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ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

1250264 ONTARIO INC.

Plaintiff

‑ and ‑

PET VALU CANADA INC.

Defendant

Proceeding under the Class Proceedings Act, 1992

STATEMENT OF CLAIM


TO THE DEFENDANTS:

A LEGAL PROCEEDING HAS BEEN COMMENCED AGAINST YOU by the plaintiffs. The claim made against you is set out in the following pages.

IF YOU WISH TO DEFEND THIS PROCEEDING, you or an Ontario lawyer acting for you must prepare a statement of defence in Form 18A prescribed by the Rules of Civil Procedure, serve it on the plaintiffs’ lawyers or, where the plaintiff does not have a lawyer, serve it on the plaintiff, and file it, with proof of service, in this court office, WITHIN TWENTY DAYS after this statement of claim is served on you, if you are served in Ontario.

If you are served in another province or territory of Canada or in the United States of America, the period for serving and filing your statement of defence is forty days. If you are served outside Canada and the United States of America, the period is sixty days.

Instead of serving and filing a statement of defence, you may serve and file a notice of intent to defend in Form l8B prescribed by the Rules of Civil Procedure. This will entitle you to ten more days within which to serve and file your statement of defence.

IF YOU FAIL TO DEFEND THIS PROCEEDING, JUDGMENT MAY BE GIVEN AGAINST YOU IN YOUR ABSENCE AND WITHOUT FURTHER NOTICE TO YOU.

If you wish to defend this proceeding but are unable to pay legal fees, legal aid may be available to you by contacting a local Legal Aid office.

Date:  December 9, 2009                                Issued by:___________________________

Local Registrar

Address of Court Office:

Superior Court of Justice

393 University Ave., 10th Floor

Toronto, ON  M5G 2J6

TO: PET VALU CANADA INC.

121 McPherson St.

Markham, Ontario L3R 3L3

CLAIM

1.                  The plaintiff claims:

(a)                 damages in an amount to be proven, not exceeding $100,000,000, for breach of contract and breach of section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 or either of them;

(b)                further, and in the alternative, compensation in an amount to be proven, not exceeding $100,000,000, for unjust enrichment;

(c)                 an interim, interlocutory and permanent order:

(i)                   preventing the defendant from charging to the class members, directly or indirectly, a mark-up on Private Label Products exceeding 10% of the true net cost of such Products;

(ii)                 preventing the defendant from charging to the class members, directly or indirectly, a mark-up on non-Private Label Products above the true net cost of such Products purchased from arm’s length third-party suppliers;

(iii)               requiring the defendant to pass on Supplier Rebates and Benefits (as defined below), to the class members in proportion to the class members’ aggregate overall purchases of Products within the Pet Valu system; and

(iv)               preventing the defendant from charging the delivery charge (as defined below);

(d)                in the event that the defendant requests any class member to enter into a new or renewal Franchise Agreement during the pendency of this action, an interim, interlocutory and permanent order:

(i)                   requiring the defendant to disclose to all class members the information concerning Supplier Rebates and Benefits and mark-ups on Products set out in paragraph 55 hereof; and

(ii)                 declaring any release executed by any class member in favour of the defendant in connection with the entering into of such new or renewal Franchise Agreement to be null and void to the extent of any issues raised or certified as common issues in this action, nunc pro tunc if necessary;

(e)                 pre-judgment and post-judgment interest pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43;

(f)                 costs of this action on a substantial-indemnity scale, plus applicable goods and services and harmonized sales tax; and

(g)                such further and other relief as this Honourable Court deems just, including all further necessary or appropriate accounts, inquiries and directions.

The parties and the proposed class

2.                  The plaintiff (“Aurora Co.”) is incorporated under the laws of Ontario.  Aurora Co. carries on business in the Town of Aurora, Ontario under the name Pet Valu as a retailer of pet food and supplies.  Aurora Co. is a franchisee under a standard form franchise agreement with the defendant, as franchisor (“Franchise Agreement”).  Aurora Co.’s Franchise Agreement is dated March 11, 2005 and was executed April 4, 2005.

3.                  The defendant (“Pet Valu”) is a corporation amalgamated under the laws of Ontario having its head office in the Town of Markham, Ontario.  Pet Valu carries on business in Ontario and Manitoba as a franchisor of retail outlets selling pet food and supplies at discounted prices to the public.

