Interlocutory Injunctions in the Franchise Context

The Threshold: From 'Serious Issue to Be Tried' to 'Strong Prima Facie Case'

Traditionally, under the first part of the Test, courts have applied the Lower Threshold in determining whether to grant an injunction to enforce a restrictive covenant. The Lower Threshold only requires the judge to be satisfied, based on a preliminary assessment of the merits, that the proceeding is neither frivolous nor vexatious.

Where the enforcement of restrictive covenants is concerned, recent developments suggest that courts may be requiring franchisors to satisfy the Higher Threshold, especially where granting the injunction would lead to a final determination of the matter or would impair a party's ability to make a living, or where the court takes issue with the ultimate enforceability of the covenant. To meet the Higher Threshold, the franchisor must establish that it is “clearly right” and that there is a “high degree of assurance” of success at trial. Further, the court will carefully examine the franchise agreement and its context, and consider the enforceability of the covenants.

Where enforcing a restrictive covenant will impose an obligation on a party to act positively, it is viewed as a mandatory injunction, and a franchisor also will have to meet the Higher Threshold. Where enforcing a restrictive covenant does not substantially alter the status quo, and does not create a new obligation, the courts continue to apply the Lower Threshold. As a result, franchisors will have greater success with meeting the Lower Threshold if they can demonstrate that the express terms of a restrictive covenant relate to an existing or ongoing obligation.

Conversely, where a franchisee seeks to enjoin a franchisor from terminating a franchise agreement, courts appear more inclined to apply the Lower Threshold. This is because of franchisees submitting that they are simply seeking to continue the rights agreed to under the franchise agreement and that an injunction will merely preserve the status quo. Injunctive relief is therefore prohibitive, and the Lower Threshold applies.

Greater Evidentiary Burden for Demonstrating Irreparable Harm

Previously, courts have readily acknowledged that a franchisee's breach of a restrictive covenant causes damage to the franchise system generally, and therefore satisfies the second criteria of the Test: irreparable harm. Courts have, for example, emphasized the importance of maintaining the integrity of franchise businesses, and have recognized the potential of franchisee's breaches encouraging other franchisees to breach similar non-competition covenants.

Recently, Ontario courts have held that franchisors must provide specific evidence of irreparable harm, such as evidence of prospective franchisees deciding not to enter into franchise agreements for new locations or existing franchisees threatening to leave the system, as a result of the former franchisee's actions. Franchisors seeking interlocutory injunctions can no longer merely rely on persuasive arguments from prior cases with respect to compromised goodwill or general damage to the franchise system. Rather, franchisors must be prepared to provide concrete evidence of actual irreparable harm suffered as a result of the franchisee's breach. If there are weaknesses on the irreparable harm front, a franchisor should tread cautiously when pursuing injunctive relief ' especially since the franchisor will have to pay a significant proportion of the franchisee's legal costs if the injunction is denied.

Conversely, it appears that courts will not apply the same scrutiny to evidence of irreparable harm adduced by franchisees. For example, in a recent case involving termination of a franchise agreement in which the franchisee was found to have suffered irreparable harm, the court found that there [was] “probably a proprietary and goodwill aspect” to the franchisee's status, and that quantification of that interest would be difficult. Franchisees seeking interlocutory relief may therefore not face the same rigorous evidentiary hurdle faced by franchisors to demonstrate irreparable harm.

Affirmation of the Test

Recently, Ontario courts have affirmed that irreparable harm and balance of convenience are factors that must be considered in determining an interlocutory injunction, even where there is unequivocal evidence of a restrictive covenant's breach. Previous Ontario decisions held that where there is clear breach of a restrictive covenant, the first element of the Test is satisfied, and the additional elements of irreparable harm and balance of convenience need not be addressed. Depending on the strength of the plaintiff's case, however, these factors may be given less weight in determining the issue.

Conclusion

Although Ontario courts have confirmed that all elements of the Test apply where there is a breach of a negative covenant, some uncertainty remains in the law of interlocutory injunctions. The apparent dichotomy between decisions in which courts have applied the Lower or Higher Thresholds, as well as conflicting case law with respect to the evidentiary standard for proving irreparable harm, suggests a need for clarification by an appellate court. Following the injunction hearing, however, many cases in Ontario tend to settle. Accordingly, it may be some time before these issues are addressed by a higher court. In the meantime, franchisors and franchisees seeking injunctive relief must be mindful that this remedy remains an extraordinary one, and proceed to court as well-prepared as possible in spite of what may be urgent circumstances.

Jennifer Dolman is a litigation partner in the Toronto office of Osler, Hoskin & Harcourt LLP and is cross-appointed to the firm's Franchise & Distribution Practice Law Group and the Intellectual Property Department. Aislinn Reid is an articling student in Osler's Toronto office. Dolman can be contacted at [email protected], and Reid can be contacted at [email protected].

Injunctions play a key role in franchising. They enable franchisors to enforce in-term and post-term covenants contained in their franchising agreements to protect their brand, reputation, and franchise system generally. They also allow franchisees to enjoin franchisors from wrongfully terminating their franchise relationship.

When pending a trial wherein a franchisor seeks to enjoin a franchisee from breaching a restrictive covenant or a franchisee seeks to enjoin a franchisor from terminating their relationship, Canadian courts have generally applied the following three-part test (the “Test”): 1) Is there a serious issue to be tried?; 2) Will the moving party suffer irreparable harm if the injunction is not granted?; and 3) Does the balance of convenience lie in favor of granting the injunction? (The quintessential test for an interlocutory injunction is set out in R.J.R MacDonald Inc. v. Canada (A.G.), [1994] 1 S.C.R. 31 at pp. 334-343.) Where the facts satisfy the Test, Canadian courts have typically granted an injunction without paying too much attention to the merits.

