In November 2012, the Ontario Superior Court of Justice granted default judgment and awarded $500,000 against former franchisees who had defamed New York Fries.1 The decision provides a lesson for franchisors in Ontario on how to reap the benefits of procedural remedies.
In June 2010, New York Fries terminated the franchisee agreement of some franchisees for failing to pay franchise fees, rent and taxes. The franchisees responded by bringing an action against New York Fries alleging that the franchisor had wrongfully terminated the agreement, and they brought a motion requesting an injunction to prevent New York Fries from terminating the franchise. The motion failed,2 the franchise agreement was terminated and the franchisees proceeded to embark on an extensive smear campaign against New York Fries.
After writing several cease and desist letters, New York Fries issued a defamation action against its former franchisees. The franchisees served a notice of intent to defend in June; however, no defence was ever filed. In July, New York Fries exercised its procedural right to have the franchisees noted in default. New York Fries then brought a motion for default judgment, asking the Court to grant a permanent injunction prohibiting the franchisees from issuing any further false and defamatory statements about New York Fries and to award general and punitive damages.
Under Rule 19.05 of the Rules of Civil Procedure, a franchisor in Ontario can move for default judgment when a franchisee has failed to deliver its statement of defence in the prescribed time and has been noted in default. While the franchisee will be deemed to admit as true all of the allegations of fact found in the franchisor’s statement of claim, the onus remains on the franchisor to show that the facts, as alleged, entitle it to the judgment requested.
The Court was quick to note that defamatory statements have a particularly negative effect in the context of a franchisor-franchisee relationship, in part because these types of statements have an impact on other franchisees as well:
It takes little to damage the corporate reputation, and much to restore it. Although defamatory statements of the kind alleged in this case can have devastating consequences in any business context, an attack on the reputation of a franchisor also attacks the goodwill, trust and confidence of each and every franchisee.
The Court held that it was clear that the franchisees had in fact defamed New York Fries and awarded $425,000 in general damages and $75,000 in punitive damages, noting that the franchisees had acted out of malice. The Court also granted the franchisor’s request for a permanent injunction – a rare remedy – and ordered the franchisees in this case permanently restrained from publishing or broadcasting any statements or other communications concerning New York Fries. The Court noted that the franchisees were unlikely to cease their defamatory campaign without legal restraint and that the franchisor was unlikely to collect on the damages judgment.
Lessons for Franchisors
- Putting the Rules of Procedure to Work: Default judgment is a simple way to obtain relief against a franchisee but it depends on the franchisee failing to defend the suit.
- Papering the Written Record: When seeking default judgment, a franchisor will benefit from the ability to provide the court with a clear written record proving the franchisee’s liability and the franchisor’s damages. For example, in this case the franchisor proved both the defamatory statements and the costs associated with efforts to repair the damage done.