Ontario, Canada, Court of Appeal Affirms Quiznos and Midas Decisions

In Quiznos Canada Restaurant Corporation v. 2038724 Ontario Ltd., 2010 ONCA 466, the representative plaintiff alleged that franchisees were charged exorbitant prices for food and other supplies purchased for use in restaurants. The plaintiff alleged this implicated Competition Act conspiracy and price maintenance claims between Quiznos, the franchisor, and Gordon Food Services, from whom franchisees were required to purchase supplies used at Quiznos restaurants.

The motions judge who first heard the plaintiff's certification motion refused to certify the class action because he concluded that damages could not be determined on a class-wide basis. The judge concluded the plaintiffs had not established a methodology for calculating what the prices for the franchisees would have been (and what the franchisees ought to have paid) if there was no conspiracy or price maintenance. The Divisional Court reversed the motions judge, concluding that the motions judge erred in his analysis of whether damages could be determined on an aggregate basis, and in failing to conclude that there were sufficient common issues that could have been determined on a collective basis to warrant certifying the class action. The Court of Appeal affirmed the Divisional Court's certification of the class action and concluded as follows:

• Although a civil claim for damages under the Competition Act requires proof of harm or damage, proving the existence of price maintenance under s. 61 of the Competition Act does not require evidence of damage, and can be determined on a class-wide basis.
• Although a civil claim for damages under the Competition Act requires proof of harm or damage, determining whether there has been an unlawful agreement to fix prices may be determined on a class-wide basis.
• In a motion for certification, a plaintiff is only required to prove that there is a reasonable likelihood that damages can be proven on an aggregate basis. It is for the trial judge, not the motions judge, to determine whether damages can in fact be determined on an aggregate basis. Even if damages cannot be determined on an aggregate basis, this is not fatal to a motion for certification because common issues and individual issues can both be accommodated in a class proceeding.

The Court of Appeal's decision is significant, and will have implications for class action practice, competition litigation and franchise litigation across Canada. First, the Court of Appeal embraced a line of reasoning that will make it easier to seek certification of class proceedings in Canada, particularly in respect of claims that require proof of harm or damage as an integral component of liability.

Second, the Court of Appeal's decision appears to have lowered the threshold for the certification of competition class actions in Canada; it is the first time that the Ontario Court of Appeal has certified a competition class action. In its decision, the Court of Appeal properly noted that Parliament had repealed the offense of price maintenance in 2009. However, this amendment arguably did not have retroactive effect, and as a result, the court's decision may renew scrutiny of vertical pricing and distribution practices prior to 2009, particularly in cases involving resale prices and exclusive sourcing of supply.

Third, the Court of Appeal's decision is notable from a franchising perspective. The franchise class action certified is for claims not based on provincial franchise legislation like the Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”). Further, the decision indicates that courts hearing franchise class actions are willing to determine as a common issue whether there has been a breach by the franchisor of a specific provision of a standard-form franchise agreement. Finally, in determining that a class proceeding was the preferable procedure to resolve the common issues, the Court of Appeal specifically found that “a dispute between a franchisor and several hundred franchisees is exactly the kind of case for a class proceeding.”

The Midas Appeal

In an article in the May 2010 issue of FBLA, “Tarnishing the Golden Touch: Releases from Midas Franchisees Found Unenforceable,” the authors identified a number of common practices of franchisors in Canada called into question by the Ontario Superior Court of Justice's decision in 405341 Ontario Limited v. Midas Canada Inc. (“Midas”), 64 B.L.R. (4th) 251 (Ont. S.J.), summarized the grounds for appeal to the Ontario Court of Appeal heard on April 12, 2010, and discussed what impact the dismissal of the appeal would have on the Canadian franchise industry.

On July 6, 2010, the Ontario Court of Appeal upheld the lower court's decision on all points (2010 ONCA 478), including the following issues:

Requiring Releases on Transfer or Renewal. The lower court's decision cast into doubt the enforceability of releases that franchisors commonly require franchisees to provide upon renewal or transfer of the franchise agreement. Not only did the Court of Appeal confirm that such releases are prima facie unenforceable, but also that the provisions in the franchise agreement requiring such releases “offend and are contrary” to the Wishart Act.

Further, the Court of Appeal found that such releases are unenforceable due to Section 11 of the Wishart Act and do not fall within the exceptions to that section as set out in the earlier case of 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (“Tutor Time,” [2006] O.J. No. 3011 (Ont. S.J.); upheld at [2006] O.J. No. 4992 (Div. Ct.)) (i.e., that Section 11 will not apply to releases given by a franchisee, with independent legal advice, in the course of the settlement of a dispute of existing, known breaches of the Wishart Act).

