In This Issue:

Zwaniga v. Johnvince Foods: A Warning Against Improperly Naming Defendants as “Franchisor’s Associates”

In Zwaniga v. Johnvince Foods (Zwaniga), Justice Perell granted pre-certification summary judgment dismissing a proposed class action against one of two defendants, Johnvince Foods Distribution LP (Johnvince), finding that Johnvince was neither partner nor “franchisor’s associate” of the defendant Revolution Technologies Inc. (Revolution).

Under the Arthur Wishart Act (Franchise Disclosure), 2000 (Act), a franchisor’s associate may be jointly and severally liable with the franchisor for rescission of a franchise agreement, misrepresentation or interference with franchisees’ right to associate. A franchisor’s associate that is a party to a franchise agreement may also be jointly and severally liable for breach of the statutory duty of fair dealing. Where a franchisor and franchisor’s associate(s) are found to be jointly and severally liable, a franchisee can collect damages from either or both of them. Naming a franchisor’s associate may therefore significantly improve a successful franchisee plaintiff’s chances of recovering a damages award, particularly if a franchisor’s associate is perceived to have “deep pockets.”

The Act defines “franchisor’s associate” as a person who directly or indirectly controls or is controlled by the franchisor or by another person who also controls the franchisor and who is directly involved in the grant of the franchise or exercises significant operational control over the franchise and to whom the franchisee has a continuing financial obligation in respect of the franchise.

Background

In March 2011, David and Jennifer Zwaniga (the Zwanigas) commenced a class action against Revolution and Johnvince. The Zwanigas had signed a membership agreement with Revolution to participate as individual distributors in a distributorship program. Under this program, Revolution sold vending machines to individual distributors who became members of a buying group that brought candies and confections for sale in the vending machines. Johnvince, the exclusive Canadian distributor of Planters Peanuts, supplied Revolution with the candies and confections sold in the distributorship program vending machines.

In the proposed class action, the Zwanigas, on behalf of a national class of persons that entered into membership agreements with Revolution to participate in the distributorship program, allege that Revolution induced the Zwanigas and other class members to participate in the distributorship program by making a number of misrepresentations, including misrepresentations regarding the profitability of the distributorship program. The Zwanigas claim that they were not provided with a proper disclosure document as required under the Act, and seek to rescind their membership agreement. The Zwanigas also claim damages both for alleged breach of the statutory duty of fair dealing under the section 3 of the Act and for alleged fraudulent or negligent misrepresentation.

The Zwanigas allege that Johnvince was a partner, joint venturer or franchisor’s associate of Revolution and therefore jointly and severally liable with Revolution for the alleged misrepresentations, failure to disclose and breach of the duty of fair dealing. The Zwanigas allege, among other things, that the distributorship program was presented to them (and other class members) as a partnership between Revolution and Planters Canada. Johnvince has taken the position that it was never Revolution’s partner, joint venturer or a franchisor’s associate; its only role was to grant Revolution a licence to use the Planters trademarks and to supply Planters products.

Court Clarifies Meaning of “Franchisor’s Associate”

The key issue on the motion for summary judgment was whether Johnvince “controlled” Revolution, in the sense of meeting the definition of “franchisor’s associate” under the Act. Justice Perell determined that “control” over a franchisor involves something more than being important, being influential or having bargaining power or control over the “business fate” of a franchisor through exercising contractual rights. Rather, Justice Perell stated that “in the context of the Arthur Wishart Act, control connotes being in charge of or governing or directing or leading the franchisor.”

The judge found that the Zwanigas conflated the concepts of importance and control. While Johnvince was Revolution’s most important supplier, Johnvince was neither in charge of, nor the “boss” over, Revolution. All of the day-to-day and long-term management, administration and business planning were exercised by Revolution. The legal relationship between Revolution and Johnvince was entirely contractual, and they were separate and independent entities. Finally, Justice Perell found no evidence that Johnvince led, regulated, directed, oversaw or governed Revolution or the distributorship program.

In granting Johnvince’s motion for summary judgment, Justice Perell concluded that the Zwanigas’ “only case is against Revolution Food and their case against Johnvince Foods is hopeless.”

