Injunctions in the Franchising Context: Comparing the Canadian and American Systems

The Franchise Context

As a general rule, non-competition clauses are difficult to enforce, yet in the franchise context they are absolutely crucial. In fact, such clauses are so central that franchising must be distinguished from other areas of law in this regard. For example, in the employment context, courts are extremely reluctant to enforce non-competition covenants that restrict individuals from working in their area of expertise, as it represents an undesirable restraint on trade. As such, it becomes critical for the franchisor to emphasize the franchise context and the rationale behind such covenants.

To succeed at enforcing a non-competition covenant in the franchise context, the benefits gained by franchisees from the franchisor's business model and established brand, as compared with starting an independent enterprise, must be fully explained. Doing this helps establish that different policies and values operate in the franchising context than, for example, the employment context. In the broadest terms, franchises provide a fundamental service to society as a whole because they help level the playing field between large corporations and individual businesspersons. This general social good is reflected at the individual level where a franchisee gains access to a franchise's fully developed 'brand' ' its goodwill, trademarks, products, and services ' without having to independently pursue a risky and unproven concept. A crucial component of the consideration given to the franchisor in the exchange is a promise by the franchisee not to compete against the franchisor and its system for a reasonable amount of time after exiting the franchise system. Without that basic covenant, a very real danger exists that the value of the brand to all other franchisees and potential franchisees will be compromised.

Timing

While it is impossible to generalize regarding the status of court calendars, it may take longer to get an injunction motion before an Ontario court than a U.S. federal court. Ontario has a Commercial List of judges who have a particular background in corporate and commercial matters. As well, a 'triage court' permits counsel to make a very brief presentation as to why they need an expedited hearing. If the case qualifies for hearing on the Commercial List or if the request for an expedited hearing is granted, an injunction motion can generally be heard within six to eight weeks of the process being initiated. Upon a Notice of Action being filed, the plaintiff/ moving party requests a motion date and prepares an initial set of motion materials. Practically speaking, the motion for the injunction is often not heard on that first motion date. Typically, the responding party will not be prepared for the motion by the initial date, and so will request further time to deliver responding materials and to conduct cross-examinations.

In the United States, the federal courts usually follow one of two methods in setting a hearing date. The first is to obtain a hearing date from the court and then, counting backward, to determine when the initial motion papers are due. Court rules then establish a time frame for the opponent's response and any reply. The second method is to file and serve the initial motion papers, which likewise triggers a schedule for a response and a reply. Only after all of the motion papers are filed will the court set a hearing date. There is no known instance of a 'triage court' in the United States, but injunction hearings can still often be scheduled and heard in less than six to eight weeks.

How to Seek an Injunction

The first point of difference between the nations' court systems is the method by which a franchisor can seek an injunction. In Ontario, there are two ways to commence a proceeding seeking an interlocutory injunction ' by way of action or by application. Actions result in a trial and require full documentary and oral discovery, whereas applications lead to a hearing based on affidavit evidence only. In Ontario, franchisors can also seek an injunction without notice to the other side pursuant to Rule 40.02(1) of the Rules of Civil Procedure, which injunction may be granted for a period not exceeding 10 days. These are typically called 'interim' injunctions, and injunctions brought with notice for longer, but still temporary, periods are generally referred to as 'interlocutory' injunctions. For simplicity of comparison, the authors have chosen to focus only on interlocutory injunctions, leaving interim (Canada) or temporary (U.S.) injunctions, restraining orders, and other extraordinary relief for another discussion.

Although it is possible to seek an injunction by way of application, the injunctive relief must be ancillary to some other relief for which a party is entitled to proceed by way of application under Rule 14.05 of the Rules of Civil Procedure. More often than not, the Canadian authors move for an interlocutory injunction within an action. However, rather than commencing the action by way of a detailed Statement of Claim, they commence the action by way of a Notice of Action pursuant to Rule 14.01(2) of the Rules of Civil Procedure (made under the Courts of Justice Act, R.R.O. 1990, Reg. 194). Other jurisdictions in Canada have similar rules of civil procedure providing for the commencement of an action when there is insufficient time to prepare a statement of claim.

