The Ontario Superior Court of Justice recently certified a class action by dealers of a home furnishings company in 1291079 Ontario Limited v. Sears Canada Inc.

The dealers are outlet stores for a national department store (the putative franchisor) and allege that they are “franchisees” within the meaning of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the Act).

The case raises a number of interesting issues.

First, do direct sales by the putative franchisor to customers within a dealer’s local market area violate the duty of good faith and fair dealing?  The putative franchisor sells products to customers directly through mail-order catalogues and online shopping.  The dealers allege that this practice unreasonably undermines their profitability and breaches the putative franchisor’s duty of good faith.  The Court certified this issue as a common issue under the Class Proceedings Act.  Since the dealer agreement appears to provide the putative franchisor with discretion to conduct these sales, the matter will turn on whether that discretion was exercised by the putative franchisor in compliance with the duty of good faith.

As commerce is increasingly conducted over the internet, bricks and mortar storefronts must compete with websites that deliver products to their customers’ front doors.  Where a putative franchisor conducts direct sales online, this may lead to tension with the traditional method of allocating market areas to dealers.  If this matter proceeds to a hearing on the merits, we can expect the Court to provide guidance on this issue in the context of the duty of good faith and fair dealing.

Another key issue in the case concerns the right of the putative franchisor to set the compensation that it will pay to its dealers for their sales of goods.  The representative plaintiff alleges that the compensation arrangement currently in place renders the dealer body as a whole economically nonviable and thus breaches the duty of good faith.  The Court certified this as a common issue to the extent that it involves an examination of how the putative franchisor exercised its discretion to set compensation.  The Court recognized that there may also be individual, dealer-specific issues concerning the impact that the compensation arrangement has on each of dealers.  If this issue proceeds to a hearing on the merits, it will need to determine whether in fact the duty of good faith can provide franchisees with a substantive right to be economically viable in a competitive market.