Planters distributor won’t even be paying peanuts in franchise class action

…Justice Perell granted summary judgment to Johnvince Foods dismissing the Zwanigas’ action against it on the basis that the Zwainigas’ case against Johnvince Foods was “hopeless .

In an area where there is relatively little case law defining the limits of the concept of “franchisor’s associate,” this case establishes some important limits on the ability of franchisee plaintiffs to find deeper pockets and increase their recoveries by naming parties with only tenuous connections to a franchisor.

National Post
September 24, 2012

Planters distributor won’t even be paying peanuts in franchise class action
Jennifer Dolman
Getty Images/Thinkstock

Until there was franchise legislation in Canada, there was no special legal consequence associated with being a franchise. Now, in four Canadian provinces (soon to be five when as of October 1, Manitoba’s Franchises Act is in force), if a relationship is a franchise, then a franchisor typically must deliver a disclosure document to a prospective franchisee before entering into any agreement or taking any money. Under Ontario’s Arthur Wishart (Franchise Disclosure) Act, 2000 (the “Act“), not only is a franchisor liable to the franchisee for any failure to disclose properly but a “franchisor’s associate” may also be liable.

A franchisor’s associate is defined in a couple of different ways under the Act, and includes a person (whether an individual or a company) who controls the franchisor, and who is directly involved in the grant of the franchise, or exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation. Under the Act, a franchisor’s associate may be liable to a franchisee for statutory rescission and statutory misrepresentation or failure to disclose. If a franchisor’s associate is a party to a franchise agreement, he may also be liable for any breach of the statutory duty of fair dealing. Finally, a franchisor’s associate may also be liable under the Act for any interference with a franchisee’s right to associate with other franchisees.

Under the Act, if there is liability by a franchisor and franchisor’s associate for breach of the duty of fair dealing, interference with the right of association, and statutory misrepresentation or failure to disclose (but not statutory rescission), a franchisor’s associate will be jointly and severally liable with the franchisor. This means that if both a franchisor and franchisor’s associate are found liable for these wrongful acts, the franchisee can collect any damage award from one or both of them. This way the franchisee has a better shot at being fully compensated. For this reason, in litigation against a franchisor, franchisees’ counsel frequently allege that one or more persons are franchisor’s associates and seek damages against them as well as the franchisor.

In a proposed class action commenced by David and Jennifer Zwaniga, a claim for failure to provide the required statutory disclosure document was brought against Revolution Food Technologies Inc., a vending machine distributor. In addition, the Zwanigas sued Johnvince Foods Distribution L.P., the exclusive distributor of Planters nut products in Canada on the basis that Johnvince Foods was either a partner of, in a joint venture with, or a franchisor’s associate of Revolution Food. Johnvince Foods disputed that it was in any way liable to the Zwanigas and brought a summary judgment motion to dismiss the Zwanigas’ action against it. Although it is disputed by Revolution Food whether the distributorship program created a franchise program between itself and the Zwanigas, Johnvince Foods conceded, for the purpose of the summary judgment motion, that Revolution Food is a franchisor.

On September 19, 2012, Justice Perell granted summary judgment to Johnvince Foods dismissing the Zwanigas’ action against it on the basis that the Zwainigas’ case against Johnvince Foods was “hopeless.” A copy of the decision is available at: http://canlii.ca/t/fsrt4. Justice Perell found that Johnvince Foods and Revolution Food were not partners. Rather, they were independent entities and arms-length contractors carrying on separate businesses that didn’t share expenses or revenues. Although they both had a view to profit, they weren’t after the same profit. Nor were the companies involved in a joint venture.

Justice Perell also found that Johnvince Foods wasn’t a franchisor’s associate because it wasn’t the boss of and didn’t control Revolution Food or the distributorship program. Further, Johnvince Foods wasn’t a shareholder, parent corporation or associated corporation of Revolution Food. Rather, Johnvince Foods’ relationship with Revolution Food was entirely contractual. Although Johnvince Foods was an important supplier, this didn’t make it a franchisor’s associate. Johnvince Foods didn’t lead, regulate, direct, oversee or govern Revolution Food. In an area where there is relatively little case law defining the limits of the concept of “franchisor’s associate,” this case establishes some important limits on the ability of franchisee plaintiffs to find deeper pockets and increase their recoveries by naming parties with only tenuous connections to a franchisor.

Subject to the outcome of the Zwanigas’ appeal, the proposed franchise class action will continue only against Revolution Foods. If the action is certified and ultimately successful, there will only be one deep pocket for the class to pursue.

http://business.financialpost.com/2012/09/24/planters-distributor-wont-even-be-paying-peanuts-in-franchise-class-action/


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