Franchising in the Courts

Volume rebates continue to be a volatile area for franchisors as a Pet Valu franchisee wins a certification decision in 1250264 Ontario Inc. v. Pet Valu Canada Inc. This decision is another victory for franchisees seeking to use class action litigation as a forum to bring about change in their relationships with franchisors.
Feb 10, 2011

Franchising in the Courts
Jennifer Dolman and Gillian Scott

1250264 Ontario Inc. v. Pet Valu Canada Inc.


Volume rebates continue to be a volatile area for franchisors as a Pet Valu franchisee wins a certification decision in 1250264 Ontario Inc. v. Pet Valu Canada Inc. This decision is another victory for franchisees seeking to use class action litigation as a forum to bring about change in their relationships with franchisors.

In his January 14, 2011 decision in 1250264 Ontario Inc. v. Pet Valu Canada Inc., Justice Strathy of the Ontario Superior Court of Justice certified a class action brought by franchisees against Pet Valu Canada Inc. (Pet Valu). However, not all of the common issues put forward by Pet Valu were certified; only those claims relating to volume rebates.

Certification of Volume Rebate Claims
Justice Strathy certified volume rebate claims in finding that there was some basis for the assertion that the Pet Valu standard form franchise agreement required it to pass on the benefit of volume based rebates, allowances and discounts granted to the franchisor by its suppliers (volume rebates) to its franchisees, and that it failed to do so.

Volume rebates are a key aspect to many franchise relationships, as franchisors are able to exert substantial purchasing power. Franchisor practices with regard to sharing volume rebates have come under significant fire from franchisees (see 1176560 Ontario Ltd v. Great Atlantic & Pacific Co. of Canada Ltd (2004) (A&P), 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corp. (2010 (Quiznos) and 578115 Ontario Inc. v. Sears Canada Inc.). The disclosure of volume rebates, as well as a franchisor’s policy on passing volume rebates on to franchisees is specifically required by Section 8, Ontario Regulation 581/00 under the Arthur Wishart Act.

Other Points of Interest

A. Franchisee’s Individual Purchasing History and Circumstances Not a Sufficient Bar to Certification

Justice Strathy flatly rejected Pet Valu’s argument that the action was not appropriately certifiable as a class action because an examination of the individual circumstances of each of its franchisees would be required in order to determine what losses, if any, that individual franchisee suffered due to Pet Valu’s volume rebate practices. Individual circumstances identified by Pet Valu as having an effect on a specific franchisee’s losses included: purchasing history, distance from distribution centres, proximity of competitors, product mix and compliance with and participation in promotional programs. Justice Strathy found that because of Pet Valu’s uniform practices in applying volume rebates, determining individual franchisee losses due to these practices was simply a matter of accounting which could be accomplished easily with Pet Valu’s “formidable accounting system.” Alternatively, Justice Strathy found that it might be possible to do a proportionate valuation of each franchisee’s damages.

B. Internal Franchisee Council Not an Adequate Forum for Addressing Franchisee Concerns

Justice Strathy also flatly rejected Pet Valu’s argument that its Canadian Franchise Council (the CFC), a group representing Pet Valu franchisees, was a more appropriate forum for addressing franchisee complaints than a class action. In his reasoning, Justice Strathy relied on evidence that while franchisees raised their concerns about volume rebates in CFC meetings, and the CFC reported these concerns to Pet Valu management, the concerns were not reflected in the form of Pet Valu’s most recent revised Franchise Agreement. This reinforces the fact that while internal franchisee advisory organizations may function as an effective way of avoiding collective action from franchisees, they will only do so in instances where their input is seen to modify the behaviour of franchisors.

C. Franchisee Class Appropriately Extends Across Provincial Jurisdictions

In line with the decision in Quiznos, Justice Strathy held that it was appropriate for the class of plaintiffs to include Pet Valu franchisees in Manitoba as well as in Ontario, despite the fact that the complaint as drafted is based in part under Ontario’s Arthur Wishart Act. Justice Strathy found that the bulk of claims as drafted in the action were common to Manitoba franchisees, and that there was “no reason why there should not be a sub-class of Manitoba franchisees who will have an interest only in those common issues that do not depend on the Arthur Wishart Act for their resolution.”

Not All Bad News for Franchisors - Key Conclusions & Practical Applications

In the wake of the recent wave of franchisee class actions, franchisors will be relieved that Justice Strathy accepted Pet Valu’s argument that it is “wrong to simply say that because this is a franchise claim it is appropriate for class action.” Justice Strathy held that: “[t]he lense of judicial economy, access to justice and behaviour modification do not obviate the need for inquiry into whether a class proceeding is a fair, efficient and manageable method of resolving a claim.” It of course remains to be seen whether this test will be rigorously applied in franchise class actions, or whether the David and Goliath perceptions at play in this form of litigation may reduce the test to a cursory examination once it is established that the parties were acting under a common standard form franchise agreement. Furthermore, although this is only a certification decision with no final determination on the merit of the Volume Rebate claims, it serves as a reminder that franchisors need to be careful with how they disclose their rebate policy in their disclosure statements. Furthermore, where franchisors have agreed in their standard form franchise agreements to share Volume Rebates with their franchisees, they must do so.

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