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

C. Common Issues (Section 5(1)(c)):

Section 1 of the CPA defines “common issues” as:

a.         common, but not necessarily identical issues of fact, or

b.         common, but not necessarily identical issues of law that arise from  common, but not necessarily identical facts.

The definition of “common issues” in section 1 of the CPA reflects a conscious effort by the Legislature to avoid setting the certification bar too high. Courts have had regard to that intention in stating that the “common issues” requirement is a “low bar”. The real issue is whether a class proceeding will avoid duplication of fact finding or legal analysis.[29]

A plaintiff must adduce “some basis in fact” to show that the issues in the litigation are common.[30] The underlying question is whether allowing the suit to proceed will avoid duplication of fact finding or legal analysis. Although the CPA is silent in respect of the quality or nature of the common issues that must exist, courts will not consider an issue to be “common” within the meaning of the test unless the issue is a substantial ingredient of each class member’s claim. At the same time, common issues do not have to determine liability but need only be issues of fact or law that will move the litigation forward. Similarly, the resolution of the common issues does not have to be sufficient to support relief. All that is required is that, for any member of the class to succeed, the common issues must be determined in his or her favour.[31]

The existence of issues that are individual rather than common is not a bar to certification.[32] Nor is the possibility that damages will need to be assessed individually.[33] As Justice Strathy held in the Sears decision:

I note that in Rosedale Motors, above, the existence of some individual issues did not prevent the court from certifying the proceeding because the common issues would materially advance the action – the same is true here.[34]

The proper approach to the common issues assessment is not to focus on how many individual issues there might be. Instead, the Ontario Court of Appeal held in Cloud that courts should analyze whether there are “any issues the resolution of which would be necessary to resolve each class member’s claim and which could be said to be a substantial ingredient of those claims.”[35]

a. Factors Militating in Favour of a Finding of Common Issues

In franchise litigation, typically all class members are or were parties to a franchise agreement that is identical in respects material to the litigation. This is an obvious and important factor in considering whether the issues raised by the action are common. As the Divisional Court found in Quizno’s, while each franchisee may have suffered different damages, the conduct giving rise to liability was “systemic.” According to the Court, “every franchisee is subject to the same contract, pricing structure and distribution.”[36] Similarly, in A&P, the court found the franchisor’s argument that there were numerous individual issues unpersuasive, holding that “although there are 70 Franchise Agreements at issue, each is a standard form contract, identical in all material respects to each other agreement.”[37]

Franchise contracts typically adopt the law of a single jurisdiction. Where, for instance, parties to a franchise agreement adopt the law of Ontario, they are subject to the relationship provisions of the Arthur Wishart Act, including the duty of fair dealing under Section 3 and the right of association under Section 4, regardless of where the franchisee carries on business.[38]

Each of the following common issues involves questions of fact and law that would have to be proven by any individual member of the class asserting a claim. Each has been found to be suitable for certification in previous franchise certification motions:

(a)                breach of a common franchise agreement in relation to the supply of products to franchisees;[39]

(b)               failure of a franchisor to pass on supplier rebates and allowances;[40]

(c)                breach of the common law contractual duty of good faith in relation to the supply of products by a franchisor;[41]

(d)               breach of the statutory duty of good faith under the Arthur Wishart Act in relation to the prices charged on supplies;[42]

(e)                breach of the statutory duty of good faith under the Arthur Wishart Act in relation to the failure of the franchisor to disclose rebates from suppliers;[43]

(f)                whether a Franchise Agreement imposes a common law duty on a franchisor to charge commercially reasonable prices and whether such duty has been breached;[44]

(g)               whether conduct by a franchisor in relation to the distribution of products to franchisees can give rise to unjust enrichment;[45]

(h)               whether damages relating to overcharging on supplies and improper withholding of supplier monies can be determined in the aggregate;[46] and

(i)                 whether a duty was owed to a network of dealers to adjust the compensation paid to the dealers.[47]

Cases in which the determination of the common issues will leave few, if any, individual inquiries to be undertaken are ideally suited for class treatment.[48] For example, in circumstances where the proposed representative plaintiff seeks an interlocutory and permanent mandatory order requiring compliance by the franchisor with its obligations under the franchise agreement and where that relief would be common to all franchisees, that would be a factor in favour of certification.[49]

