A recent decision of the Ontario Superior Court, which resolved numerous common issues in a franchise class action on summary judgment, provides practical guidance to franchisors on how to reduce legal risk relating to the sharing of volume discounts or other pricing benefits with franchisees.

In 1250264 Ontario Inc. v. Pet Valu Canada Inc.2014 ONSC 6056, Justice Belobaba decided five of seven common issues certified in a class proceeding brought by about 150 former franchisees against Pet Valu, a franchisor. The decision includes three helpful lessons for franchisors:

  1. Similar to the well-known Tim Horton’s case from 2012 (Fairview Donut Inc. v. The TDL Group Corp.,2012 ONSC 1252), a class proceeding brought by franchisees can be resolved, or at least substantially narrowed, on a summary judgment motion. Numerous common issues in this case could be disposed of through the Court interpreting key documents, eliminating the need for a long and expensive trial to decide these questions.
  2. Franchise agreements conferring discretion upon the franchisor regarding how rebates and volume discounts will be shared with franchisees can provide flexibility in determining the amount and the method by which these benefits will be shared with franchisees, although this discretion should be exercised reasonably to minimize legal risk. The Court noted that the franchise agreement in this case provided wide-ranging discretion on the franchisor in deciding how volume rebates will be shared with franchisees, but that both franchise legislation and the common law principles require a franchisor to exercise its discretion “reasonably and with proper motive, and … not… arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.”
  3. Franchisors can assist themselves in litigation regarding rebate issues by tracking and demonstrating (on a representative basis) prices paid, volume and other discounts obtained, mark-ups added, and wholesale prices to franchisees compared to other suppliers. The franchisor in this case marshaled clear evidence of these elements, and the representative franchisee had no contrary evidence to support its allegation that the sharing of rebates was unreasonable. After reviewing and assessing the franchisor’s transparent disclosure of how its pricing is arrived upon, the Court held in its favour, concluding that there were no “phantom rebates”.

The core issue in Pet Valu was whether the franchisor failed to share volume-related pricing benefits with franchisees. This involved an interpretation of the franchise agreement to determine whether the franchisor was contractually obliged to share volume rebates with franchisees, as well as a factual assessment of whether the franchisor did, in fact, share such volume rebates.

The Court answered both questions in the affirmative.  Although it agreed that the franchise agreement required the franchisor to share volume rebates, Justice Belobaba held that the franchisor met this requirement. This conclusion was reached upon review of the franchisor’s comprehensive evidence, which (a) demonstrated that its prices were 6-14% lower than competitors’ prices available to the franchisees, and (b) set out in detail for its top 100 products: list price, applicable volume or other discounts, mark-up applied, and franchisees’ net costs. The product pricing evidence demonstrated that pricing discounts to the franchisor were passed along to franchisees, even after the franchisor added a reasonable mark-up.

The Court’s analysis on this issue was determinative of several other common issues certified for the class, including whether the franchisor breached the duty of fair dealing or was unjustly enriched.

The remaining two common issues raised the question of whether the duty of good faith and fair dealing imposed by s. 3 of the Arthur Wishart Act can be used to compel ongoing disclosure from a franchisor. Justice Belobaba noted that Spina v Shoppers Drug Mart suggests the answer is likely “no”, but deferred the determination of these issues to a later date. During the summary judgment motion, the plaintiff class decided to move to add a new common issue on the basis of sworn statements made by the franchisor on the motion. As the decision on the motion for the addition of the new common issue could be determinative of the remaining common issues, Justice Belobaba deferred his answers on those issues until the motion was decided.