4.                  Pet Valu also owns a number of corporate stores carrying on business under the Pet Valu name and system.

5.                  At the end of 2008, there were 293 Pet Valu stores operating in Canada, of which 178 were franchised and 115 were company-owned.

6.                  The proposed class consists of all persons carrying on business as a franchisee under a Franchise Agreement with Pet Valu at any time on or after December 31, 2003 (the “class members” or “franchisees”).

Collective purchasing power a fundamental component of Pet Valu system

7.                  Pet Valu acts as a wholesaler/distributor of pet food and supplies to its franchisees.

8.                  Pet Valu is one of the largest purchasers of pet food and supplies in Canada.

9.                  Because of the aggregate purchasing volume of the Pet Valu system, including both franchised and corporate stores, Pet Valu has enormous purchasing power with its suppliers and negotiates prices and terms commensurate with its purchasing power.

10.              The class members’ most significant expense is the cost of products for resale, equipment, services, and operating supplies (collectively “Products”) which they purchase for their stores.  The ability of the Pet Valu franchisees to purchase Products at reduced prices is critical to their survival and profitability.

11.              The need for reduced-priced Products is heightened by two facts common to all of the class members.

12.              The first reason consists of the fees charged by Pet Valu, including royalties of 6% of gross sales, advertising fees of 3% of gross sales, percentage rent of up to 10% of gross sales (resulting in a mark-up of Aurora Co.’s minimum rent of over 100% based on current sales levels), a 5% distribution fee (based on retail prices) on Products purchased from Pet Valu, and a POS System fee of approximately $160 per month.  These fees make up a significant part of every class member’s costs of operation.  Most of these costs are not borne by the franchisees’ competitors.

13.              Second, the Pet Valu System requires the class members to continually advertise discounted prices to the retail customer and offer discounts to breeders, veterinarians, kennels and other volume purchasers.

14.              To offset the effect of the fees and discounted retail prices, the Franchise Agreement obligates Pet Valu to use its substantial purchasing power to supply Products to the class members at low, discounted prices.

15.              The importance of discounted prices obtained through Pet Valu’s purchasing power is incorporated into the very definition of the “Pet Valu System” in the Franchise Agreement which includes “the … buying power and buying systems of [Pet Valu] which collectively and severally benefit the operation of Pet Valu stores”.  Section 27(a) of the Franchise Agreement states that this benefit is a “fundamental component of the Pet Valu System” (emphasis added).

16.              The importance of Pet Valu’s purchasing power is emphasized throughout the Franchise Agreement, beginning with the following recitals:

AND WHEREAS [Pet Valu] has substantial purchasing power in relation to products for resale, equipment, services, and operating supplies;

AND WHEREAS the said purchasing power results from [Pet Valu]’s ability to negotiate with suppliers promotional or other merchandising activities at and through all Pet Valu stores … ;

AND WHEREAS the said purchasing power is diminished in the event that one or more Pet Valu franchisees either fails to co-operate with the commitments negotiated by [Pet Valu] with suppliers of products or services or attempts to negotiate directly with such suppliers;

AND WHEREAS there exists an obligation on the part of the Franchisee and all other franchisees of the Pet Valu System, to enhance the collective purchasing power and the business image of all Pet Valu stores[.] (emphasis added)

17.              The opening sentence of the Franchise Agreement confirms that those recitals “document the anticipation and reliance of the Parties” and are binding on Pet Valu.

Pet Valu fails to pass on benefits of purchasing power

18.              Pet Valu in fact has substantial purchasing power and purchasing expertise in its markets.  It exercises this power and expertise to negotiate and obtain low net pricing on Products from its suppliers.  However, Pet Valu does not directly pass on the significant benefits of its substantial purchasing power to the class members; instead, it retains many of the direct benefits of its purchasing power for its sole and exclusive benefit.

19.              The prices that the class members pay for Products purchased from Pet Valu are as high as or higher than they could pay on their own for the same Products purchased from a competing wholesaler, without any collective purchasing power whatsoever.

20.              Pet Valu has failed to pass on the benefits of its substantial purchasing power in three separate respects, each of which is a breach of its obligations under the Franchise Agreement and its duty of fair dealing under section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“Wishart Act”) as more fully pleaded below.

