In Zwaniga v. Johnvince Foods (Zwaniga), Justice Perell granted pre-certification summary judgment dismissing a proposed class action against one of two defendants, Johnvince Foods Distribution LP (Johnvince), finding that Johnvince was neither partner nor “franchisor’s associate” of the defendant Revolution Technologies Inc. (Revolution).

Under the Arthur Wishart Act (Franchise Disclosure), 2000 (Act), a franchisor’s associate may be jointly and severally liable with the franchisor for rescission of a franchise agreement, misrepresentation or interference with franchisees’ right to associate. A franchisor’s associate that is a party to a franchise agreement may also be jointly and severally liable for breach of the statutory duty of fair dealing. Where a franchisor and franchisor’s associate(s) are found to be jointly and severally liable, a franchisee can collect damages from either or both of them. Naming a franchisor’s associate may therefore significantly improve a successful franchisee plaintiff’s chances of recovering a damages award, particularly if a franchisor’s associate is perceived to have “deep pockets.”

The Actdefines “franchisor’s associate” as a person who directly or indirectly controls or is controlled by the franchisor or by another person who also controls the franchisor and who is directly involved in the grant of the franchise or exercises significant operational control over the franchise and to whom the franchisee has a continuing financial obligation in respect of the franchise.

Background

In March 2011, David and Jennifer Zwaniga (the Zwanigas) commenced a class action against Revolution and Johnvince. The Zwanigas had signed a membership agreement with Revolution to participate as individual distributors in a distributorship program. Under this program, Revolution sold vending machines to individual distributors who became members of a buying group that brought candies and confections for sale in the vending machines. Johnvince, the exclusive Canadian distributor of Planters Peanuts, supplied Revolution with the candies and confections sold in the distributorship program vending machines.

In the proposed class action, the Zwanigas, on behalf of a national class of persons that entered into membership agreements with Revolution to participate in the distributorship program, allege that Revolution induced the Zwanigas and other class members to participate in the distributorship program by making a number of misrepresentations, including misrepresentations regarding the profitability of the distributorship program. The Zwanigas claim that they were not provided with a proper disclosure document as required under the Act, and seek to rescind their membership agreement. The Zwanigas also claim damages both for alleged breach of the statutory duty of fair dealing under the section 3 of the Act and for alleged fraudulent or negligent misrepresentation.

The Zwanigas allege that Johnvince was a partner, joint venturer or franchisor’s associate of Revolution and therefore jointly and severally liable with Revolution for the alleged misrepresentations, failure to disclose and breach of the duty of fair dealing. The Zwanigas allege, among other things, that the distributorship program was presented to them (and other class members) as a partnership between Revolution and Planters Canada. Johnvince has taken the position that it was never Revolution’s partner, joint venturer or a franchisor’s associate; its only role was to grant Revolution a licence to use the Planters trademarks and to supply Planters products.

Court Clarifies Meaning of “Franchisor’s Associate”

The key issue on the motion for summary judgment was whether Johnvince “controlled” Revolution, in the sense of meeting the definition of “franchisor’s associate” under the Act. Justice Perell determined that “control” over a franchisor involves something more than being important, being influential or having bargaining power or control over the “business fate” of a franchisor through exercising contractual rights. Rather, Justice Perell stated that “in the context of the Arthur Wishart Act, control connotes being in charge of or governing or directing or leading the franchisor.”

The judge found that the Zwanigas conflated the concepts of importance and control. While Johnvince was Revolution’s most important supplier, Johnvince was neither in charge of, nor the “boss” over, Revolution. All of the day-to-day and long-term management, administration and business planning were exercised by Revolution. The legal relationship between Revolution and Johnvince was entirely contractual, and they were separate and independent entities. Finally, Justice Perell found no evidence that Johnvince led, regulated, directed, oversaw or governed Revolution or the distributorship program.

In granting Johnvince’s motion for summary judgment, Justice Perell concluded that the Zwanigas’ “only case is against Revolution Food and their case against Johnvince Foods is hopeless.”

Importantly, the judge determined that evidence filed by both Revolution and Johnvince providing opinions on whether Johnvince Foods was a partner or a franchisor’s associate was irrelevant. He observed that what is relevant to the determination of the nature of the legal relationship between the parties is “what the parties said and did, not their after-the-fact legal opinions or self-serving position as to their legal positions.”

Discussion

In litigation against franchisors, franchisee plaintiffs, or representative plaintiffs in the case of class actions, often name additional parties as defendants by claiming that these additional parties are franchisor’s associates. Justice Perell’s decision in Zwaniga both provides judicial guidance on the practical application of “franchisor’s associate” as defined in the Act, and serves as a warning to franchisees not to bring “hopeless” cases against deep pocketed defendants on the basis that the latter are franchisor’s associates. Finally, the Court’s decision in Zwaniga is an encouraging example of an improperly named defendant to a class action successfully using the expanded summary judgment rule to be removed as a party prior to certification.

Justice Perell’s decision has been appealed and is scheduled to be heard by the Ontario Court of Appeal on April 24, 2013.