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Ontario Court of Appeal Provides Guidance on the Definition of "Franchisor’s Associate"

Published by the Franchise & Distribution Group

A recent decision of the Court of Appeal for Ontario (ONCA) helps define the concept of "control," as it relates to the definition of a "franchisor’s associate" in the Ontario Arthur Wishart Act (Franchise Disclosure), 2000 (Act).

In Zwaniga v. Johnvince Foods Distribution L.P.,1 the ONCA upheld the motion judge’s determination that a major supplier would not be classified as a "franchisor’s associate" under the Act merely because the supply agreement included minimum volume targets and allowed the supplier to approve marketing materials. According to the ONCA, these types of contractual provisions in a supply agreement did "not establish direct or indirect control" of the franchisor by the supplier.

Background

In this case, Johnvince Foods Distribution L.P. (Johnvince), the exclusive distributor of Planters™ nut products in Canada, entered into an agreement with Revolution Food Technologies Inc. (Revolution) for the supply of nut products to Revolution’s vending machine distributorship program. Under the terms of the agreement, Revolution agreed to maintain certain sales levels, comply with reporting requirements and uphold prudent practices with respect to Johnvince’s intellectual property. Revolution controlled the distributorship program in all material respects, including the marketing of products, the recruitment of distributors and the management of the distributorship’s business operations. Prospective distributors were even required to sign a letter of understanding stating that Revolution and Johnvince were not affiliated.

Defining "Franchisor’s Associate"

The plaintiffs alleged that certain promotional materials used in a sales presentation drafted by Revolution and prominently displaying Planters™ trademarks contained material misrepresentations. They further alleged that Johnvince was a "franchisor’s associate" of Revolution and thus subject to the Act’s disclosure obligations and the duties of good faith and fair dealing.

The Act defines a "franchisor’s associate" to mean a person,

  1. who, directly or indirectly,
    1. controls or is controlled by the franchisor, or
    2. is controlled by another person who also controls, directly or indirectly, the franchisor, and
  2. who,
    1. is directly involved in the grant of the franchise,
      1.  by being involved in reviewing or approving the grant of the franchise, or
      2.  by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or
    2. exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise;

Under the facts of this case, both the trial judge and the ONCA found that Johnvince was not a franchisor’s associate under the Act. Rather, Johnvince’s relationship with Revolution was akin to that of an important supplier. Johnvince had no legal right to exercise control over the operations of Revolution or the distributorship program and thus lacked the requisite degree of control required of a franchisor’s associate. According to the ONCA, influence and bargaining power does not equate with control. The ONCA noted that the restrictions in the supply agreement between Revolution and Johnvince were commercially reasonable in the context of a supplier attempting to protect its licensed intellectual property rights.

1 2013, ONCA 271 (CanLII)