A. Improper mark-ups on Products

21.              Section 22(c) of the Franchise Agreement permits Pet Valu to charge a mark-up of 10% on Private Label products above their net cost.  Pet Valu has breached this section of the Franchise Agreement by charging undisclosed mark-ups significantly above 10% of the net cost of Private Label Products.

22.              Apart from the 10% mark-up permitted on Private Label Products, Pet Valu is not permitted under the Franchise Agreement to mark-up Products.  Instead, Pet Valu is required to use its substantial purchasing power to obtain low prices for the benefit of all Pet Valu stores, including both corporate and franchised stores.

23.              Pet Valu’s failure to pass on the benefits of its substantial purchasing power, which is to be used for the “collective” and “several” benefit of all Pet Valu stores (Franchise Agreement, ss. 2 (gg)), is a breach of its “fundamental” obligation to the franchisees (Franchise Agreement, ss. 27(a)).

24.              Pet Valu is not permitted to negate or undermine this fundamental obligation by charging mark-ups on Products, directly or indirectly, absent specific authorization in the Franchise Agreement, such as is contained in section 22(c) of the Franchise Agreement in respect of Private Label Products.

25.              Despite written request, Pet Valu has refused to disclose to Aurora Co. or any other franchisee its policy regarding mark-ups on Private Label and other Products.

B.        Failure to pass on supplier rebates and benefits

26.              The second way in which Pet Valu has failed to pass on the benefits of its substantial purchasing power is by retaining for itself volume allowances, promotional allowances and non-monetary benefits granted by suppliers or manufacturers to Pet Valu (“Supplier Rebates and Benefits”) in respect of the class members’ purchases which it is required to pass on to the class members.

27.              The obligation to allocate volume allowances to the class members is contained in section 22(f) of the Franchise Agreement:

22 (f)   Volume allowances granted to [Pet Valu] by a supplier or manufacturer based upon [Pet Valu]’s annual purchasing volume shall be allocated all as more particularly set forth in the Pet Valu Franchise Business System. (Emphasis added)

28.              The obligation to allocate promotional allowances to the class members is contained in section 22(e) of the Franchise Agreement:

22 (e) Promotional allowances granted to [Pet Valu] by a supplier or manufacturer shall be allocated as more particularly set forth in the Pet Valu Franchise Business System except if the Franchisee does not meet the performance requirements by [Pet Valu] or by a supplier or manufacturer to earn the promotional allowance.

29.              The obligation to allocate non-monetary benefits granted by a supplier or manufacturer to Pet Valu is contained in section 23(c) of the Franchise Agreement:

23 (c) Any non-monetary benefits granted by a supplier or manufacturer to [Pet Valu] including but not limited to, premiums, consumer give-aways, advertising materials, contest opportunities, and posters, for distribution to or through Pet Valu stores, shall be allocated by [Pet Valu] among [Pet Valu]-owned and franchised Pet Valu stores on the basis of [Pet Valu]’s reasonable estimate of need provided that the basis for allocation does not discriminate against franchised Pet Valu stores in favour of [Pet Valu]-owned Pet Valu stores.  Allocation of such benefits may be limited by [Pet Valu] to a proportionate share of benefits based upon sales volume.

30.              Where Pet Valu is required under the Franchise Agreement to allocate Supplier Rebates and Benefits to the class members, it must do so in a manner which is fair, reasonable and in good faith.  Pet Valu is not permitted to prefer its own interests including those of its corporate stores in the allocation of Supplier Rebates and Benefits.  Pet Valu is required to allocate Supplier Rebates and Benefits to corporate stores and franchised stores in proportion to the stores’ purchases.

31.              Pet Valu has failed and continues to fail to allocate and pay to the class members Supplier Rebates and Benefits.

32.              Alternatively, Pet Valu has failed and continues to fail to allocate and pay to the class members Supplier Rebates and Benefits in proportion to the class members’ aggregate purchases of Products from Pet Valu as compared to the aggregate purchases by Pet Valu’s corporate stores.

33.              The failure to allocate and pay Supplier Rebates and Benefits to the class members is a breach of sections 22(e) and (f), 23(c) and 27(a) of the Franchise Agreement, as well as the above-cited recitals.