Not all proceedings in the franchise context raise common issues, however, even if the claims involve standard form agreements. The analysis is necessarily fact driven. In 909787 Ontario Limited v. Bulk Barn Foods Ltd., the high level of individuality among franchise claims proved a bar to certification.[50] Although the case was certified at first instance, that certification was overturned on appeal. The plaintiff alleged that the franchisor, Bulk Barn, had breached its standard form franchise agreement, which contained a provision stating that supplies to franchisees would be priced at a level “generally charged or realized by other competitive suppliers in the general market area.”[51] The appellate court had particular difficulty in seeing commonality amongst franchisees, all of whom were from different general market areas:

The network of stores as has been noted is spread out over a substantially large geographical area in Canada. The wording of the contract ties the whole question of comparable price to those “generally charged or realized by other competitive suppliers in the general market area or region in which the franchise business is located.” There was no evidence before the court and certainly no reason to expect that local prices would be the same in St. John, New Brunswick as they would in Sarnia, Ontario or for that matter within a large heavily populated area such as the Greater Toronto area or the Hamilton/Burlington area. The possible differences in each locale raise the very distinct possibility that there are no common issues which can be manageably tried together and which will advance the litigation. [52]

It is important to note, however, that the force of the ruling in Bulk Barn has likely been diminished by the Supreme Court of Canada’s decision in Hollick which emphasized the “low bar” for certification. Further, the record in Bulk Barn was of a very different nature than what has been commonly found in the cases that have followed Hollick. Finally, leave to appeal the Divisional Court’s decision to the Ontario Court of Appeal was granted, but the action settled prior to the hearing.

b. Damages

The fact that damages cannot be determined without individual inquiries is not a bar to certification. For example, in certifying common issues relating to the assessment of damages in the Sears decision, Justice Strathy held that “while individual assessments may be required, the determination of a common method of assessment will advance the claim of every class member.”[53] Further, in A&P, Justice Winkler (as he then was) held on the certification motion:

Although A&P argues that there are substantial individual inquiries necessary to determine individual entitlement, if the plaintiffs are successful in proving their allegation that Rebates have been wrongfully withheld, the distribution process is but a matter of accounting.[54]

Generally speaking, in franchise litigation involving systemic or system-wide issues, common issues relating to damages are likely more readily determined in the aggregate and therefore more likely to be certified. This is particularly true where damages can be readily calculated or are capable of proof with resort to the records of the franchisor.[55] By contrast, determinations of damages arising from misrepresentations and breaches of contract are less likely to be certified as common issues.[56]

It is also important to note that a franchisee’s individual profitability is irrelevant to the common issues analysis. In deciding a refusals motion in the context of the A&P litigation, the court specifically found that the franchisees’ profit was not relevant to a claim against their franchisor where it withheld supplier rebates and allowances:

I do not regard the level of profit made by the plaintiffs to be relevant to the common issues. In the counterclaim, A&P claims it has overpaid members of the class and claims the plaintiffs have benefited from largesse by A&P. The finances of the plaintiffs are relevant to the counterclaim but I do not agree there is relevance to the profits made by each franchisee in the common issues phase of the trial.[57]

D. Preferable Procedure (Section 5(1)(d)):

The CPA is remedial legislation. It is to be construed generously to give full effect to the benefits foreseen by its drafters, particularly at the certification stage. Its three procedural goals of judicial economy, access to justice and behaviour modification are intended to ensure the just and expeditious resolution of large, complex cases.[58] In light of this, the Supreme Court of Canada has emphasized that “preferable” is to be construed broadly and is meant to capture two ideas: first, whether or not a class proceeding would be a fair, efficient and manageable method of advancing the claim; and second, whether a class proceeding would be preferable in the sense of preferable to other procedures such as joinder, test cases, consolidation, etc.[59] The question in the preferability analysis is not whether there should be any litigation at all, but whether or not a class proceeding is the preferable procedure for resolving the dispute.[60]

The Supreme Court of Canada has held that the preferability inquiry is to be conducted with a view to the three principal goals of class proceedings outlined above.[61] The goal of judicial economy will not be served where, for example, individual concerns would overwhelm common issues.  In terms of behaviour modification, a court may determine that a class action would not further this goal where, for example, the alleged wrongs are system-specific and no longer on-going, or where the types of transactions at issue are governed by a regulatory scheme.

