recent B.C. case highlights both the risk of alleged franchisee misconduct to franchisors’ brands in the social media era and the challenges faced in opposing a franchisee’s effort to restrain termination of a franchise agreement by way of an injunction pending trial.

Background

In this case, there was a media report based on allegations from former employees of the franchisee that the franchisee had withheld pay from its employees and assaulted and threatened employees. This report generated widespread negative commentary about the franchisor on social media. The franchisor investigated. After the investigation, the franchisor attempted to terminate the franchise agreement.

In giving notice of termination, the franchisor relied on sections of the franchise agreement providing that the franchisor could immediately terminate the agreement in the event that the franchisee engaged in conduct that affected the reputation of the franchisor or the goodwill associated with the franchisor’s marks and system “as conclusively determined by [the franchisor].”

The Court acknowledged that these provisions “allowed the franchisor to determine whether and to what extent the conduct of the franchisee adversely affected [the franchisor’s] interest.” Further, the Court stated: “There can be little question that if the plaintiffs acted in the manner alleged…[the franchisor] would be within its rights to terminate the agreement.”

However, the Court said the termination provisions “cannot reasonably be interpreted to give [the franchisor] a right, as sole and unreviewable trier of fact, to say what the franchisee has or has not done. Such an interpretation would give [the franchisor] the right to terminate the agreement on the basis of any evidence it chose to accept, even where the evidence was clearly unreliable or would be seen by an objective observer to be patently false.”

As the franchisee denied the allegations of misconduct and the test for granting an interlocutory injunction only requires the court to conclude there is a “serious issue to be tried,” the Court concluded that a detailed factual inquiry could not and should not be made at the interlocutory motion stage. The Court also found the franchisee had satisfied the other elements of the test for obtaining an injunction, and so the franchisee succeeded in enjoining termination.

Implications and Practical Considerations

There are a number of points to be taken from this decision:

  • Allegations of franchisee misconduct (which, as the decision states, were disputed and not proven in court) can have significant adverse effects on a franchisor’s brand when the allegations can be repeated broadly and commented upon through social media.
  • The Court’s acknowledgment that the termination provisions permitted the franchisor to determine whether or not its reputation or brand had been damaged by a franchisee’s conduct suggests it is not necessary for a franchisor having the benefit of such provisions to conclusively prove damage to its reputation or goodwill to enforce a termination. Even so, in the event of litigation, it would be prudent to have evidence from which the inference of damage could be drawn; in this case, it appears the franchisor included evidence of “widespread negative commentary” on social media in the record before the court.
  • Without an admission by a franchisee that it has engaged in misconduct, or incontrovertible evidence of such misconduct, enforcing a termination for alleged misconduct may be difficult in the face of the franchisee’s motion for an interlocutory injunction, given the low threshold for establishing a “serious issue to be tried” and the Court’s reasoning that the franchisor cannot have the last word on what the franchisee has or has not done.
  • As the courts’ willingness to evaluate conflicting evidence is limited on a motion of this sort, other franchisors in similar situations should consider other procedural mechanisms to enforce terminations for misconduct potentially without having to engage in a lengthy trial process. One possible option is to seek a final determination on an application or motion for summary judgment, as in the recent Hryniak v. Mauldindecision by the Supreme Court which confirms that judges have expanded powers to determine disputed facts where findings of fact can be fairly made without the elaborate and costly machinery of a trial