This article is different. It assumes that you are going to use generative AI to do legal research and have chosen which tool to use. It proposes five ways to refine your prompts to get better answers, regardless of what tools you are using or what types of questions you are researching.

Tip 1: Set the Temperature

“Temperature” is a term of art in AI research. You can think of it as a measure of how eager to please the AI will be. It is best understood with an example. Suppose you ask an AI tool “Find me a case that says X” but there is no case that says X and in fact the law is the opposite.

• If the temperature was zero, it may say “You are wrong. There is no case that says X.” It doesn’t care about pleasing you and does little more than find identical text.
• If the temperature was higher, it may say “There is no case that says X, but here is a case that says Y which is similar to X.” Y may or may not actually be similar to X.
• If the temperature was even higher, it may say “Here is a case that says X”, omitting to tell you that the case does not exist or actually says the opposite.

Some AI tools let you explicitly set the temperature, e.g. there’s a slider. But even if your tool does not have a slider, try adding “set temperature to zero”, “set temperature low”, or “set temperature high” to your prompts. Many tools are sophisticated enough to understand and adjust accordingly.

It should be obvious why you might want low temperature: fewer hallucinations. Most of the time with legal research, low temperature is the right choice. Note that I did not say “no” hallucinations. Even at low temperature, AI can misinterpret a case or miss that it has been overturned.

You may want to try setting the temperature higher when the case law is against you and you need to find a creative argument, or if you’re working in an area with little case law where the only arguments will come by analogy. Just be aware that when you set temperature high, you have to be extra careful in double-checking that the interpretation is accurate.

Tip 2: Ask for Keywords or Prompts

As you develop expertise in an area of law, you develop an intuitive sense of the terms of art you care about. For example, where a law student may ask, “When can a bankrupt debtor sell future income they may not get”, a bankruptcy expert might instead ask, “Does the anti-deprivation rule apply to property to be vested only on satisfaction of a condition precedent”. There is a case squarely on point. You are more likely to find it with the second prompt.

So get the AI tool to build the second prompt for you. If all you know is the first prompt, type that in and instead of asking for an answer, ask the AI tool for what terms of art or what legal doctrines might be relevant. When the AI tool tells you about the anti-deprivation rule and conditions precedent, you can now turn that into the second prompt and use that one to get your answer.

Tip 3: Ask for the Chain of Thought

Modern legal AI tools do not simply plug your prompt into their model and spit out whatever it says. They usually go through their own multi-step process of refining the question first. It is often a good idea to ask the tool to show you those steps by asking for its “chain of thought”.

The chain of thought will identify the terms of art that the tool came up with, which you can use to refine your next prompt. If the tool went totally off course, that is usually visible in the chain of thought, so you can try the prompt again but expressly tell it not to veer off in that direction. For example, if you were looking for what a reasonable expectation of privacy means under privacy legislation, but the chain of thought shows that the model started looking at criminal cases, you can prompt it again saying “Focus on cases under privacy statutes or tort law, and only refer to criminal law to the extent that it is endorsed in those cases”.

Tip 4: Refine with Follow-Up Questions

When you are looking for cases with an AI tool, you can expect to get cases that are not relevant or are easily distinguishable. Many people stop there, concluding either that the AI tool does not understand or that there is no case on point. But sometimes all it takes is identifying why that case is wrong and asking the AI tool to try again. Consider trying follow-up prompts like “Try again but limited to cases about [specific cause of action]” or “Try against but exclude cases in [specific area of law]” or “Try again but exclude interlocutory decisions”.

Tip 5: If You Find Something Good, Look for Something Better

Sometimes, the AI tool gives you a great case. The natural inclination is to stop there. But there might be an even better case out there. Consider prompts like “Is there an appellate decision that says the same thing”, “Is there a case from [your jurisdiction] that stands for the same proposition”, or “Is there a case with the same holding with [your client’s facts]”.

None of the tips in this article will work on every tool or on every question. But you would be amazed how often they do. And you lose nothing by giving them a try. Happy prompting!

