In 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corporation, the Ontario Superior Court of Justice recently dismissed a motion to approve a Settlement Agreement between the Franchisor and the Representative Franchisees on the basis of an overbroad unfair release.

Background

The allegations forming the basis of the class action included anti-competitive behaviour on the part of the Franchisor. The Franchisor was alleged to be maintaining the prices of goods offered by its Designated Suppliers to Franchisees at commercially unreasonable levels. It was further alleged that there persisted a conspiracy between the Franchisor and the Designated Suppliers to the present time. The claims pleaded relied on s. 61(1) of the Competition Act, creating sanctions for influencing prices, and s. 3 of the Arthur Wishart Act (Franchise Disclosure) 2000, imposing a duty of fair dealing on parties to franchise agreements.

The Release

One of the terms of the Settlement Agreement was a full and final release, binding on the Plaintiffs and all Class Members, of the Franchisor and its co-defendant Designated Suppliers with respect to a defined set of “Released Claims.” The Released Claims were

any and all claims, demands, actions, suits, causes of action, whether class, individual or otherwise in nature, including assigned claims, whether known or unknown, asserted or unasserted, regardless of the legal theory, existing now or arising in the future by any and all of the Plaintiffs or the Class Members, arising out of or relating to the purchase, sale, distribution, promotion, or marketing of Supplies (as defined in the Statement of Claim).

The evidence showed that the parties disagreed as to the scope of the Released Claims. While Class Counsel was of the view that the covenant simply precluded claims based on the existing alleged misconduct identified in the Statement of Claim, the Defendants viewed it as barring the types of claims identified in the Statement of Claim. This distinction was vital to their interpretation of the Agreement given that they continued to carry on the purchase, sale, distribution, etc. of Supplies in the same manner as they had in the past. They sought to avoid the risk of another class action based on this same conduct.

One Class Member had raised detailed concerns in advance of the hearing, indicating that he feared the Defendants’ interpretation was the correct one despite Class Counsel’s assurances. In his letter of objection, the Class Member opined that the Settlement Agreement “gives [the Franchisor] carte blanche…to do whatever it wishes with respect to the pricing charged to franchisees for all supplies…in perpetuity.”

The Court’s Reasoning

The Court found that this concern had merit. While it acknowledged that interpreting its potential future application was a speculative exercise, it found that one possible interpretation of the release was that it would categorically bar all future claims of the types identified in the class action, rather than only the current claims or continuations of the current claims. It concluded that it would not be fair or reasonable to potentially bar all future claims based on presently unknown circumstances. While it was possible that a future Court would interpret the release so as to be fair to Class Members, it was also “certainly not impossible to release future claims.” Further, the release could have unfair effects in that the current Class Members would be unable to join cause with new franchisees with new complaints of alleged common breaches of the franchise agreement.

The Court made it clear that but for the breadth of the release, the Settlement Agreement would have been approved. Although the Agreement had very little in it for the plaintiffs, the chances of the Class Members fairing much better at trial were deemed to be slim given intervening developments in the interpretation of theCompetition Act and other difficulties inherent to the Class’ claims. The release, given its potentially unfair and unreasonable consequences, was fatal to the approval of the otherwise reasonable settlement.

Key Takeaway

The most valuable lesson to take away from this decision is the cautionary tale it contains about releases in franchise class action settlements. If a release is so broad as to plausibly lend itself to an interpretation that would release a Franchisor from all future claims of a particular type, it risks being rejected by the court for being overbroad and unfair — even if those claims are based on similar allegations as the action at issue.