The Court of Appeal stated that requiring a release as a condition precedent to permitting a franchisee to exercise a contractual right “is simply contrary to the spirit, intent and letter of the [Wishart] Act,” and that requiring a franchisee to release any claims in order to renew the franchise agreement “unequivocally runs afoul of the [Wishart] Act.” The Court of Appeal concluded by saying that not only would any releases obtained pursuant to such sections be void, but the provisions in the franchise agreement requiring such releases would be unenforceable.

The Court of Appeal distinguished Tutor Time from the facts of the Midas case, saying that the reasoning in Tutor Time upholds releases of known breaches of the Wishart Act that are provided with independent legal advice, not general, indiscriminate releases that were at issue in Midas. Interestingly, the court quotes from the Tutor Time decision, which upholds releases of “existing, known breaches.” However, when applying the reasoning to the facts at hand, the Court of Appeal refers to “existing and fully known breaches.” Whether this was intentional, and whether “fully known” has raised the bar to upholding so-called “Tutor Time” releases, remains an open issue.

Requiring Releases of Class Proceedings. The court also upheld the lower court's finding that requiring franchisees to provide such releases on renewal or transfer of the franchise agreement violated the franchisees' rights of association under Section 4(4) of the Wishart Act. The court agreed with the trial judge that the releases obtained automatically upon renewal or transfer of the franchise agreement also violate Section 4(4) of the Wishart Act by preventing franchisees from participating in class proceedings. On appeal, Midas likened the franchisees' provision of the release to electing to opt out of class proceedings. The Court of Appeal was unequivocal in disagreeing with this argument, stating that the franchisees should not be required to decide between exercising a contractual right to renew or transfer the agreement and being able to participate in class proceedings. Again, the court said that obtaining a release in this context is far from the voluntarily negotiated settlement of known claims that is required to uphold a Tutor Time release.

It should be noted that whether a release is struck down for non-compliance with Section 11 or Section 4(4) of the Wishart Act is not merely an academic issue. Section 4(4) provides a right of action for damages for any breach of that section, where no parallel right of action exists under Section 11. Accordingly, franchisors who require obtaining releases from franchisees must carefully consider both Section 4(4) and Section 11 of the Wishart Act to evaluate the possibility that the releases are not only unenforceable, but also potentially raise liability for a claim for damages under Section 4(4).

Using Ontario As Governing Law. The lower court found that selecting Ontario as the governing law in franchise agreements for franchises operated outside of Ontario effectively expanded the jurisdictional application of the Wishart Act to such provinces. This, despite Section 2 of the statute which states that the legislation applies only to franchises operated wholly or partly within the province. The Court of Appeal upheld the lower court's finding on this issue, meaning that franchisors who use Ontario as the governing law for franchises operated outside of that province do so at the risk of having the Wishart Act apply.

Before the Court of Appeal, the appellant argued that this interpretation required a substantial re-writing of the agreement, by either adding “as if the business of the franchise was operated in Ontario” and/or “notwithstanding the terms of Section 2 of the [Wishart Act],” and that such a revision was not intended by the parties. The Court of Appeal disagreed, briefly stating that parties are generally free to adopt the governing law of any jurisdiction for their commercial arrangement, subject only to public policy reasons to the contrary.

Franchisors can manage this concern on a go-forward basis with relative ease by simply changing the governing law clause in their franchise agreements. However, a greater challenge exists with respect to franchise agreements that have already been executed for franchises operating outside Ontario that have set Ontario as the governing law. Franchisors should consult with their counsel for options on how to manage the risks for such existing franchise agreements.

Each of these cases has been certified, and there are several other high-profile Canadian franchise class action disputes that are pending certification. It remains to be seen whether and to what extent the trend toward class certification of franchise disputes will continue. It is important to note, however, that even once certified, the substantive merits of these disputes remain to be determined.

Jennifer Dolman, a member of this newletter's Board of Editors, and Andraya Frith are partners at Osler, Hoskin & Hoskin LLP in Toronto, Ontario. They can be reached at [email protected] and [email protected].

Two important decisions of the Ontario Court of Appeal involving class action franchise disputes were released this summer.