A Notice of Action is an originating process designed to be used to commence an action quickly and without the need to provide the same level of detail as a plaintiff would provide in a Statement of Claim. Although the Rules of Civil Procedure provide that a Statement of Claim must be filed 30 days after the notice of action issued, practically speaking the defendant will consent to a late filing, typically 30-45 days after the injunction motion is heard. Failing that, the plaintiff can obtain leave from the court pursuant to Rule 14.03(3) to file a late statement of claim.

Once the proceeding is underway, the most effective way to seek an injunction is by bringing a motion pursuant to Rule 40 of the Rules of Civil Procedure. (Other jurisdictions in Canada have similar rules of civil procedure providing for interim injunctions. Rule 40 governs proceedings seeking injunctions, but Rule 37 governs the jurisdiction and procedure of motions.)

In the United States, injunctions are always sought by a motion within an action, under Rule 65 of the Federal Rules of Civil Procedure. There does not appear to be any procedure analogous to the Canadian 'application' method of starting an application and seeking an injunction.

The Motion Hearing and Evidentiary Considerations

The next difference is the method by which the request is presented to the court, and the ability to test the opponent's testimony. In both Ontario and the United States, requests for injunctions are submitted by motion, supported by a memorandum of law in the United States and a factum in Ontario, with initial facts and documentary evidence presented by affidavits. The hearing consists of oral submissions by counsel, who take a single judge through the relevant evidence and case law. In Ontario, it is exceeding rare to have viva voce evidence at an injunction motion, and it is only possible in extraordinarily circumstances and if the court grants leave (e.g., in a case where there was simply no time to prepare affidavit material and the matter is of great urgency). In the United States, although the motion is generally first presented to the court in writing, live testimony at the subsequent hearing is quite common. There are, of course, many times when the court or the parties prefer to submit the motion on the papers and argument of counsel, such as when witnesses are unavailable or would have to travel great distances. The ultimate decision on whether to take live testimony rests with the trial court, but there are appellate court decisions reversing decisions on an injunction where live testimony was not taken.

This difference is somewhat lessened by the procedure allowing a party to an Ontario proceeding to cross-examine the affiants. Once the motion has been submitted, and prior to the hearing, the opponent has a right to cross-examine the affiants. If such cross-examination is taken, transcript excerpts are provided to the court. As the affidavit forms the primary source of evidence and defines, in large part, the scope of cross-examination, it is generally the most time-consuming and, arguably, the most important task in the preparation of motion or application materials.

In the United States, the initial motion papers are also of critical importance. But if live testimony is going to be received at the hearing, the preparation of witnesses and the cross-examination of the opponent's witnesses may well be the most time-consuming and crucial step.

The Motion Materials

In both jurisdictions, the preparation of motion materials includes the notice of motion and at least one affidavit. Factual evidence is adduced through sworn affidavits, and in Ontario, cross-examinations. Legal arguments are advanced through memorandum of law in the United States and factums in Ontario. In these, counsel make submissions and guide the court through the evidence and legal principles that they say are most pertinent to the relief sought.

The Affidavits

In both jurisdictions, contending parties will prepare affidavits as part of their motion/responding records. An affidavit is sworn by a representative of the franchisor (usually a territory manager or other individual intimately familiar with the franchise relationship in question) and typically by the principal of the corporate franchisee. The affidavit must only contain statements of fact within the personal knowledge of the affiant, or information that is based on information and belief of the affiant, which he or she believes to be true. Where the injunction is to enforce a non-competition or other post-termination covenant, a private investigator's affidavit is often produced on behalf of the franchisor, providing evidence that the former franchisee is engaging in a competitive business and/or continuing to use the franchisor's trademarks.

Affidavits are typically prepared by counsel in conjunction with both the affiant and in-house counsel. They must include all of the relevant facts upon which the franchisor intends to rely and those facts that are necessary to meet the legal test for an injunction. Additionally, all of the documents that support the assertions of the affiants should be attached as exhibits to the affidavit. In Ontario, opposing counsel who elect to cross-examine the franchisor's representative on his or her affidavit may request additional documentation.