About the Author

Adil Abdulla, Sotos LLP

Adil is a litigation lawyer at Sotos LLP, where his practice focuses on class actions, complex IP and competition disputes, and emerging issues at the intersection of law and technology. He regularly advises clients on the practical implications of legal developments. Adil can be reached by email at aabdulla@sotos.ca or by phone at 416.572.7325.

The post Crafting Perfect Prompts for AI Legal Research appeared first on Sotos LLP.

Competition (or the lack of it) in the grocery sector has been in the news a lot in the past few years. More than 80% of Canadians believe that large grocery chains are engaged in “greedflation” (link). Whether or not that is correct, the government has responded:

• In June 2023, the House of Commons Standing Committee on Agriculture and Agri-Food published “Grocery Affordability: Examining Rising Costs in Canada”(the “House of Commons Report”).
• In July 2023, the Competition Bureau published a market study tellingly titled “Canada Needs More Grocery Competition”(the “Market Study”).
• In September 2023, the government proposed the Affordable Housing and Groceries Act (“Bill C-56”), which includes amendments to the Competition Act. It received royal assent and will come into effect on December 15, 2024.
• In November 2023, the government proposed Bill C-59, which includes more amendments to the Competition Act. It has passed second reading in the House of Commons.

This article (1) summarizes the amendments to the Competition Act in Bill C-56; (2) summarizes the proposed amendments to the Competition Act in Bill C-59; and (3) discusses how these amendments might impact competition in the grocery sector, and possible implications for grocery chains, suppliers, independent grocers, and consumers.

(1) Amendments in Bill C-56

Bill C-56 contains five major changes to the Competition Act.

First, Bill C-56 allows the Competition Bureau to compel companies to provide information for market studies (ss 10.1, 11). Currently, it can only compel industry participants to produce information where there are grounds to believe that an entity has committed or will commit an offence. This change appears to have been a response to concern identified in the House of Commons Report and the Market Study that some large grocery chains refused to provide detailed information on their profit margins.

Second, Bill C-56 prohibits any person who substantially controls a class or species of business from “directly or indirectly imposing excessive and unfair selling prices” as a prohibited anti-competitive act (s 78(k)). This might be intended to:

• Eliminate “greedflation” – that would track EU and UK law, which prohibit charging prices that are far above production costs[1] or far above prices charged in similar markets with more competition;[2]
• Reduce “shrinkflation” or to push grocers towards using unit pricing – the Market Study noted that consumers find it hard to recognize shrinkflation, especially without unit pricing, and that “a lot of Canadians expressed concerns about this practice”; and/or
• Reduce fees charged to suppliers – the House of Commons Report raised concerns about large chains charging suppliers fees for shelf space, fees for merchandising costs, late fees, and short fees, or imposing new fees “arbitrarily and without explanation”.

Third, Bill C-56 broadens “abuse of dominant position” (s 79). Under the new rule, the Bureau only has to show that the dominant company (a) engaged in a practice of anti-competitive acts; or (b) their actions are likely to prevent or lessen competition substantially. Currently, the Bureau must show both anti-competitive acts and prevention or lessening of competition substantially.

Fourth, Bill C-56 increases the penalties the Bureau can impose from $15 million ($10 million for first offence) to $35 million ($25 million for first offence) (s 79(3.1)).

Fifth, Bill C-56 allows the Bureau to prohibit agreements whose purpose is to prevent or lessen competition substantially (s 90.1(1.1)). Currently, the Bureau can only prohibit agreements that would have the effect of preventing or lessening competition substantially. This might be intended to respond to the comment in the Market Study that large grocery chains use property controls to deny independent grocers access to prime locations (e.g. leases preventing commercial landlords from leasing their other space to independent grocers).

(2) Proposed Amendments in Bill C-59

Bill C-59 proposes two major changes to the Competition Act.

