Law Times

Law Times • sepTember 3, 2012 FOCUS ON Class Actions Diverging franchise rulings raise eyebrows But lawyer says surprising Dunkin' Donuts case unique to its facts thing to cheer about. Early this year, franchisors T BY JULIUS MELNITZER For Law Times wo landmark fran- chise class action judg- ments have leſt both franchisors and fran- chisees with some- across Canada hailed the Ontario Superior Court ruling involving Tim Hortons, Fairview Donut Inc. v. The TDL Group Corp., as a sign that judges will be taking a more balanced approach to franchise litigation going forward. "Because the purpose of Ca- nadian franchise legislation is to redress potential power imbal- ances between franchisors and franchisees, Canadian courts have tended to interpret this leg- islation broadly in favour of fran- chisees," says Jennifer Dolman of Osler Hoskin & Harcourt LLP. "If you look at the jurisprudence as a pendulum, Tim Hortons repre- sents a swing back to the middle of the spectrum." Just a few months later, how- demand for product." But reaction to the impact of both cases has been mixed. Allan Dick of Toronto' tos LLP, a franchise boutique, says there is nothing novel about the Tim Hortons case. "The ruling is fairly consis- s So- franchisors have a funda- mental, ongoing, continuing, and successive obligation to support their brands. But many franchise law- tent with accepted principles and as such is not a shiſt in the pendulum," he says. "It is a win for franchisors on facts that are clearly within the ac- cepted law. Dolman, " the 166-page judgment, in which Justice George Stra- thy dismissed the action, is a highly persuasive one that will be influential. "I agree that Strathy does not make any novel points, but the manner in which he states the law and the length he goes to make his points make the deci- sion a powerful precedent that will affect future cases." The Tim Hortons case was a however, says proposed class action brought under Ontario' ever, Quebec Superior Court Justice Daniel Tingley found that Dunkin' Donuts had fundamen- tally breached its agreements with its Quebec franchisees by failing to adequately support the brand and stem the rapid rise of arch competitor Tim Hortons in Que- bec. He awarded $16.4 million in damages to the franchisees. "Generally speaking, franchi- sees assume the competitive and other business risks," says Jeffrey Hoffman of Gowling Lafleur Henderson LLP. "But this case elevates the franchisor's obligation to main- tain standards of service to a responsibility to enhance the reputation of the brand and the the Arthur Wishart Act, that im- poses a duty of dealing fairly and in good faith on both franchisors and franchisees. In it, the franchi- see plaintiffs and proposed class representatives asked Strathy to consider whether Tim Hortons had an unlimited power to im- pose system changes on them and to charge them any prices it saw fit. At the core of the case were the s franchise law, " Always Fresh" and "Lunch Menu" programs. The Always Fresh program involved a change in the way the company produced baked goods. Aſter extensive communications with franchisees, Tim Hortons decided to switch the system from having them bake their own doughnuts to delivering frozen yers say the industry has for the most part overreacted to the decision. "The panic arises from the 'If you look at the jurisprudence as a pendulum, Tim Hortons represents a swing back to the middle of the spectrum,' says Jennifer Dolman. ones that they readied for sale. The price increase in the cost of the frozen doughnuts significant- ly affected the profitability of the goods affected by the conversion. With regard to the Lunch ing about the cost of coffee," Dolman notes. From this perspective, it wasn't Menu, the plaintiffs complained that Tim Hortons had breached both its contractual duties and the duty to deal fairly by requir- ing franchisees to buy Lunch Menu item ingredients from the franchisor at prices that were higher than the market price. Strathy, however, refused to look at these matters in isolation. "The court made it clear that at the overall relationship and the overall benefits to the parties." In this case, it was clear that "Rather, the court would look " says Dolman. franchisees can't use the duty of fair dealing to attack each and every aspect of the franchising relationship, reasonable to ask the court to take the profitability of the Always Fresh and Lunch Menu items in isolation and to assess the fairness and perhaps to rewrite the con- tract on that basis. "The court made it clear that the franchisees had no right to make a profit on anything in par- ticular, heart of franchising was uniformi- ty and that individual franchisors could not just pick and choose what they wanted to comply with." The result might have been "The court recognized that the " says Dolman. different, Dolman observes, if the franchisees were unprofitable. "This was not the right system being a Tim Hortons franchisee was a profitable endeavour. Cof- fee, for example, was a lucrative and profitable item. " And no one was complain- the Tim Hortons case, however, franchisors initially reacted with shock to Bertico Inc. v. Dunkin' Brands Canada Ltd., which some have interpreted as meaning that In contrast to their reaction to " she says. to attack on the basis of particular items' profitability, perception that franchisors must now ensure the suc- cess of their franchisees," says Dolman. "My opinion is that amounts to an exaggeration of what the case says." Dolman points out that the PAGE 9 in a franchise agreement an ex- plicit obligation of this kind that effectively requires the franchi- sor to protect its brand from competition," says Dolman. " that the outcome would have been quite different absent such specific language. And it's reasonable to presume cision is without precedent. "This is case in which a court has found that fundamental breach has oc- curred, But Dolman agrees that the de- the first " franchise courts have been reluctant to make this finding even in fairly egregious cases where the fran- chisor has engaged in a whole litany of defaults." Dolman has little doubt that " she says. "Historically, franchisee lawyers will be trying to make the most of the decision. "Even though Justice Tingley acknowledged that franchisors are not the guarantors of fran- chisees' success, we will be see- ing franchisees' lawyers trying See Franchisors, page 10 decision turned on a unique contractual provision requir- ing Dunkin' Donuts to protect the demand for its products in the relevant market. "It is extremely rare to find Untitled-3 1 www.lawtimesnews.com 12-08-29 12:23 PM

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