Class actions relating to allegations of system-wide breaches by a franchisor have been found to promote all three objectives of the CPA.[62] Indeed, as stated above, the Ontario Court of Appeal has recently found that such cases are “exactly the kind of case for a class proceeding.”[63] Further, in the Sears decision, Justice Strathy highlighted the inequality between the franchisor and the franchisees as a key consideration in determining that a class proceeding was the preferable procedure:

In view of the power imbalance between the franchisor and the franchisees, the very concern that the [Arthur Wishart Act] was designed to address, there is a significant impediment to access to justice by way of individual action, particularly where some of the franchisees remain a part of the Sears system.[64]

The behaviour modification factor arises frequently in franchise class action litigation. In Quizno’s, for example, the Divisional Court noted that the motion judge characterized the relationship between the franchisees and franchisor as acrimonious, and that the efforts of franchisees to bring their concerns to Quizno’s attention were “thwarted with threats and intimidation.”[65] Similarly, the court in A&P found evidence that A&P had “consistently failed to produce proper records to the franchisees despite repeated requests and A&P’s obligations to do so in accordance with its duty of utmost good faith as franchisor.” In the A&P decision, Justice Winkler (as he then was) went on to comment on various tactics deployed by the franchisor to prevent a class action, both in the context of the behavior modification consideration under the CPA and the duty of utmost good faith owed by a franchisor to its franchisees:

Here there are allegations of misconduct of A&P that if proven, would entitle the class members to a recovery. Moreover, there is evidence that A&P has consistently failed to produce proper records to the franchisees despite repeated requests and A&P’s obligations to do so in accordance with its duty of utmost good faith as franchisor. The litigation plan proposed by the plaintiffs coupled with the availability, and suitability, of an aggregate assessment should they be successful in their claims, augur in favour of a conclusion that a class proceeding could achieve behavioural correction.[66]

E. Class Representative (Section 5(1)(e)):

In Western Canadian, McLachlin C.J.C. described the factors to be considered in assessing whether a class representative is appropriate:

The motivation of the representative, the competence of the representative’s counsel, and the capacity of the representative to bear any costs that may be incurred by the representative in particular (as opposed to by counsel or by the class members generally). The proposed representative need not be “typical” of the class, nor the “best” possible representative. The court should be satisfied, however, that the proposed representative will vigorously and capably prosecute the interests of the class.[67] (Emphasis added)

The fact that a representative plaintiff may appear to be acting independently of the other franchisees may be a factor militating in favour of the suitability of the proposed class representative. In A&P, the franchisor attempted to use the plaintiffs’ independence against them. Justice Winkler (as he then was) stated as follows:

[…] A&P highlights the admitted “independence” of the three proposed representative plaintiffs. It is common ground that the plaintiffs are prosperous, unencumbered by debt to A&P and not intimidated by A&P’s counterclaim. Simply put, A&P contends that these characteristics distinguish the plaintiffs from the putative class members and, as such, not only renders them unsuitable as representatives, but mandates a decision from the court that individual actions are a preferable method of resolving the claims of the class. …

Further, these are exactly the type of plaintiffs that may be required to prosecute a class action lawsuit in the context of a franchise relationship, with the inherent vulnerability in the dependent ongoing nature of the relationship between franchisor and franchisee. This aspect of the commercial realities of franchise arrangements has been commented upon in the context of class proceedings. In recognizing that access to justice is a major impediment for franchisees, the Ontario Law Reform Commission, Report on Class Actions (1982) Vol. 1 Ministry of the Attorney General, 1982 states at p. 128:

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.[68]

F. Workable Plan of Proceeding (Section 5(1)(e)(ii)):

It is the responsibility of the representative plaintiff to set out a method of advancing the action on a timely basis on behalf of the class and notifying the class members of the action. The certified franchise class actions to date all contain examples of workable plans of proceeding incorporated into the order for certification, even when those plans contained limited detail in certain respects.[69]

The existence of a plan of proceeding when combined with the presence of a class proceedings judge ensures a timely prosecution of a class proceeding with the availability of the judge at all times to address all matters that may arise in the context of the judge’s experience with the case. The class proceedings judge has wide powers to manage the proceeding as provided for under the CPA.[70]