First, Bill C-59 would allow private claimants to get monetary remedies from the Competition Tribunal, up to the value of the benefits that the defendant obtained from the wrongful conduct, and those remedies can be distributed to “any other person affected by the conduct” (ss 75(1.2), 76(11.1), 77(3.1), 79(4.1), 90.1(10.1)).

Second, Bill C-59 would lower the standard for private claimants to be allowed to bring claims. Whereas currently they have to show that their entire business is “substantially affected” by the alleged misconduct, the new rule allows claims by businesses affected “in part” by the alleged misconduct. More importantly, it allows claims to be brought if “it is in the public interest to do so”. This might open the door to claims by consumers.

We are not suggesting that these changes will substantially increase the number of claims brought in the short term. There is considerable uncertainty. To name just a few issues:

• Whose claims are “in the public interest”?
• What “other persons” are entitled to share in distributions?
• Are monetary remedies meant to be compensatory, restitutionary, or punitive?
• Are contingency fee agreements allowed?
• Can either party recover costs?
• Can the Competition Tribunal stay overlapping claims (i.e. award carriage)?
• If a settlement is reached, does it bind anyone other than the claimant and the defendant?

It will probably take years to resolve all this uncertainty. But once the confusion is resolved, private claims may become a viable way to enforce the new prohibitions in Bill C-56.

(3) Implications for the Grocery Sector

Overall, these amendments raise three possible issues for the grocery sector, on prices, supplier fees, and property controls.

Prices: The Competition Bureau could demand information on margins, identify products with especially high margins or recent decreases in size, and then bring an application for abuse of dominant position on the basis that these are “excessive and unfair” prices.

This is unlikely. The Competition Bureau rarely exercises its enforcement powers, and it is even less likely to conduct another market study since it just finished the Market Study.

Still, if grocery chains want to further limit this risk, they should consider adding unit prices on items (e.g. $1.00/kg or $1.00/L). In the Market Study, the Competition Bureau suggested that unit prices would limit or obviate concerns about pricing.

Supplier Fees: Suppliers could challenge fees for shelf space, fees for merchandising costs, late fees, and short fees as “excessive and unfair”, especially if those fees are (1) higher than fees in comparable markets; and/or (2) imposed “arbitrarily and without explanation”.

If Bill C-59 passes, this is somewhat likely. However, the fact that suppliers have to continue working with grocery chains after a claim will make such claims relatively rare.

Suppliers interested in bringing claims should check fee schedules of different chains and in comparable markets – e.g. grocery chains in other jurisdictions, or non-grocery distributors of similar products – and compare those to the fees they are being charged.

If grocery chains want to limit this risk, they should also check fee schedules of competitors and in comparable markets,[3] and make sure that all fees charged to suppliers are disclosed in advance with a written explanation.

Property Controls: The Competition Bureau is investigating Loblaws and Sobeys relating to property controls (link). If it chooses not to proceed, then after these amendments, independent grocers could challenge clauses in leases between grocery chains and commercial landlords preventing the latter from leasing to an independent grocer.

If Bill C-59 passes, this is likely. Independent grocers have the most to gain from the amendments, as collectively they give independent grocers a basis to challenge exclusion, a procedural means to bring that claim, and a lower leave standard for doing so.

If grocery chains want to limit this risk, they should review their property controls and attempt to identify purposes for those clauses other than excluding a competitor from the market. If they are unable to do so, they should reconsider those clauses.

Finally, what does all of this mean for consumers? In the short term, probably not much. These amendments are unlikely to reduce retail grocery prices or increase competition. In the longer term, if Bill C-59 passes and once independent grocers start bringing claims, competition might increase a bit, but probably not enough to meaningfully bring down grocery bills. If that was the government’s goal, then it needs to try harder.

At Sotos LLP, our team of experts possesses an unrivalled understanding of the business structure of today’s grocery sector. Whether you wish to understand the implications of Bill C-56 and Bill C-59, assistance in negotiating improved supplier relationships, or strategic advice to enhance your market position, we are here to support you. If you would like to discuss how we can help your business thrive in this highly challenging environment, please contact us.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached at 416.977.9806 or jsotos@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.