Cross-Examinations on the Affidavit

In Ontario, after the parties have exchanged materials, including any reply materials, each party has the right to cross-examine the opposing party's affiant on the information contained in his or her affidavit. The cross-examination must be limited to relevant issues, although in the case of an injunction the full merits of the action are arguably relevant. The answers to questions asked on a cross-examination, as well as documents produced in answer to undertakings, can be used as evidence by either party. The only limitation relating to cross-examinations on motions is provided by Rule 39.02 of the Rules of Civil Procedure, which states that a party cannot cross-examine the deponent of its adversary until the examining party has filed all affidavits upon which the party intends to rely. It is often the case that, in response to the franchisee's responding materials, the franchisor will file a reply affidavit.

The cross-examination of a witness prior to the hearing is not as of right in the United States, although counsel may certainly agree or can seek an order from the court to do so.

The Factum Or Memorandum of Law

The final written submissions by the parties are called factums in Canada and memoranda of law in the United States. Both are a summary of the facts, supporting evidence, and legal arguments. In complex cases, the factum/memorandum may be a lengthy document. Generally, the moving party prepares a factum/memorandum on the facts presented in the initial motion record; but in Ontario, if the hearing is adjourned to allow for responding materials and cross-examination, the factum will be revised based on the additional facts disclosed through the responding materials and cross-examinations.

Next month's installment will address the legal tests for injunctive relief, damages/security, and an expedited approach offered in the U.S. system.

The Canadian authors are Jennifer Dolman, a partner at Osler, Hoskin & Harcourt LLP in Toronto, Ontario, and Denise Sayer, an associate at Osler, Hoskin & Harcourt LLP. The U.S. author is Jon S. Swierzewski, a shareholder at Larkin Hoffman Daly & Lindgren Ltd., in Minneapolis.

Part One of a Two-Part Series

Franchisors often seek injunctions to enforce non-competition and other covenants contained in their franchise agreements, sometimes during but most often after the end of the franchise relationship. A common example is an injunction to enforce a covenant in which the franchisee contracts to not compete in a similar business for a specified period of time and within a specified geographic area. If successful, the moving party-franchisor is granted an injunction forcing the former franchisee to abide by its contractual obligations for the specified time period. Given the time it generally takes to reach trial, the non-competition clause often will expire before the trial occurs. As such, a successful interlocutory injunction motion often will finally decide the issues for the franchisor, rendering the trial moot. Given this reality, parties frequently settle after a successful interlocutory injunction, or the case may be abandoned after an unsuccessful one.

Recognizing the key role played by injunctions in franchise litigation, this article contrasts the procedures and, to a lesser extent, the substantive arguments used to obtain an injunction in Ontario and the United States. For simplicity's sake, the authors have chosen to focus on the Ontario provincial courts and the U.S. federal court system. While all of the other provinces, the Canadian federal government, and all of the U.S. states have some analogous procedures, a full discussion of the nuances of the laws in each such jurisdiction is beyond the scope of this article.

The Franchise Context

As a general rule, non-competition clauses are difficult to enforce, yet in the franchise context they are absolutely crucial. In fact, such clauses are so central that franchising must be distinguished from other areas of law in this regard. For example, in the employment context, courts are extremely reluctant to enforce non-competition covenants that restrict individuals from working in their area of expertise, as it represents an undesirable restraint on trade. As such, it becomes critical for the franchisor to emphasize the franchise context and the rationale behind such covenants.

To succeed at enforcing a non-competition covenant in the franchise context, the benefits gained by franchisees from the franchisor's business model and established brand, as compared with starting an independent enterprise, must be fully explained. Doing this helps establish that different policies and values operate in the franchising context than, for example, the employment context. In the broadest terms, franchises provide a fundamental service to society as a whole because they help level the playing field between large corporations and individual businesspersons. This general social good is reflected at the individual level where a franchisee gains access to a franchise's fully developed 'brand' ' its goodwill, trademarks, products, and services ' without having to independently pursue a risky and unproven concept. A crucial component of the consideration given to the franchisor in the exchange is a promise by the franchisee not to compete against the franchisor and its system for a reasonable amount of time after exiting the franchise system. Without that basic covenant, a very real danger exists that the value of the brand to all other franchisees and potential franchisees will be compromised.