34.              Further, the failure to allocate and pay Supplier Rebates and Benefits to the class members fairly and in proportion to the class members’ overall purchases of Products is a breach of the duty of fair dealing under section 3 of the Wishart Act.

C. Delivery charges not permitted under Franchise Agreement

35.              In addition to charging uncompetitive prices on Products, Pet Valu charges a 5% delivery charge to all franchisees on all purchases of Products (“delivery charge”).  The delivery charge is calculated based on the anticipated retail price of the Products purchased rather than on the wholesale cost.

36.              The delivery charge further inflates the already inflated cost of Products to the franchisees and has a negative impact on the financial condition of the class members.

37.              Although the delivery charge results in an expense to the franchisees almost equal to the 6% royalties which they are required to pay on their gross sales, it is not permitted by or disclosed in the Franchise Agreement and is not disclosed in the disclosure document which Pet Valu is required to give to prospective franchisees in Ontario pursuant to the Wishart Act which must disclose all fees and all material facts related to the business.

38.              The delivery charge is inconsistent with Pet Valu’s fundamental obligation to provide low priced products to the class members.  Competing distributors of Products typically either waive all delivery charges if the amount purchased exceeds a certain dollar amount (typically $500 per delivery) or charge a lesser amount based on a percentage of wholesale, not retail, cost.

39.              The charging of the delivery charge is a breach of the Franchise Agreement.

40.              Further, the delivery charge is commercially unfair and unreasonable and therefore a breach of the duty of fair dealing under section 3 of the Wishart Act.

41.              Further, and in the alternative, Pet Valu has been unjustly enriched by charging a delivery charge exceeding its actual cost of delivering Products to the class members’ stores, and the class members have been unjustly impoverished by a corresponding amount.

Damages

42.              The class members have suffered damages as a result of Pet Valu’s wrongful charging of mark-ups and delivery charges, and its failure to pass on to the class members the Supplier Rebates and Benefits to which they are entitled.

43.              Further, and in the alternative, Pet Valu has been unjustly enriched and the class members have been impoverished by these acts and omissions.

44.              As a result of Pet Valu’s breaches of the Franchise Agreement and the duty of fair dealing, and unjust enrichment, the class members have suffered loss and damage.  The class members seek restitutionary or compensatory damages, or compensation, for the period from December 31, 2003 to the date of judgment, in an amount equal to the sum of:

(a)                 the total mark-ups wrongfully charged directly or indirectly by Pet Valu or any of its affiliates on Products sold to the class members over and above the 10% mark-up permitted under the Franchise Agreement in respect of Private Label Products;

(b)                the total amount of Supplier Rebates and Benefits attributable to the Products purchased by the class members and wrongfully withheld by Pet Valu from the class members, and

(c)                 the total delivery charges wrongfully charged by Pet Valu to the class members.

Injunctive Relief

A. Compliance with Pet Valu’s obligations under Franchise Agreement

45.              Aurora Co.’s sales are approximately $1 million annually, placing it among the top 15% of stores in the Pet Valu franchise system in terms of sales.  Despite increasing the sales of the store by approximately 400% compared to the previous owner, Aurora Co. has never made any profit, and has operated on a cash-flow negative basis.  This lack of profitability is not commercially reasonable in the circumstances.

46.              The lack of profitability is widespread within the Pet Valu franchise system.

47.              Aurora Co. and the other class members’ lack of profitability is caused by Pet Valu’s charging of unauthorized mark-ups, its failure to pass on the benefit of its substantial purchasing power to the class members in breach of the Franchise Agreement, and the unlawful delivery charge.

48.              Aurora Co. and the other class members suffer and will continue to suffer irreparable harm, including the prospect of losing their businesses, if Pet Valu is permitted to continue such practices in breach of its contractual obligations and statutory duty of fair dealing and its unjust enrichment.

49.              Accordingly, Aurora Co. seeks the injunctive relief set out in paragraphs 1(b) and (c) above.

B.        Non-disclosure of supplier rebates and benefits

50.              Despite mandatory disclosure obligations under section 5 of the Wishart Act and section 8 of Regulation 581/00 under the Wishart Act, Pet Valu has failed to disclose to the class members material information concerning the Supplier Rebates and Benefits and its mark-up practices.

