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Franchise Lessons to Be Learned From the Shoppers Drug Mart Certification Decision

Date

July 22, 2013


The Shoppers Drug Mart franchisees recently took another step forward in their class action lawsuit. Building on his earlier decision discussed here,  Justice Perell for the Ontario Superior Court of Justice (ONSC) certified a number of elements of the plaintiffs’ action as a class proceeding. In this article, we have focussed on the three aspects of the decision that, in our view, are most significant to franchise and distribution systems.

Policies Communicated to the Franchisees May Become Part of the Franchise Manual

Franchisors should ensure that their franchise agreements are absolutely clear as to which documents form part of the franchisor’s "manual" (or set of standard provisions) that governs franchisees. Lack of clarity on this point could lead to a franchisor inadvertently establishing an enforceable obligation on itself.

In Spina v. Shoppers Drug Mart Inc. (Spina), the franchisees entered into evidence a memorandum issued by the franchisor that stated that "[fees] and other charges to stores are intended to cover the cost of these services by central office without a profit element (emphasis added)." The franchisor’s position was that this memorandum did not form part of the "Manual," and thus was not legally enforceable. The franchisees relied on this language to bolster their claim that the franchisor had unlawfully profited from certain fees charged in connection with the services provided to the franchisees.

This issue will now proceed to a common issues trial, as the franchisees established sufficient traction on this point on the certification motion.

A Class Action May Include Franchisees Operating Under Different Agreements

Courts may be willing to certify class proceedings brought by groups of franchisees operating under different versions of the franchise agreement, notwithstanding potential material discrepancies between the two documents.

In Spina, one group of franchisees was operating under the 2002 franchise agreement, while another was operating under the 2010 franchise agreement. The ONSC certified two subclasses of franchisees, each corresponding to their governing agreement. Going forward, the ONSC will assess the certified issues in relation to each of these subclasses, despite the possibility of divergent findings.

System-Wide Changes That Affect the Franchisees Individually May not Be Suited for Class Proceedings

The ONSC may be unwilling to certify causes of action that address system-wide changes by the franchisor if the impact of such changes can only be determined at the individual franchise level.

In this case, the franchisor introduced a system in which it pre-determined the expected budget of each franchisee. This projection had an important impact on the franchisee’s annual net earnings and compensation from the franchisor. The franchisees alleged that the franchisor instituted this system in a punitive and unlawful manner. However, the ONSC refused to certify the issues associated with the claim on the basis that they failed to raise "common issues" for the class. The ONSC held that this budgeting process was "inherently individualistic" and that the plaintiffs had failed to substantiate their allegation that the franchisor had imposed unreasonable and biased budget targets on a system-wide basis. By contrast, the ONSC certified a number of other causes of action where the franchisees had demonstrated issues that were common to the franchise network as a whole.

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