2611707 Ontario Inc. v. Freshly Squeezed Franchise Juice Corporation, 2022 ONCA 437

By Colin Pendrith, Cassels Brock & Blackwell LLP

The Court of Appeal for Ontario upheld Justice Vella’s finding (previously reported on here) that a franchisee had validly rescinded its franchise agreement pursuant to section 6(2) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Wishart Act”).

In the decision below, the Superior Court determined that the franchisor, Freshly Squeezed Franchise Juice Corporation, had delivered a deficient franchise disclosure document (“FDD”) for three key reasons: 

1. the financial statements provided did not include explanatory notes;

• the FDD failed to disclose that (i) the franchisor had not yet entered into a head lease;  or (ii) whether the franchisee would have the benefit of an “escape clause” should the terms of the head lease be unacceptable; and,

• the FDD did not disclose that the franchise was the first non-mall location in the system.

Citing the Court of Appeal’s prior decision in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, the franchisor appealed, arguing that the FDD was not so deficient as to “effectively amount to a complete lack of disclosure”.  The franchisor argued that the question of whether an FDD contains sufficient information to allow the franchisee to make an informed investment decision should be assessed subjectively.  On that basis, the franchisor asserted that the franchisee had failed to adduce evidence that its subjective decision-making ability was impaired.

The Court of Appeal rejected the franchisor’s argument, clarifying that the test for rescission is objective and “focuses on the disclosure itself, not its recipient, because the [Wishart Act] seeks to ensure that the franchisor provides the same disclosure to every potential franchisee.”

Finding no reversible error in the decision below, the Court of Appeal confirmed that the failure to disclose the absence of a headlease or “escape clause” would objectively impair a franchisee’s decision-making ability.  This finding highlights the need for franchisors to customize the FDD being delivered to include information concerning status of the head lease (and any related escape clause).

The Court of Appeal also noted that even though the franchisee could have potentially determined for itself that the franchise was the first non-mall location, it was incumbent upon the franchisor to disclose that it was “essentially test-driving the franchise in a non-mall setting”.  This finding suggests that a FDD should call attention to any novel aspect of the franchise being granted.  This could include a new or untested type of location or a unique operational method (such as a mobile franchise).  Otherwise, there is a risk that the Court may find that the lack of disclosure caused the franchisee to “unknowingly invest in a business model with no track record of success.”

Court of Appeal Affirms Renewal By Conduct

Coffee Time Donuts Incorporated v. 2197938 Ontario Inc., 2022 ONCA 435

In a decision released on June 1, 2022, the Court of Appeal for Ontario upheld the summary judgment decision of Justice Dow, which granted judgment on a franchisor’s claim against a franchisee for unpaid royalties.  These royalties related to a period that followed the expiration of the term of the franchise agreement, but during which the franchisee continued to use the franchise system.  After continuing to pay its royalties for some time, the franchisee stopped.

The Court below held that the franchise agreement had been renewed by the conduct of the franchisee and franchisor.  In particular, the Court noted that the franchisee continued to (i) pay royalties for nearly two years following the expiration of the franchise agreement; (ii) used Coffee Time branding on its store; and (iii) purchased products from exclusive suppliers.

Despite the extension of the franchise agreement, the franchisee was able to avoid liability for some of the royalty claims based on the statute of limitations.  The franchisee stopped paying royalties on February 16, 2016, but the claim was not commenced until August 9, 2019. In the result, the claims for the unpaid royalties from February 16, 2016 to August 9, 2017 were outside the two-year limitation period and therefore statute-barred.

On appeal, the Court of Appeal for Ontario upheld the motions judge’s finding that the agreement had been extended, noting that “[e]ven after the appellants ceased paying the franchise royalties, they continued to use the “Coffee Time” branding for their business and to purchase products from authorized suppliers.”

This decision affirms that franchise agreements can and will be extended by conduct of the parties, and that no formal renewal is required.  In this case, the deemed extension assisted the franchisor in making out its royalty claims, but in other situations, franchisors should be leery of inadvertently extending the term of an agreement by engaging in “business as usual”.

