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The recent certification of an Ontario class action against Sears Canada Inc. and its U.S. counterpart (apparently part of dealer agreements because they own several Sears trademarks) is worth noting for all Canadian franchisors and potentially designated “pseudo-franchisors” (1291079 Ontario Limited v. Sears Canada Inc., 2014 ONSC 5190).  The class action, which seeks up to $100 million in damages, alleges Sears breached their Dealer Agreement with approximately 260 “Sears Hometown Stores” by taking inappropriate and undue advantage of its position, to the unlawful disadvantage of the store operators.

Of particular note, the class alleges that the Dealer Agreement essentially makes the members of the class “franchisees” and Sears a “franchisor”.  These would be very significant designations because it would bring into play the disclosure obligations pursuant to the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, which can lead to statutory causes of action and potential damages.   Alternatively, even if the court does not find the franchise designations apply, the class alleges Sears breached their common-law obligation of exercising discretion under the agreements in good faith, which could also give rise to damages.

The class alleges that Sears used its discretionary powers under the Dealer Agreements to make it virtually impossible for a dealer to realize a profit unless it achieves unattainable revenues. The class further alleges that Sears conceals the economic reality about the Hometown Store program from prospective dealers, disregarding franchise law designed, among other things, to provide full disclosure of all material facts related to the franchise system.  Instead of disclosing the truth about the economics of the system, it is alleged Sears provided a common information package to prospective dealers which touts the system as “brilliant”, “better than a franchise”, and “a smart business model”.

The class alleges that once the Dealer Agreement is signed, Sears exploits the dealer by maintaining a compensation structure that does not allow the dealer to make a living wage, let along a return on its investment and efforts.  Types of exploitation alleged include poaching sales by selling goods direct to consumers, charging unauthorized “handling fees”, and claw backs.

Common issues certified as part of the decision, to be determined at the trial of common issues, include whether Sears breached their obligation under the Dealer Agreements, and whether Sears is in fact a franchisor within the meaning of the Arthur Wishart Act.

Companies entering into Dealer Agreements need to be wary that their actions could potentially be deemed as a Franchisor/Franchisee relationship, bringing into play the disclosure obligations (and potential damages) puruant to the Arthur Wishart Act they may have been seeking to avoid. Companies should be aware of the types of claims being certified by the Courts.  As always, ensuring your company is structured and operating in accordance with the law is the best approach to maximize avoiding potentially protracted and costly litigation.