Franchisors should take note of potential novel allegations being brought against them since the Quebec Court of Appeal’s ruling in Dunkin’ Brands Canada Ltd. v. Bertico Inc., 2015 QCCA 624 (“Dunkin”).
Dunkin reiterated the law’s willingness to read certain obligations into franchise agreements based on the duty of good faith and obligations which flow from the general nature of franchise agreements. Franchisors and franchisees alike have been left to speculate where the limits of their respective obligations and rights lie in the face of a legal landscape in flux.
Since Dunkin, two actions of note have been filed which levy relatively novel allegations against franchisors [in Quebec]. In Franchisés v. Groupe Qualinet (“Qualinet”), Plaintiffs are asking the court to recognize novel implied obligations including, amongst others, the duty to provide training. More recently, in Sopropharm v. Jean Coutu (“Jean Coutu”), the court is being asked to annul franchise agreements because they violate the professional obligations of its franchisees. Although both cases are still before the court, they bring forth a number of new allegations which franchisors should be alive to in their ongoing relations with franchisees.
(a) Jean Coutu: franchise agreements versus professional obligations?
The action brought in Jean Coutu involves the tension between the professional obligations imposed on franchisees by law against those outlined in franchise agreements. The Petitioner Sopropharm (a non-for profit association of pharmacists) filed a putative class action on behalf of all pharmacists operating Jean Coutu franchises on July 15, 2016. The Petitioner alleges that the franchise agreements are null on the basis that they require pharmacists to violate their professional obligations under the Code of ethics of Pharmacists and the Pharmacy Act. The Petitioner asks the court to both set aside the franchise agreements and effect restitution in excess of $250 million. The court’s decision as to which set of obligations, contractual or professional, should prevail will undoubtedly have a serious impact on franchises operating in the professional domain. The Petitioner alleges the franchise agreement violates pharmacists’ professional obligations in two ways:
- Illegal sharing of profits and fees
The Petitioner claims that Jean Coutu’s franchise agreement requires pharmacists to share their profits and fees illegally with Jean Coutu. Jean Coutu’s franchise agreement requires that franchisees pay Jean Coutu a royalty based on a percentage of their annual sales. However, the Petitioner contends that article 49 of the Code of ethics of Pharmacists (the “Code”) only permits pharmacists to share their profits in proportion to the consideration (of services from Jean Coutu) they receive in exchange. The Petitioner also points to explicit provisions of the franchise agreement which state that it will be exercised in accordance with the Professional obligations of pharmacists, specifically citing obligations under the Code. The Petitioner thus claims that the franchise agreements violate both the implicit and explicit obligation to respect the professional obligations of pharmacist, and must therefore be set aside.
In the event the franchise agreements are set aside, the Petitioner asks the court to effect the restitution of the amount of royalties paid out in excess of fair market value of services provided by Jean Coutu. The Petitioner has alleged that this amount, limited to the past three years, is in excess of $250 million.
- Violation of the exclusive property rights of pharmacists
Another contention of the Petitioner is that the franchise agreement violates pharmacists’ exclusive right to own a pharmacy and liberally dispose of it. Jean Coutu’s franchise agreement stipulates that pharmacists may not sell, alienate, transfer, mortgage or sublet their pharmacies without the express permission of Jean Coutu. Furthermore, any permission to sell a pharmacy is conditional on the granting of a full release to Jean Coutu. The Petitioner contends that this is direct violation of article 27 of the Pharmacy Act states that only a pharmacist may own a pharmacy. The Petitioner has asked, should it fail to find in its favour regarding violation article 49 of the Code (above), that the court annul all provisions of the Jean Coutu’s franchise agreements which interfere with the exclusive property rights of pharmacists, enshrined at article 27 of the Pharmacy Act.
(b) Qualinet: novel implied obligations of franchisors?
On March 21, 2016 a number of franchisees (dry cleaners and disaster cleaners), filed a Motion to Institute Proceedings (“MIP”) against Groupe Qualinet and its president (“Defendant”) for damages in excess of $26 million. In addition to claiming the violation of the obligation “not to compete unfairly” and to “protect and enhance its brand” previously recognized in Dunkin, the Plaintiffs ask the court to recognize the existence of the following implied obligations, and their subsequent violation:
- Obligation to provide training
- The Plaintiffs allege that training provided by the defendant was “unorganized, makeshift in nature, and insufficient.”
- Although the contract did state that the Plaintiffs would be provided training, it did not contain any specifics with regards to its type, frequency or duration.
- Obligation to provide meaningful and sustained consultations
- The Plaintiffs allege that annual meetings held between them and the Plaintiff were not consultative in nature, but rather were used by the Plaintiff to sell its products and promote its services.
- The Plaintiffs allege that, despite numerous attempts, the Defendant refused to hear their grievances and actively prevented plaintiffs from discussing them with each other.
- Obligation to provide support and assistance
- The Plaintiffs called for help in reaching their sales projections as forecasted by the Defendant.
- The Defendant failed to take any steps to aid the Plaintiffs, and moreover blamed the Plaintiffs behaviour for having failed to reach the projections.