The decision also serves as a reminder that waiting too long to sue on a royalty claim may result in some or all of the amounts claimed falling outside the limitation period, and therefore being unrecoverable.

Trademark Squatter’s Registration Expunged for Bad Faith

Beijing Judian Restaurant Co. Ltd. v. Meng, 2022 FC 743

In this decision, the Federal Court made the novel finding that a trademark should be struck from the Register of Trademarks on the basis that it was registered in bad faith, and was invalid pursuant to section 18(1)(e) of the Trademarks Act. 

Section 18(1)(e) provides that the registration of a trademark is invalid if, subject to section 17, the application for registration was not the person entitled to secure the registration. 

In 2019, the JU DIAN & Design Mark had been registered by the respondent, an individual named Wei Meng, for use in Canada in association with “restaurant services; take-out restaurant services” and “beer”.

The applicant, Beijing Judian Restaurant Co. Ltd., is the owner and operator of two restaurants in British Columbia, and, since 2005, had operated a chain of well-known restaurants in China that used a family of Ju Dian character trademarks, including the mark registered by the respondent.

Shortly after registering the mark, the respondent sought to sell the registration to the applicant for $1.5 million.  When the applicant refused, the respondent made threats towards the applicant’s business and attempted to sell the registration to others.

The applicant successfully argued that the respondent’s registration had no legitimate commercial purpose, and that the respondent was not the person entitled to secure the registration.  Based on the evidence of the respondent’s extortive conduct and lack of any evidence of a valid commercial purpose for the registration, the Court found that the respondent had acted in bad faith, and expunged the registration.

Despite the respondent’s conduct, the Federal Court declined to award punitive damages to the applicant because the allegations of bad faith are not a separately actionable tort.

The applicant’s passing-off claim was also dismissed, as the respondent had never used the mark commercially, and there was no evidence to establish a likelihood of confusion in the marketplace.

For franchisors entering the Canadian market or those that have not yet registered certain trademarks, the Federal Court’s decision should provide comfort that our Courts are willing to expunge marks registered in bad faith by opportunistic trademark squatters.

British Columbia Court of Appeal Upholds Injunction Against Non-Party

Garcha Bros Meat Shop Ltd. v. Singh, 2022 BCCA 36

The franchisor, Garcha Bros Meat Shop Ltd., terminated a franchise agreement containing a post-term non-competition covenant. 

Not long after the termination, the franchisee transferred the lease for the premises of the franchised business to a numbered company (11270058 BC Ltd.) that had recently been incorporated by a former employee of the franchisee named Arshpreet Singh.  The numbered company was then transferred to Kulwinder Kaur Sandhu, a cousin of the franchisee’s principal. 

Neither the newly incorporated numbered company, Mr. Singh nor Ms. Sandhu were parties to the franchise agreement.

An interim injunction was granted by the British Columbia Supreme Court, preventing not only the franchisee and its principals, but also Mr. Singh, Ms. Sandhu and 11270058 BC Ltd., from operating a competing business. The Court was comfortable enjoining the non-signatories based on the finding that the numbered company was set up for the purpose of avoiding the operation of the non-competition covenant.

On appeal, Mr. Singh, Ms. Sandhu and 11270058 BC Ltd. argued that they could not be bound by the non-competition covenant unless they were found to be alter egos of the franchisee or its principals.  The Court of Appeal declined to resolve this question, noting that it was not advanced in the court below, but also stating that “proper approach may well be to deal with the problem not by applying the contractual provision to the non-signatories, but by enjoining them from continuing with their conspiracy to operate a business in violation of the restrictive covenant”.  The Court of Appeal was satisfied that “both approaches yield the same result”, and “most importantly, either approach supports the order the judge made, prohibiting all the defendants from continuing to operate the business in breach of the restrictive covenant.”

The Court of Appeal’s decision will be helpful for franchisors dealing with the not uncommon scenario where a family member of the franchisee is the ostensible owner of the competing business.  Where the involvement of family members appears to be a transparent attempt to avoid a non-competition covenant, Courts may take action to enjoin non-signatories.