Timing

While it is impossible to generalize regarding the status of court calendars, it may take longer to get an injunction motion before an Ontario court than a U.S. federal court. Ontario has a Commercial List of judges who have a particular background in corporate and commercial matters. As well, a 'triage court' permits counsel to make a very brief presentation as to why they need an expedited hearing. If the case qualifies for hearing on the Commercial List or if the request for an expedited hearing is granted, an injunction motion can generally be heard within six to eight weeks of the process being initiated. Upon a Notice of Action being filed, the plaintiff/ moving party requests a motion date and prepares an initial set of motion materials. Practically speaking, the motion for the injunction is often not heard on that first motion date. Typically, the responding party will not be prepared for the motion by the initial date, and so will request further time to deliver responding materials and to conduct cross-examinations.

In the United States, the federal courts usually follow one of two methods in setting a hearing date. The first is to obtain a hearing date from the court and then, counting backward, to determine when the initial motion papers are due. Court rules then establish a time frame for the opponent's response and any reply. The second method is to file and serve the initial motion papers, which likewise triggers a schedule for a response and a reply. Only after all of the motion papers are filed will the court set a hearing date. There is no known instance of a 'triage court' in the United States, but injunction hearings can still often be scheduled and heard in less than six to eight weeks.

How to Seek an Injunction

The first point of difference between the nations' court systems is the method by which a franchisor can seek an injunction. In Ontario, there are two ways to commence a proceeding seeking an interlocutory injunction ' by way of action or by application. Actions result in a trial and require full documentary and oral discovery, whereas applications lead to a hearing based on affidavit evidence only. In Ontario, franchisors can also seek an injunction without notice to the other side pursuant to Rule 40.02(1) of the Rules of Civil Procedure, which injunction may be granted for a period not exceeding 10 days. These are typically called 'interim' injunctions, and injunctions brought with notice for longer, but still temporary, periods are generally referred to as 'interlocutory' injunctions. For simplicity of comparison, the authors have chosen to focus only on interlocutory injunctions, leaving interim (Canada) or temporary (U.S.) injunctions, restraining orders, and other extraordinary relief for another discussion.

Although it is possible to seek an injunction by way of application, the injunctive relief must be ancillary to some other relief for which a party is entitled to proceed by way of application under Rule 14.05 of the Rules of Civil Procedure. More often than not, the Canadian authors move for an interlocutory injunction within an action. However, rather than commencing the action by way of a detailed Statement of Claim, they commence the action by way of a Notice of Action pursuant to Rule 14.01(2) of the Rules of Civil Procedure (made under the Courts of Justice Act, R.R.O. 1990, Reg. 194). Other jurisdictions in Canada have similar rules of civil procedure providing for the commencement of an action when there is insufficient time to prepare a statement of claim.

A Notice of Action is an originating process designed to be used to commence an action quickly and without the need to provide the same level of detail as a plaintiff would provide in a Statement of Claim. Although the Rules of Civil Procedure provide that a Statement of Claim must be filed 30 days after the notice of action issued, practically speaking the defendant will consent to a late filing, typically 30-45 days after the injunction motion is heard. Failing that, the plaintiff can obtain leave from the court pursuant to Rule 14.03(3) to file a late statement of claim.

Once the proceeding is underway, the most effective way to seek an injunction is by bringing a motion pursuant to Rule 40 of the Rules of Civil Procedure. (Other jurisdictions in Canada have similar rules of civil procedure providing for interim injunctions. Rule 40 governs proceedings seeking injunctions, but Rule 37 governs the jurisdiction and procedure of motions.)

In the United States, injunctions are always sought by a motion within an action, under Rule 65 of the Federal Rules of Civil Procedure. There does not appear to be any procedure analogous to the Canadian 'application' method of starting an application and seeking an injunction.

The Motion Hearing and Evidentiary Considerations

The next difference is the method by which the request is presented to the court, and the ability to test the opponent's testimony. In both Ontario and the United States, requests for injunctions are submitted by motion, supported by a memorandum of law in the United States and a factum in Ontario, with initial facts and documentary evidence presented by affidavits. The hearing consists of oral submissions by counsel, who take a single judge through the relevant evidence and case law. In Ontario, it is exceeding rare to have viva voce evidence at an injunction motion, and it is only possible in extraordinarily circumstances and if the court grants leave (e.g., in a case where there was simply no time to prepare affidavit material and the matter is of great urgency). In the United States, although the motion is generally first presented to the court in writing, live testimony at the subsequent hearing is quite common. There are, of course, many times when the court or the parties prefer to submit the motion on the papers and argument of counsel, such as when witnesses are unavailable or would have to travel great distances. The ultimate decision on whether to take live testimony rests with the trial court, but there are appellate court decisions reversing decisions on an injunction where live testimony was not taken.

