Franchise class actions on the rise

"Anytime you're litigating a franchise dispute, there's always the possibility that someone will threaten to turn that into a class action because a class action is a way for franchisees to gain more leverage and change the power dynamic that exists in the franchisee-franchisor relationship."

National Post
February 9, 2010

Franchise class actions on the rise
Access to justice; 'Pendulum has swung in favour of plaintiffs'
Daryl-Lynn Carlson


Lawyers John Sotos, left, and David Sterns, of Sotos LLP, have been busy lately. One high-profile case they have now is a $750-million class action filing on behalf of 215 General Motors dealers, … Brett Gundlock/National Post

Franchise owners are increasingly using class actions to sue their parent companies over disputes they otherwise couldn't to afford to pursue on their own, lawyers say.

Taking a franchise company to court as an individual owner is a daunting and expensive prospect. However, by suing the company that licenses franchises, individual owners can band together and garner significant clout to fight back at corporate actions they don't like.

Ongoing cases include familiar corporate names such as Tim Hortons, Midas Inc., Quiznos, General Motors and Suncor, to name a few.

"The pendulum has swung in favour of plaintiffs," says Eunice Machado, a partner in the commercial litigation group at Cassels Brock & Blackwell in Toronto, whose firm defends franchisors in class actions.

She says many cases launched in Ontario have been certified as a national class, which enables plaintiffs across Canada to participate and benefit from any settlement or court-ordered award.

On the plaintiff side, David Sterns, of Sotos LLP in Toronto, says class actions facilitate access to justice for franchisees.

"The biggest challenge in these cases is that you are in effect suing your business partner and you have an ongoing relationship, so you are vulnerable as a result."

Mr. Sterns and his partners, including John Sotos — who has been involved in some of the earliest lawsuits involving franchisees suing their corporate masters — have been busy in the past few weeks. The firm filed a $750-million class suit on behalf of 215 General Motors dealers, whose agreements were terminated during the auto crisis last year. It also filed a $200-million case on behalf of 300 gas station operators in Ontario, after Suncor announced it would terminate its relations with Ontario dealers as part of the company's plans to merge with Petro-Canada. It also represents franchisees in the Quiznos case, which has been certified as a class suit but is under appeal.

Mr. Sterns says he is concerned that franchise companies are making concerted efforts to dissuade individual owners from participating in class suits.

"The franchisors' response is often to give the franchisees some small benefit and, in response, have them all to sign a release to end the suit," he says.

"Because the franchisors are limited in their abilities to discourage or prevent franchisee association, there's a real question to what extent they can solicit releases from franchisees while cases are pending."

Most of the franchise-related class actions, which are still in the early stages and must be proved before a judge, revolve around a few key claims:

- The franchise company violated provincial legislation by changing the terms of the agreement.

- It breached a duty to franchisees. Or,

- It engaged in negligent representation.

Under franchise legislation in Alberta, Ontario, New Brunswick and Prince Edward Island, franchisees have the statutory right of association, which enables owners to meet absent of interference or penalties by the franchisor.

The legislation is also designed to encourage franchisors to be able to communicate new business decisions or changes, or hear their members' concerns.

The statutory right of association has likely been a key contributor to a rise in franchise-related class actions.

"Franchisees are in a better position to communicate with each other," says Ms. Machado.

Her firm represents franchisor defendants in several ongoing class actions, including the $75-million suit against Quiznos.

She advises franchisors to participate in franchisee associations to communicate any business-related or corporate structure changes to offset the prospect of a class action.

She acknowledges franchise class actions are relatively new in Canada, and courts, particularly in Ontario, have been generally receptive to plaintiffs. "Often we're looking to U.S. case law to give us some persuasive authority for cases that have not yet been litigated here," she says.

However, many states provide for a contractual clause precluding class actions in the event of a dispute, which Ms. Machado says has been upheld by the United States courts in 60% of the cases plaintiffs have sought certification.

Kevin Wright, a Vancouver partner in the competition, antitrust and litigation group at Davis LLP, points out that many franchise class actions include alleged violations of federal competition and antitrust laws.

"Because franchises present commonalities in the contract, they are prone to class actions," says Mr. Wright.

Colin Feasby, a partner and litigator at Osler Hoskin & Harcourt's Calgary office, says despite Alberta's Franchise Act, there have been few related suits launched in that province due to its class-action rules. "In Alberta, you can still construct a national class, but it's only binding on parties in Alberta and people outside of Alberta have to opt in," says Mr. Feasby.

Still, he says, it's imperative for franchisors to seek outside legal advice when contemplating any fundamental changes to their business in order to avoid the prospect of a lawsuit.

"Anytime you're litigating a franchise dispute, there's always the possibility that someone will threaten to turn that into a class action because a class action is a way for franchisees to gain more leverage and change the power dynamic that exists in the franchisee-franchisor relationship."

Jerome Morse, founding partner at Adair Morse in Toronto, represents plaintiffs in ongoing class actions against Tim Hortons, the Ontario Lottery and Gaming Corporation, and Sunrise Propane following an explosion in north Toronto in 2008.

He says while class actions are more economical for franchisees, they still take excessive time and money; the Tim Hortons matter has been ongoing for two years and has finally been scheduled for a certification hearing the week of June 21.

Because franchise class actions are relatively new, it will take several years before the courts develop a complement of case law to assist parties and their lawyers on both sides with litigating franchise class actions.

"There's no doubt class actions are very helpful as a tool to get the answer to questions that form the basis of disputes between franchisee and franchisor," he says.

"Even if a court agrees with the franchisor, it serves to resolve the issue, so it works both ways in terms of having the court in a class proceeding make a determination that applies to so many players. But we will need more precedents to develop" before parties determine what to expect from the courts in the long run, he says.


When it comes to the franchise market, Canada is no slouch.

-The country has nearly 78,000 franchises operating under more than 1,200 brand names.

-Franchising contributes $96-billion to Canada's GDP.

-85% of Canadian franchises are in Ontario, Quebec and British Columbia.

-60% of franchises operate under a master licence issued by U.S. franchise systems.

-Franchised businesses account for 40% of all retail sales.

-Franchising has been reported to account for one out of every five consumer dollars spent in Canada (goods and services).

-Franchising directly employs more than 1,000,000 people in Canada.

Source: — U.S. Commercial Service, a division of the U.S. Department of Commerce/ Canadian Franchise Association

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