The Quiznos Appeal

On June 24, 2010, the Ontario Court of Appeal released its long-awaited decision in the Quiznos case, unanimously affirming the Divisional Court's certification of a competition and franchise class action against Quiznos for a range of contractual and antitrust claims arising from the franchisor's vertical supply and pricing arrangements.

In Quiznos Canada Restaurant Corporation v. 2038724 Ontario Ltd., 2010 ONCA 466, the representative plaintiff alleged that franchisees were charged exorbitant prices for food and other supplies purchased for use in restaurants. The plaintiff alleged this implicated Competition Act conspiracy and price maintenance claims between Quiznos, the franchisor, and Gordon Food Services, from whom franchisees were required to purchase supplies used at Quiznos restaurants.

The motions judge who first heard the plaintiff's certification motion refused to certify the class action because he concluded that damages could not be determined on a class-wide basis. The judge concluded the plaintiffs had not established a methodology for calculating what the prices for the franchisees would have been (and what the franchisees ought to have paid) if there was no conspiracy or price maintenance. The Divisional Court reversed the motions judge, concluding that the motions judge erred in his analysis of whether damages could be determined on an aggregate basis, and in failing to conclude that there were sufficient common issues that could have been determined on a collective basis to warrant certifying the class action. The Court of Appeal affirmed the Divisional Court's certification of the class action and concluded as follows:

• Although a civil claim for damages under the Competition Act requires proof of harm or damage, proving the existence of price maintenance under s. 61 of the Competition Act does not require evidence of damage, and can be determined on a class-wide basis.
• Although a civil claim for damages under the Competition Act requires proof of harm or damage, determining whether there has been an unlawful agreement to fix prices may be determined on a class-wide basis.
• In a motion for certification, a plaintiff is only required to prove that there is a reasonable likelihood that damages can be proven on an aggregate basis. It is for the trial judge, not the motions judge, to determine whether damages can in fact be determined on an aggregate basis. Even if damages cannot be determined on an aggregate basis, this is not fatal to a motion for certification because common issues and individual issues can both be accommodated in a class proceeding.

The Court of Appeal's decision is significant, and will have implications for class action practice, competition litigation and franchise litigation across Canada. First, the Court of Appeal embraced a line of reasoning that will make it easier to seek certification of class proceedings in Canada, particularly in respect of claims that require proof of harm or damage as an integral component of liability.

Second, the Court of Appeal's decision appears to have lowered the threshold for the certification of competition class actions in Canada; it is the first time that the Ontario Court of Appeal has certified a competition class action. In its decision, the Court of Appeal properly noted that Parliament had repealed the offense of price maintenance in 2009. However, this amendment arguably did not have retroactive effect, and as a result, the court's decision may renew scrutiny of vertical pricing and distribution practices prior to 2009, particularly in cases involving resale prices and exclusive sourcing of supply.

Third, the Court of Appeal's decision is notable from a franchising perspective. The franchise class action certified is for claims not based on provincial franchise legislation like the Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”). Further, the decision indicates that courts hearing franchise class actions are willing to determine as a common issue whether there has been a breach by the franchisor of a specific provision of a standard-form franchise agreement. Finally, in determining that a class proceeding was the preferable procedure to resolve the common issues, the Court of Appeal specifically found that “a dispute between a franchisor and several hundred franchisees is exactly the kind of case for a class proceeding.”

The Midas Appeal

In an article in the May 2010 issue of FBLA, “Tarnishing the Golden Touch: Releases from Midas Franchisees Found Unenforceable,” the authors identified a number of common practices of franchisors in Canada called into question by the Ontario Superior Court of Justice's decision in 405341 Ontario Limited v. Midas Canada Inc. (“Midas”), 64 B.L.R. (4th) 251 (Ont. S.J.), summarized the grounds for appeal to the Ontario Court of Appeal heard on April 12, 2010, and discussed what impact the dismissal of the appeal would have on the Canadian franchise industry.

On July 6, 2010, the Ontario Court of Appeal upheld the lower court's decision on all points (2010 ONCA 478), including the following issues:

Requiring Releases on Transfer or Renewal. The lower court's decision cast into doubt the enforceability of releases that franchisors commonly require franchisees to provide upon renewal or transfer of the franchise agreement. Not only did the Court of Appeal confirm that such releases are prima facie unenforceable, but also that the provisions in the franchise agreement requiring such releases “offend and are contrary” to the Wishart Act.

