has been rendered. Given that parties frequently appeal certification decisions, it is not uncommon for several years to pass between the issuance of the statement of claim and the final certification outcome.[13] Even if the action is finally certified as a class proceeding, it is important to note that certification merely constitutes the court’s blessing for an action to go forward as a class proceeding, and that no determination on the merits of the case has been made.
For franchisees who have limited access to resources to fund the litigation, the potential for a drawn-out and expensive certification process is a factor to consider. Similarly, franchisees seeking to use litigation as an instrument for effecting systemic change must be aware that the certification hurdle (as well as the possibility for appeals) looms as a significant barrier. To attempt to reduce the often significant delays associated with class proceedings, the CPA establishes that a single judge will be appointed to monitor all aspects of the class proceeding, including all scheduling issues, to ensure the timely prosecution of the action in accordance with the approved plan of proceeding.
As alluded to above, in group litigation, it is open to the franchisor to challenge the franchisees’ joinder of their claims. Although the test for joinder of claims is different from the certification tests in a class action, it is not an absolute right for franchisees to combine to pursue group litigation as an alternative to proceeding by way of class proceedings. By way of a recent example, General Motors of Canada Limited sought various relief, including severance of the joined claims, against a group of nineteen General Motors Dealers who were presented with an agreement for the winding-down of their businesses which they refused to accept.[14] After considering the test for joinder of claims set out in the Ontario Rules of Civil Procedure, and having acknowledged that there were numerous differences among the plaintiffs in the group, Justice Pepall declined to sever the group of plaintiffs and held that “if the claims are severed, there would be an increase in the cost and length of each proceeding.”[15]
The prosecution of a claim as a group proceeding is procedurally different and involves different considerations from the prosecution of an action as a class proceeding. Apart from the issue of requiring certification, the procedural rules applying to the two proceedings are markedly different. For example, while all plaintiffs in a group action are susceptible to being examined for discovery, only the representative plaintiff in a class proceeding is subject to being examined for discovery unless the court orders other members of the class to be examined.[16] Further, all plaintiffs in a group action are susceptible to paying the defendant’s legal costs if the action is not successful. By contrast, only the representative plaintiff risks having to pay the franchisor’s costs in an unsuccessful class proceeding. Moreover, in Ontario, a fund is available through the Law Foundation of Ontario to cover disbursements that are required to prosecute a class action proceeding. In return, the Law Foundation acquires a financial interest in the outcome of the litigation. For example, the disbursements of the plaintiff class in the Midas class action are being funded by the Law Foundation of Ontario. These funds are not available to a plaintiff group in a group proceeding.
The possibility to effect system-wide change is potentially more significant in a class proceeding than it is in a group proceeding, principally because the settlement of a class proceeding binds all members of the class except those potential members who have chosen to opt out of the action. Given that settlements must be approved by the court in a class action and that, once approved, those settlements are binding upon all members of the class, there is a greater availability on the part of a franchisor to resolve the dispute by offering to implement broad changes that will apply across the system. By contrast, the resolution of a group proceeding affects only the parties to the litigation themselves. Nevertheless, in relatively small franchise systems, all or nearly all of the franchisees may be able to join together in a group action, rather than as a class. Further, it is worth noting that plaintiff franchisees (whether proceeding as a group or as a class) do not always seek system-wide change. Even within the franchise context, it may be that simple damages are the only (or the principal) relief sought from the litigation.