Recent trends in Ontario courts, however, indicate that there is some debate regarding how to approach and apply the Test. There is a dichotomy as to whether the first part of the Test should be “serious issue to be tried” (the “Lower Threshold”) or the more stringent requirement of “strong prima facie case” (the “Higher Threshold”). Further, where a franchisor seeks to enjoin a franchisee from breaching a restrictive covenant, courts now require more concrete evidence of irreparable harm. Finally, even where there is a clear breach of a restrictive covenant by a franchisee, courts require franchisors to satisfy all three elements of the Test. The result of these trends is that Ontario courts appear to be taking an earlier look at the merits of a case, possibly making it more difficult for franchisors to obtain interlocutory injunctions. However, where franchisees seek to enjoin a franchisor from terminating a franchise agreement, courts continue to apply the Lower Threshold test and do not appear to consider the merits to the same degree.

The Threshold: From 'Serious Issue to Be Tried' to 'Strong Prima Facie Case'

Traditionally, under the first part of the Test, courts have applied the Lower Threshold in determining whether to grant an injunction to enforce a restrictive covenant. The Lower Threshold only requires the judge to be satisfied, based on a preliminary assessment of the merits, that the proceeding is neither frivolous nor vexatious.

Where the enforcement of restrictive covenants is concerned, recent developments suggest that courts may be requiring franchisors to satisfy the Higher Threshold, especially where granting the injunction would lead to a final determination of the matter or would impair a party's ability to make a living, or where the court takes issue with the ultimate enforceability of the covenant. To meet the Higher Threshold, the franchisor must establish that it is “clearly right” and that there is a “high degree of assurance” of success at trial. Further, the court will carefully examine the franchise agreement and its context, and consider the enforceability of the covenants.

Where enforcing a restrictive covenant will impose an obligation on a party to act positively, it is viewed as a mandatory injunction, and a franchisor also will have to meet the Higher Threshold. Where enforcing a restrictive covenant does not substantially alter the status quo, and does not create a new obligation, the courts continue to apply the Lower Threshold. As a result, franchisors will have greater success with meeting the Lower Threshold if they can demonstrate that the express terms of a restrictive covenant relate to an existing or ongoing obligation.

Conversely, where a franchisee seeks to enjoin a franchisor from terminating a franchise agreement, courts appear more inclined to apply the Lower Threshold. This is because of franchisees submitting that they are simply seeking to continue the rights agreed to under the franchise agreement and that an injunction will merely preserve the status quo. Injunctive relief is therefore prohibitive, and the Lower Threshold applies.

Greater Evidentiary Burden for Demonstrating Irreparable Harm

Previously, courts have readily acknowledged that a franchisee's breach of a restrictive covenant causes damage to the franchise system generally, and therefore satisfies the second criteria of the Test: irreparable harm. Courts have, for example, emphasized the importance of maintaining the integrity of franchise businesses, and have recognized the potential of franchisee's breaches encouraging other franchisees to breach similar non-competition covenants.

Recently, Ontario courts have held that franchisors must provide specific evidence of irreparable harm, such as evidence of prospective franchisees deciding not to enter into franchise agreements for new locations or existing franchisees threatening to leave the system, as a result of the former franchisee's actions. Franchisors seeking interlocutory injunctions can no longer merely rely on persuasive arguments from prior cases with respect to compromised goodwill or general damage to the franchise system. Rather, franchisors must be prepared to provide concrete evidence of actual irreparable harm suffered as a result of the franchisee's breach. If there are weaknesses on the irreparable harm front, a franchisor should tread cautiously when pursuing injunctive relief ' especially since the franchisor will have to pay a significant proportion of the franchisee's legal costs if the injunction is denied.

Conversely, it appears that courts will not apply the same scrutiny to evidence of irreparable harm adduced by franchisees. For example, in a recent case involving termination of a franchise agreement in which the franchisee was found to have suffered irreparable harm, the court found that there [was] “probably a proprietary and goodwill aspect” to the franchisee's status, and that quantification of that interest would be difficult. Franchisees seeking interlocutory relief may therefore not face the same rigorous evidentiary hurdle faced by franchisors to demonstrate irreparable harm.

Affirmation of the Test

Recently, Ontario courts have affirmed that irreparable harm and balance of convenience are factors that must be considered in determining an interlocutory injunction, even where there is unequivocal evidence of a restrictive covenant's breach. Previous Ontario decisions held that where there is clear breach of a restrictive covenant, the first element of the Test is satisfied, and the additional elements of irreparable harm and balance of convenience need not be addressed. Depending on the strength of the plaintiff's case, however, these factors may be given less weight in determining the issue.

Conclusion

Although Ontario courts have confirmed that all elements of the Test apply where there is a breach of a negative covenant, some uncertainty remains in the law of interlocutory injunctions. The apparent dichotomy between decisions in which courts have applied the Lower or Higher Thresholds, as well as conflicting case law with respect to the evidentiary standard for proving irreparable harm, suggests a need for clarification by an appellate court. Following the injunction hearing, however, many cases in Ontario tend to settle. Accordingly, it may be some time before these issues are addressed by a higher court. In the meantime, franchisors and franchisees seeking injunctive relief must be mindful that this remedy remains an extraordinary one, and proceed to court as well-prepared as possible in spite of what may be urgent circumstances.

Jennifer Dolman is a litigation partner in the Toronto office of Osler, Hoskin & Harcourt LLP and is cross-appointed to the firm's Franchise & Distribution Practice Law Group and the Intellectual Property Department. Aislinn Reid is an articling student in Osler's Toronto office. Dolman can be contacted at [email protected], and Reid can be contacted at [email protected].