Further, the Court of Appeal found that such releases are unenforceable due to Section 11 of the Wishart Act and do not fall within the exceptions to that section as set out in the earlier case of 1518628 Ontario Inc. v. Tutor Time Learning Centres LLC (“Tutor Time,” [2006] O.J. No. 3011 (Ont. S.J.); upheld at [2006] O.J. No. 4992 (Div. Ct.)) (i.e., that Section 11 will not apply to releases given by a franchisee, with independent legal advice, in the course of the settlement of a dispute of existing, known breaches of the Wishart Act).

The Court of Appeal stated that requiring a release as a condition precedent to permitting a franchisee to exercise a contractual right “is simply contrary to the spirit, intent and letter of the [Wishart] Act,” and that requiring a franchisee to release any claims in order to renew the franchise agreement “unequivocally runs afoul of the [Wishart] Act.” The Court of Appeal concluded by saying that not only would any releases obtained pursuant to such sections be void, but the provisions in the franchise agreement requiring such releases would be unenforceable.

The Court of Appeal distinguished Tutor Time from the facts of the Midas case, saying that the reasoning in Tutor Time upholds releases of known breaches of the Wishart Act that are provided with independent legal advice, not general, indiscriminate releases that were at issue in Midas. Interestingly, the court quotes from the Tutor Time decision, which upholds releases of “existing, known breaches.” However, when applying the reasoning to the facts at hand, the Court of Appeal refers to “existing and fully known breaches.” Whether this was intentional, and whether “fully known” has raised the bar to upholding so-called “Tutor Time” releases, remains an open issue.

Requiring Releases of Class Proceedings. The court also upheld the lower court's finding that requiring franchisees to provide such releases on renewal or transfer of the franchise agreement violated the franchisees' rights of association under Section 4(4) of the Wishart Act. The court agreed with the trial judge that the releases obtained automatically upon renewal or transfer of the franchise agreement also violate Section 4(4) of the Wishart Act by preventing franchisees from participating in class proceedings. On appeal, Midas likened the franchisees' provision of the release to electing to opt out of class proceedings. The Court of Appeal was unequivocal in disagreeing with this argument, stating that the franchisees should not be required to decide between exercising a contractual right to renew or transfer the agreement and being able to participate in class proceedings. Again, the court said that obtaining a release in this context is far from the voluntarily negotiated settlement of known claims that is required to uphold a Tutor Time release.

It should be noted that whether a release is struck down for non-compliance with Section 11 or Section 4(4) of the Wishart Act is not merely an academic issue. Section 4(4) provides a right of action for damages for any breach of that section, where no parallel right of action exists under Section 11. Accordingly, franchisors who require obtaining releases from franchisees must carefully consider both Section 4(4) and Section 11 of the Wishart Act to evaluate the possibility that the releases are not only unenforceable, but also potentially raise liability for a claim for damages under Section 4(4).

Using Ontario As Governing Law. The lower court found that selecting Ontario as the governing law in franchise agreements for franchises operated outside of Ontario effectively expanded the jurisdictional application of the Wishart Act to such provinces. This, despite Section 2 of the statute which states that the legislation applies only to franchises operated wholly or partly within the province. The Court of Appeal upheld the lower court's finding on this issue, meaning that franchisors who use Ontario as the governing law for franchises operated outside of that province do so at the risk of having the Wishart Act apply.

Before the Court of Appeal, the appellant argued that this interpretation required a substantial re-writing of the agreement, by either adding “as if the business of the franchise was operated in Ontario” and/or “notwithstanding the terms of Section 2 of the [Wishart Act],” and that such a revision was not intended by the parties. The Court of Appeal disagreed, briefly stating that parties are generally free to adopt the governing law of any jurisdiction for their commercial arrangement, subject only to public policy reasons to the contrary.

Franchisors can manage this concern on a go-forward basis with relative ease by simply changing the governing law clause in their franchise agreements. However, a greater challenge exists with respect to franchise agreements that have already been executed for franchises operating outside Ontario that have set Ontario as the governing law. Franchisors should consult with their counsel for options on how to manage the risks for such existing franchise agreements.

Each of these cases has been certified, and there are several other high-profile Canadian franchise class action disputes that are pending certification. It remains to be seen whether and to what extent the trend toward class certification of franchise disputes will continue. It is important to note, however, that even once certified, the substantive merits of these disputes remain to be determined.

Jennifer Dolman, a member of this newletter's Board of Editors, and Andraya Frith are partners at Osler, Hoskin & Hoskin LLP in Toronto, Ontario. They can be reached at [email protected] and [email protected].