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To Be Or Not To Be… A Franchisee?
This blog was first published by the Ontario Bar Association on January 17, 2024.
On May 1, 2023, the Ontario Superior Court heard two motions in the matter of Tripsetter Inc. v 2161907 Alberta Ltd.1 The matter involves a dispute over the nature of a former business relationship in relation to the operation of a retail cannabis shop. Tripsetter Inc. (the “Plaintiff”) claims that it operated as a franchisee of 2161907 Alberta Ltd (“216”) and has sought a rescission claim and damages under the Arthur Wishart Act 2000, S.O. 2000, c.3 (the “Act”), whilst 216, along with Canopy Growth Corporation and Justin Farbstein (collectively with 216, the “Defendants”) maintain that the parties entered into a license agreement and therefore, the relationship was one of licensor/licensee.
PLAINTIFF’S MOTION
The Plaintiff argued that 216 failed to produce all relevant documents in its possession, control or power2, which specifically included: 1) a franchise disclosure document (“FDD”); and 2) a financial projections document.
1. FDD
While both parties agreed that the FDD exists, they disagreed in principle on whether such document was relevant to the matter. The Plaintiff argued that the FDD would contain a list of costs associated with the establishment of a franchise, which would be relevant to both the characterization of the relationship and to 216’s argument that if the Plaintiff is a franchisee, 216 is exempt from the disclosure requirement under the Act.
On the other hand, 216 argued that the FDD would not be relevant for three reasons: 1) the FDD was created in or about April, 2020, which postdates the agreement that the parties entered into in June, 2019 and therefore, the FDD cannot speak to relevant costs incurred by the Plaintiff
at the time of establishing the franchise; 2) the costs are known to the Plaintiff, as the Plaintiff incurred such costs; and 3) the costs of establishing a franchise are not comparative to a licensee’s costs. Furthermore, 216 pleads that in the event that the Plaintiff is a franchisee, 216 is exempt from the requirement under the Act to provide a disclosure document because either 216 invested at least $5,000,000 in the acquisition and operation of the franchise over a one year period or alternatively, the Plaintiff’s total franchise investment did not exceed $15,000.
In response to the Defendants’ claim for exemption under the Act, the Plaintiff argued that the scope of the costs of establishing a franchise is not limited to the amount that was actually spent by the Plaintiff, but also included the costs estimated by the franchisor for the establishment of the franchise. Further, the Plaintiff argued that the disclosure exemptions contained in sub-clause 5(7)(g)(i) and 5(7)(h) of the Act based on the prospective franchisee’s “total initial investment” are, in accordance with s.9(1) of O. Reg. 581/00 “determined by all of the franchisee’s costs associated with the establishment of the franchise”, including any “costs or estimates of costs associated with the establishment of the franchise” (emphasis added).
The motions judge, Justice Jolley, found that the FDD was relevant, as the Plaintiff should be afforded the opportunity to argue that relevant costs should be interpreted to include anticipated costs. Additionally, Justice Jolley found that the FDD is relevant to the Plaintiff’s argument that the relationship was always one of a franchise, “despite the licence and consulting labels that the parties used”. Moreover, the FDD is relevant to 216’s claim that the Alcohol and Gaming Commission of Ontario (“AGCO”) prohibited franchise agreements in June 2019 and, therefore, the Plaintiff could not have been a franchisee.
Ultimately, Justice Jolley determined the FDD to be relevant to the core issues of the nature of the parties’ relationship and the costs of establishing a franchise.
2. Financial Projections Document
The Plaintiff argued that the financial projections document (“Financial Projections”) is relevant, as it speaks to initial costs of establishing the franchise. Justice Jolley agreed that the Financial Projections should be produced as evidence, as it remains open to the Plaintiff to challenge the Defendants’ disclosure exemption defence, without impairment to the Defendants’ ability to argue that the Plaintiff’s figures would vary drastically from the Financial Projections, given its status as a licensee.
DEFENDANTS’ MOTION
The Defendants moved on four categories of refusals and sought an order for the Plaintiff’s representative to re-attend to answer the refused questions.3
1. Category 1
The Defendants sought production of agreements that the Plaintiff either entered into or was negotiating with other companies in the cannabis industry, prior to signing the agreement with 216. The Defendants argued that these agreements would demonstrate that the Plaintiff was aware that franchise agreements were not permitted by the AGCO at this time and, therefore, that the Plaintiff’s Notice of Rescission was delivered in bad faith.
Conversely, the Plaintiff argued that its subjective view of the “legal operating requirements of a cannabis store” would be irrelevant in the court’s determination of the nature of the parties’ relationship. Rather, the nature of the relationship should be determined based upon an objective assessment of the factors set out in the Act, relevantly: (a) a payment or a commitment to make payment in the course of operating the business or as a condition of acquiring the business or commencing operations; (b) the grant by the franchisor of the right to sell goods under a trademark; and (c) the right or exercise of significant control or significant assistance in the franchisee’s method of operation by the franchisor. Justice Jolley agreed with the Plaintiff and expanded further that these potential agreements or discussions between the Plaintiff and other cannabis companies would be of little relevance to the court in determining the nature of the Plaintiff and Defendants’ relationship.
2. Category 2
The Defendants counterclaimed for damages against the Plaintiff for removing the Tokyo Smoke branding overnight on June 1, 2021, and re-branding the store as Purple Moose Cannabis, without notification to the Defendants. The Defendants argued that they are entitled to know the details of the Plaintiff’s planning, carrying out and reasoning for this change in business operations. One of the questions for which the Defendants sought an answer from the Plaintiff’s representative related to whether the Plaintiff is currently receiving bulk discounts on Purple Moose products, as such discounts could be considered a windfall and would, as a result, reduce a potential damages award under the Act. Justice Jolley determined that a purported windfall by the Plaintiff could not be considered under the four distinct headings of damages found in the Act, as the Act does not provide a mechanism for an offset of damages.
3. Category 3
The Defendants argued that the amount of money in the Plaintiff’s bank account in or around May 2019 is relevant to the potential applicability of the franchise disclosure exemptions. Justice Jolley did not agree that knowing how much money was in the Plaintiff’s bank account would assist the court in determining whether the Plaintiff paid the initial franchise investment from its own funds or from the branding fee.
4. Category 4
The Defendants sought production of a copy of an opinion from the Plaintiff’s lawyer relating to a “Click and Collect agreement”, which allowed curbside pickup of products by consumers during COVID. The request was based on the Plaintiff purportedly having waived privilege over the document during discovery. Justice Jolley found no waiver of privilege. Justice Jolley found that the question of whether it was the Plaintiff or 216 that controlled the Click and Collect service was the live issue in determining whether the parties were in a franchise relationship, not the advice the Plaintiff obtained from its lawyer about the service or the related agreement.
CONCLUSION
The case is still proceeding. While the plaintiff was largely successful in defending the motion, as the matter progresses, it will be interesting to see how the underlying issues are eventually determined by the court. The case shows potential to become a significant touchstone in the further development of franchising law in Canada.
This article was written by Business and Franchise Lawyer Ashley Caldwell. For additional information, please do not hesitate to contact ashley.caldwell@mckenzielake.com.
If you require assistance with a franchise and intellectual property law matter or wish to speak to a franchise lawyer at McKenzie Lake Lawyers LLP, please call (519) 672-5666.