This difference is somewhat lessened by the procedure allowing a party to an Ontario proceeding to cross-examine the affiants. Once the motion has been submitted, and prior to the hearing, the opponent has a right to cross-examine the affiants. If such cross-examination is taken, transcript excerpts are provided to the court. As the affidavit forms the primary source of evidence and defines, in large part, the scope of cross-examination, it is generally the most time-consuming and, arguably, the most important task in the preparation of motion or application materials.

In the United States, the initial motion papers are also of critical importance. But if live testimony is going to be received at the hearing, the preparation of witnesses and the cross-examination of the opponent's witnesses may well be the most time-consuming and crucial step.

The Motion Materials

In both jurisdictions, the preparation of motion materials includes the notice of motion and at least one affidavit. Factual evidence is adduced through sworn affidavits, and in Ontario, cross-examinations. Legal arguments are advanced through memorandum of law in the United States and factums in Ontario. In these, counsel make submissions and guide the court through the evidence and legal principles that they say are most pertinent to the relief sought.

The Affidavits

In both jurisdictions, contending parties will prepare affidavits as part of their motion/responding records. An affidavit is sworn by a representative of the franchisor (usually a territory manager or other individual intimately familiar with the franchise relationship in question) and typically by the principal of the corporate franchisee. The affidavit must only contain statements of fact within the personal knowledge of the affiant, or information that is based on information and belief of the affiant, which he or she believes to be true. Where the injunction is to enforce a non-competition or other post-termination covenant, a private investigator's affidavit is often produced on behalf of the franchisor, providing evidence that the former franchisee is engaging in a competitive business and/or continuing to use the franchisor's trademarks.

Affidavits are typically prepared by counsel in conjunction with both the affiant and in-house counsel. They must include all of the relevant facts upon which the franchisor intends to rely and those facts that are necessary to meet the legal test for an injunction. Additionally, all of the documents that support the assertions of the affiants should be attached as exhibits to the affidavit. In Ontario, opposing counsel who elect to cross-examine the franchisor's representative on his or her affidavit may request additional documentation.

Cross-Examinations on the Affidavit

In Ontario, after the parties have exchanged materials, including any reply materials, each party has the right to cross-examine the opposing party's affiant on the information contained in his or her affidavit. The cross-examination must be limited to relevant issues, although in the case of an injunction the full merits of the action are arguably relevant. The answers to questions asked on a cross-examination, as well as documents produced in answer to undertakings, can be used as evidence by either party. The only limitation relating to cross-examinations on motions is provided by Rule 39.02 of the Rules of Civil Procedure, which states that a party cannot cross-examine the deponent of its adversary until the examining party has filed all affidavits upon which the party intends to rely. It is often the case that, in response to the franchisee's responding materials, the franchisor will file a reply affidavit.

The cross-examination of a witness prior to the hearing is not as of right in the United States, although counsel may certainly agree or can seek an order from the court to do so.

The Factum Or Memorandum of Law

The final written submissions by the parties are called factums in Canada and memoranda of law in the United States. Both are a summary of the facts, supporting evidence, and legal arguments. In complex cases, the factum/memorandum may be a lengthy document. Generally, the moving party prepares a factum/memorandum on the facts presented in the initial motion record; but in Ontario, if the hearing is adjourned to allow for responding materials and cross-examination, the factum will be revised based on the additional facts disclosed through the responding materials and cross-examinations.

Next month's installment will address the legal tests for injunctive relief, damages/security, and an expedited approach offered in the U.S. system.

The Canadian authors are Jennifer Dolman, a partner at Osler, Hoskin & Harcourt LLP in Toronto, Ontario, and Denise Sayer, an associate at Osler, Hoskin & Harcourt LLP. The U.S. author is Jon S. Swierzewski, a shareholder at Larkin Hoffman Daly & Lindgren Ltd., in Minneapolis.