51.              By letter dated November 4, 2009, Aurora Co., by its counsel, advised Pet Valu of its failure to comply with mandatory disclosure obligations and requested that Pet Valu provide answers to fundamental questions concerning the Supplier Rebates and Benefits and its mark-up practices.  Under sections 41(b) and (c) of the Franchise Agreement, Pet Valu has 30 days from the date of such notice to respond to and, if warranted, remedy the alleged breach.  As at the date of issuance of this claim, Pet Valu has neither responded to nor remedied the alleged breaches, stating that it does not have ready access to the information requested.

52.              Pet Valu is obligated to provide such information promptly to the class members pursuant to the duty of good faith at common law, the duty of fair dealing under section 3 of the Wishart Act, and s. 41(c) of the Franchise Agreement.

53.              At the same time as Pet Valu advised Aurora Co. that it needed additional time to respond to Aurora Co.’s request for information, Pet Valu announced that it is in the process of redrafting its Franchise Agreement and that it expects to introduce the newly drafted agreement to the class members imminently.

54.              The majority of class members are not nearing the end of their franchise terms, and Pet Valu has no right to introduce a new franchise agreement.  Pet Valu’s plan to introduce a new Franchise Agreement is intended to strip away the franchisees’ fundamental rights under the Franchise Agreement to purchase Products at low prices as a result of Pet Valu’s substantial purchasing power.  Pet Valu can only convince the franchisees to surrender their fundamental rights under their existing Franchise Agreement by concealing from them information concerning the Supplier Rebates and Benefits and its mark-up practices.

55.              Therefore, in the event that Pet Valu proceeds with its announced plan to introduce a new Franchise Agreement which purports to remove any of the rights which the franchisees have to discounted pricing and to Supplier Rebates and Benefits, Aurora Co. seeks an interim, interlocutory and permanent order requiring Pet Valu to disclose to all franchisees, at least 14 days before they enter into the Franchise Agreement, the following information:

(a)                 Whether Pet Valu or its affiliates including Peton Distributors Inc. (“Peton”) receives rebates, commissions, payments or other benefits (“supplier monies”) from third party suppliers in respect of the purchases which are made by Pet Valu or its affiliates for wholesale to the franchisees.

(b)                What is Pet Valu’s policy in respect of the allocation of supplier monies to the franchisees and, in particular, how has Pet Valu complied with sections 22 (e) and (f) of the Franchise Agreement?

(c)                 What amount of supplier monies has Pet Valu or its affiliates received since January 1, 2004?

(d)                How much of those supplier monies did it retain, and how much, if any, did it pass onto the franchisees?

(e)                 What criteria were used to determine how much of the supplier monies it retained and how much, if any, it passed onto the franchisees?

(f)                 Whether and to what extent Peton or Pet Valu mark-up Products purchased from third party suppliers and sold to franchisees.

56.              Aurora Co. pleads and relies on the disclosure obligations under section 5 of the Wishart Act, section 8 of Regulation 581/00 under the Wishart Act, the duty of fair dealing under section 3 of the Wishart Act and the duty of good faith at common law.  In addition, Aurora Co. pleads and relies on the first preamble of the Franchise Agreement which states “honesty is the basis of the relationship between the Parties”.

C. Releases null and void

57.              In the event that Pet Valu requests or requires any class member to enter into a release in connection with the entering into of a new or renewal Franchise Agreement, Aurora Co. seeks an order declaring such releases to be null and void to the extent of the issues raised or certified as common issues in this action.

58.              Aurora Co. pleads and relies on sections 3, 4 and 11 of the Wishart Act.

59.              All class members, wherever situated, are entitled to the protection of the Wishart Act by virtue of the choice of law provision in paragraph 40(a) of the Franchise Agreement which designates Ontario law as the law of the contract.

60.              Aurora Co. proposes that this action be tried at the City of Toronto, Ontario.

DATE:  December 9, 2009                                                                                                                             SOTOS LLP

Barristers and Solicitors

Suite 1250

180 Dundas Street West

Toronto, Ontario  M5G 1Z8

Allan D.J. Dick (LSUC # 24026W)

David Sterns (LSUC # 36274J)

Tel.: (416) 977-0007

Fax.: (416) 977-0717

Lawyers for the Plaintiff