In May 2010, the Ontario Superior Court refused to strike a franchisee’s allegations of breaches of the duty of good faith against Glenn Miller, a man alleged to control the franchisor even though he was not an officer, director or shareholder of the franchisor. As this case starkly demonstrates, people operating a closely-held franchisor take greater personal risk because they are less likely to be protected by the corporate veil.
The Plaintiffs in WP (33 Sheppard) Gourmet Express Restaurant Corp. v. WP Canada Bistro & Express Co. Inc. wanted a Wolfgang Puck franchise and entered into agreements with the Canadian Wolfgang Puck licensor (WPC), which was owned and operated by Glenn’s son, Neil Miller, and Marty Soltys. The Plaintiffs alleged that Glenn was one of WPC’s “directing minds,” although it appears he had no position with WPC.
Glenn had been active in the Wolfgang Puck system. He originally purchased the Canadian Wolfgang Puck licence from Wolfgang Puck Express Licensing LLC (WPEL) and transferred the licence to WPC. He continued to be the primary contact with WPEL. He allegedly was a “key financier” behind WPC. Along with Neil, he also agreed to fund the construction of a turnkey Wolfgang Puck operation for the Plaintiffs, although it was Neil and Soltys who made these representations to the Plaintiffs.
After a year of construction delays, the Plaintiffs allegedly learned that WPC had misrepresented the amount of funding the Millers would provide. Glenn and Neil decided to get out of the restaurant business and withdrew their funding. Glenn’s decision started a chain of events that led to WPC losing the Canadian Wolfgang Puck licence making it impossible for WPC to give the Plaintiffs a Wolfgang Puck franchise.
The Plaintiffs sued eight defendants, including Glenn, alleging a number of causes of action. The Plaintiffs alleged that Glenn was a franchisor or franchisor’s associate as defined by the Arthur Wishart Act and had breached the common law, contractual or statutory duty of good faith. Glenn argued that he was merely the financier of the Plaintiffs’ operation and not a franchisor or franchisor’s associate. After all, he had not signed any contract with the Plaintiffs and apparently was not a director, officer or shareholder of WPC. He brought a motion asking the Court to strike the claims against him.
The Court refused to do so, holding that Glenn could be a franchisor’s associate as defined by the Arthur Wishart Act. The Court noted that a franchise agreement includes any agreement “in relation to” a franchise and held that the franchise agreement in this case “must” include the Millers’ agreement to fund the franchise. The Court also held that “[e]ither directly or in [his] capacity as the directing mind of WPC” Glenn was a party to a franchise agreement.
The Court focussed on the fact that only three people, including Glenn, were actively involved in the franchisor and commented, “When a franchising corporation is run by a few people, as opposed to many, the court may look behind the corporation to those additional parties who are ‘franchisors’ or ‘franchisor’s associates.’” Given Glenn’s involvement in funding the construction, his history with the Wolfgang Puck franchise system, and the Plaintiffs’ allegation that Glenn was a directing mind of WPC, the Court could not find that it was obvious that Glenn was not a franchisor’s associate without a trial of the issue.
The Court also stated that the duties of controlling individuals are “heightened where...the actions of the franchisor can only reflect the directions of a small finite number of persons involved in the corporation, and particularly where those individuals step into the role of a franchisor’s associate,” again upping the ante for people working for a closely-held franchisor.
As this decision arose from a motion to strike pleadings, the evidence at trial may show that Glenn was not sufficiently involved in the franchise relationship to be a franchisor’s associate. The Court’s comments, however, are consistent with the increasing legislative and judicial protection of franchisees and the resulting increase in risk to franchisors.
As the Court seems to find it easier to pierce the corporate veil in closely-held franchise systems to find individuals personally liable for breaches of the duty of good faith, those working in such franchise systems should take steps to protect their assets. Other than the usual methods of doing so (i.e. structuring personal affairs so that one’s spouse owns the personal assets), one should also ensure that his or her role in the franchise system is clearly documented to avoid becoming tangled in a lawsuit that could lead to personal liability.