On February 24, 2012, Mr. Justice G.R. Strathy of the Ontario Superior Court of Justice issued a 163 page judgment in an application by Fairview Donut Inc. and Brule Foods Ltd. to certify a class action under the Ontario Class Proceedings Act, 1992 against The TDL Group Corp. and Tim Hortons Inc. (Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252). To say that Tim Hortons won a decisive victory would be an understatement. However, this case will have repercussions for franchising for years to come. It establishes a number of benchmarks for franchisors, slows the momentum of the class action strategy by franchisees against their franchisors, and clarifies the rules on summary judgment applications in franchise cases. It is predicted that this seminal case will be extensively studied, cited and argued about in many of the franchise cases that will come after it, as it stands for much more than defeating an attempt by the Tim Hortons franchisees to bring a class action against their franchisor.

Class Action

This case started out as a motion for certification as a class action for alleged abuses by Tim Hortons regarding the cost of inventory to franchisees arising from the switch to par baked product from scratch baking and lunch menu items. In fact, the class action certification was never decided, as Tim Hortons brought a counter motion for summary judgment dismissing the entire action, which succeeded on all issues.

Since class action lawsuits first began to be used in a franchise context some 15 or so years ago, there has been an evolution of sorts in the process. Early cases were hard fought at the certification stage and settlement ensued fairly soon after a certification motion succeeded. Perhaps this was because of the defendant franchisor’s fear of adverse publicity, a potentially expensive adverse judgment or a combination of both. Plaintiff franchisees (or perhaps more their lawyers, who took these cases on contingency) became emboldened and we witnessed a surge of such cases, especially in the last few years. Adding to the frenzy to bring such actions were the various judicial pronouncements that a class action proceeding was an appropriate vehicle to resolve issues in a franchise system. The early class action cases also helped iron out a number of potential impediments for plaintiff franchisees, such as the issue of needing common issues and the combination of various sub-classes in one action.

Of considerable interest is the fact that, to date, there has never been a trial in a franchise class action lawsuit, only motions for certification, so the lawsuit could continue on behalf of the class of franchisees. It was expected that the days of easy “shakedown” settlements following certification were over and that franchisee lawyers could expect a long, arduous and expensive trial process after certification. No one, however, was prepared for or expected that a franchisor could close the entire process down so completely and so early through a motion for summary judgment, as Tim Hortons has done.

Of course, the facts had to be present, there were some extenuating circumstances allowing for the summary judgment motion to be brought at the same time as the certification motion and there are whispers in the judgment that an iconic Canadian franchisor gets the benefit of the doubt. However, it is conjectured that we will see similar procedures brought, or at least attempted, in the future.

What Was Decided?

At the risk of oversimplifying the decision, Tim Hortons succeeded with this extraordinary remedy because the language of their franchise agreements allowed them a wide discretion in how they charged their franchisees for inventory. They created a business model that worked well financially for most of their franchisees, their modifications to their system over time were based on sound business principles and they received input from franchisees and considered that input in their business decisions for change.

Stay tuned, however, as there is a lot more stated in Mr. Justice Strathy’s decision that will have far reaching impact on future franchise cases. For example:

“Franchisees are not entitled to pick and choose between menu offerings and to sell only the most profitable ones.”“If the franchisor reasonably believes that an economically-priced lunch selection is a good way of attracting customers in off-peak hours, helps to cross-sell other profitable products, and builds customer loyalty, then, subject to the terms of its contracts with its franchisees, it is entitled to price the ingredients as it sees fit, having regard to the franchisee’s operations as a whole, and the return on investment they receive.”

“In order to keep the system healthy and competitive, the franchisor must be permitted to introduce new products, new methods of production or sale, and new techniques or systems during the life of a franchise agreement. The franchisees have an expectation that this will be done for the benefit of both the franchisor and the franchisee. It would not be commercially reasonable to require that the franchisor can only implement system-wide changes over the life of a particular franchise agreement if the proposed change is demonstrated to be an improvement that benefits that particular franchisee. Nor would it be commercially reasonable to require the franchisor to demonstrate that every such change will be a financial benefit for every franchisee.”

“Tim Hortons, as franchisor, is entitled to tell the franchisees what to buy and where to buy it, and what to sell and how to sell it. It is entitled to make a profit on what the franchisees are required to buy and it is entitled to determine the amount of its profit.”

“There are contractual and statutory limits to what Tim Hortons can do. It must abide by the terms of its contracts. It must deal fairly with its franchisees and act in good faith and in accordance with reasonable commercial standards in the performance and enforcement of its contract. It cannot deprive the franchisees of the benefits of the contract or undermine the very foundation of the contract. There is no evidence, considering the contract as a whole, that Tim Hortons has failed to discharge these obligations.”

What must be kept in mind in assessing the impact of this decision in future franchise cases is that the core of the plaintiff franchisee’s claims, as stated by Mr. Justice Strathy, was the fact that “Their real complaint is not that they don’t make a reasonable profit as Tim Hortons franchisees – but rather that they don’t make more profit.” Had this been a franchise system with a lot of failing franchisees or franchisees earning little profit, the result would likely have been very different.

Notice of appeal has been filed by the plaintiff franchisees. This appeal, if it proceeds, will be watched very closely by the franchise community.