In his June 21, 2011, decision in the 1250264 Ontario Inc. v. Pet Valu Canada Inc. class action Justice Strathy of the Ontario Superior Court of Justice denied franchisor Pet Valu Canada Inc. (Pet Valu)’s motion for a declaration that releases between it and certain of its franchisees were enforceable.
Pet Valu had entered into agreements with four of its franchisees to buy-back their franchisees (the Buy-Back Agreements and the Buy-Back Franchisees). Pet Valu also anticipated entering into at least four more such agreements in the near future. Pet Valu was under no contractual obligation to buy-back the franchises. The franchisees, for various different reasons, no longer wanted to continue their businesses and had been unable to otherwise sell them.
As part of the Buy-Back Agreements, Pet Valu sought releases from the Buy-Back Franchisees settling all commercial issues between Pet Valu and the Buy-Back Franchisees, including the Buy-Back Franchisees’ entitlement to recovery in the class action as certified by Justice Strathy in January of 2011 (the Buy-Back Releases). On this motion, counsel to Pet Valu sought a declaration from the Court that the Buy-Back Releases are enforceable. Justice Strathy refused to grant the motion.
In this case the Court:
- found that in the circumstances both Pet Valu and the Buy-Back Franchisees were acting in their own commercial interests by entering into the Buy-Back Agreements;
- recognized that the request by the franchisor of a release of future litigation rights by the franchisee in such a context is common and even good business practice; and
recognized that the Buy-Back Franchisees:
- had consideration for the release;
- were aware of the class action and that they would be foregoing rights in relation to it; and
- had been advised by legal counsel.
However, the Court ultimately decided not to rule that the Buy-Back Releases are enforceable as, among other things:
- caution is required in allowing individual settlements with potential class members as such settlements may undermine the class action (although Strathy, J. found in this instance that there was no evidence of such an intent on the part of Pet Valu);
- none of the Buy-Back Franchisees were before the Court on the motion;
- the notice period had not passed so the Buy-Back Franchisees had not yet had the opportunity to opt out of the class action (and there would be no concern with an opt out franchisee entering into such a release); and
- certain material information, namely the potential amount of damages being foregone by the Buy-Back Franchisees was not disclosed at the time of the Buy-Back Releases.
Following this decision, it appears as though a franchisor may only have a reasonable prospect of success at obtaining a release of broad litigation rights on the part of a potential class member franchisee where: i) the franchisee releasing its right has already opted out of the class action; ii) the franchisee releasing its rights attends before the Court on any hearing regarding the approval of the release; or iii) where potential damages award amounts in the class action have been assessed and disclosed by the franchisor.
Uncertainty of Potential Amounts Released
The strongest driving factor behind Justice Strathy’s ruling appears to be the fact that the amount of damages Buy-Back Franchisees might be foregoing by entering into the Buy-Back Releases was undisclosed. Strathy, J. holds that the amount each Buy-Back Franchisee is potentially foregoing is a “material fact” warranting disclosure pursuant to the Arthur Wishart (Franchise Disclosure) Act, 2000, and that disclosure of the amount might influence a decision finding the Buy-Back Releases enforceable. This is somewhat unprecedented, as it appears to require Pet Valu to make full disclosure of potential damages in a pre-discovery stage of a class action. This sets a higher standard than that generally applicable for settlement approval as it is common for proceedings, including class proceedings, to settle in the pre-discovery phase.
Interests of Buy-Back Franchisees not Represented
None of the Buy-Back Franchisees were before the Court on the motion, it was not clear that they had notice of the motion, and class counsel took the position that they could not represent the Buy-Back Franchisees as they were not yet a part of the class. It is perhaps worth considering whether it would have affected the result if the Buy-Back Franchisees had been joined as parties for the purposes of the motion.
Take-Aways for Franchisors
This case highlights the difficulties of maintaining an ongoing and mutually beneficial business relationship between franchisor and franchisee while those parties are subject to an ongoing class action. Justice Strathy’s decision in this case effectively restrains the ability of both franchisor and franchisee from acting in the normal course of their business relationship to resolve a situation in both of their best commercial interests by subordinating those interests to those of a potential future class of franchisees. There can therefore be no guarantee of certainty in settling commercial issues between a franchisor and a franchisee while under the shadow of a class action.