Importantly, the judge determined that evidence filed by both Revolution and Johnvince providing opinions on whether Johnvince Foods was a partner or a franchisor’s associate was irrelevant. He observed that what is relevant to the determination of the nature of the legal relationship between the parties is “what the parties said and did, not their after-the-fact legal opinions or self-serving position as to their legal positions.”

Discussion

In litigation against franchisors, franchisee plaintiffs, or representative plaintiffs in the case of class actions, often name additional parties as defendants by claiming that these additional parties are franchisor’s associates. Justice Perell’s decision in Zwaniga both provides judicial guidance on the practical application of “franchisor’s associate” as defined in the Act, and serves as a warning to franchisees not to bring “hopeless” cases against deep pocketed defendants on the basis that the latter are franchisor’s associates. Finally, the Court’s decision in Zwaniga is an encouraging example of an improperly named defendant to a class action successfully using the expanded summary judgment rule to be removed as a party prior to certification.

Justice Perell’s decision has been appealed and is scheduled to be heard by the Ontario Court of Appeal on April 24, 2013.


New York Fries: Court Awards $500,000 Against Franchisees for Defamation

In November 2012, the Ontario Superior Court of Justice granted default judgment and awarded $500,000 against former franchisees who had defamed New York Fries.1  The decision provides a lesson for franchisors in Ontario on how to reap the benefits of procedural remedies.

Background

In June 2010, New York Fries terminated the franchisee agreement of some franchisees for failing to pay franchise fees, rent and taxes. The franchisees responded by bringing an action against New York Fries alleging that the franchisor had wrongfully terminated the agreement, and they brought a motion requesting an injunction to prevent New York Fries from terminating the franchise. The motion failed,2 the franchise agreement was terminated and the franchisees proceeded to embark on an extensive smear campaign against New York Fries.

After writing several cease and desist letters, New York Fries issued a defamation action against its former franchisees. The franchisees served a notice of intent to defend in June; however, no defence was ever filed. In July, New York Fries exercised its procedural right to have the franchisees noted in default. New York Fries then brought a motion for default judgment, asking the Court to grant a permanent injunction prohibiting the franchisees from issuing any further false and defamatory statements about New York Fries and to award general and punitive damages.

The Procedure

Under Rule 19.05 of the Rules of Civil Procedure, a franchisor in Ontario can move for default judgment when a franchisee has failed to deliver its statement of defence in the prescribed time and has been noted in default. While the franchisee will be deemed to admit as true all of the allegations of fact found in the franchisor’s statement of claim, the onus remains on the franchisor to show that the facts, as alleged, entitle it to the judgment requested.

The Judgment

The Court was quick to note that defamatory statements have a particularly negative effect in the context of a franchisor-franchisee relationship, in part because these types of statements have an impact on other franchisees as well:

        It takes little to damage the corporate reputation, and much to restore it. Although defamatory statements of the kind alleged in this case can have devastating consequences in any business context, an attack on the reputation of a franchisor also attacks the goodwill, trust and confidence of each and every franchisee.

The Court held that it was clear that the franchisees had in fact defamed New York Fries and awarded $425,000 in general damages and $75,000 in punitive damages, noting that the franchisees had acted out of malice. The Court also granted the franchisor’s request for a permanent injunction – a rare remedy – and ordered the franchisees in this case permanently restrained from publishing or broadcasting any statements or other communications concerning New York Fries. The Court noted that the franchisees were unlikely to cease their defamatory campaign without legal restraint and that the franchisor was unlikely to collect on the damages judgment.

Lessons for Franchisors

  • Putting the Rules of Procedure to Work:  Default judgment is a simple way to obtain relief against a franchisee but it depends on the franchisee failing to defend the suit.
  • Papering the Written Record:  When seeking default judgment, a franchisor will benefit from the ability to provide the court with a clear written record proving the franchisee’s liability and the franchisor’s damages. For example, in this case the franchisor proved both the defamatory statements and the costs associated with efforts to repair the damage done.

1  2012 ONSC 6338

2  2010 ONSC 3817