Adil Abdulla, Sotos LLP

Adil is an associate with Sotos LLP in Toronto. He can be reached at 416.572.7325 or aabdulla@sotos.ca.

[1] See United Brands Company v Commission of the European Union, EU document 61976CJ0027; Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK, case CE/9742-13.
[2] See Bodson v SA Pompes funèbres des régions libérées, EU document 61987CJ0030; Latvijas Autoru apvienība v Konkurences padome, EU document 62016CJ0177.
[3] To be clear, this does not mean that grocery chains can coordinate their fees with competitors. That is still a criminal offence that can result in jail time.

The post Amendments to the Competition Act: Implications for the Grocery Sector appeared first on Sotos LLP.

• Estoppel: If a franchisor provides a service not listed in the franchise agreement, and the franchisees support the provision of that service, the franchisees may be estopped from later disputing the fees charged by the franchisor for that service;
• Discretionary Fees: If the franchise agreement gives a franchisor discretion to set fees for services it provides franchisees, the franchisor may set those fees at a level higher than its actual costs of providing those services;
• Unwanted Inventory: If a franchisor requires a franchisee to purchase significant unwanted inventory, the franchisor may be in breach of the duty of fair dealing; and
• Franchisor’s Revenues: Franchisors may have to disclose sources of revenue obtained because of a franchisee, even if the franchisee has no right to that revenue.

(1) Estoppel

Shoppers operates a loyalty program called “Optimum”. The franchisees were required to participate in the Optimum program. Shoppers charged franchisees a fee to participate in Optimum.  This fee was not expressly listed in the franchise agreement. Shoppers relied on a term in the franchise agreement allowing it to charge for “services from time to time rendered”, besides “included services”, to charge the franchisees the fee related to Optimum.

The plaintiff alleged that participation in Optimum was an “included service”. The court rejected that claim. In the alternative, the court endorsed Shoppers’ other argument: even if Optimum was an “included service”, franchisees were estopped from disputing the fee because: (1) they were “eager participants in the Optimum Program” and told Shoppers as much, and (2) Shoppers relied on the franchisees’ words and deeds to incur the huge expenses of underwriting the Optimum program costs (paras 732-736).

From a practical point of view, this finding should be of comfort to responsible franchisors who undertake system changes in consultation with their franchisees.  Where the franchisees’ response to a change or new program is positive, and the changes are implemented collaboratively, the franchisor is justified in relying on the franchisees’ positive words and deeds.  Franchisees may be estopped from retroactively claiming that changes were improper if they willingly embraced and sought the benefits of such changes.

For franchisees, this finding stands as a reminder to raise concerns promptly and clearly if they perceive changes to be improper or problematic. Acquiescence may be interpreted as endorsement.

(2) Discretionary Fees

The franchise agreement expressly allowed Shoppers to charge fees for loss prevention, training, accounting, and equipment rental. Shoppers was entitled to set the amount of those fees “in the good faith exercise of its judgment”. The court found as a fact that Shoppers set fees at a level higher than Shoppers’ actual costs to provide the related services.

The plaintiff alleged that Shoppers was only allowed to charge its actual costs. The court rejected that argument, noting that it was not connected to any express language in the contract.  In contrast, Shoppers relied upon express language that Shoppers Charges “shall be such amount or amounts as [Shoppers] shall, in the good faith exercise of its judgement, determine”.  On this basis, the court held that Shoppers was entitled to exercise its contractual discretion to extract profits from those fees (paras 749-760).

For franchise systems, one take-away is the benefit of clear contractual language, reserving rights of discretion and sources of profitability where appropriate. As a corollary, franchisors should consider the extent to which their practices and rights to profit from alternative sources constitute material facts, that must be disclosed in provinces with franchise legislation.

(3) Unwanted Inventory

Shoppers sold inventory to franchisees. The franchise agreement also allowed it to mandate minimum purchases of inventory through mass delivery of products to large groups of stores.

The plaintiff alleged that this practice downloaded the financial risk of inventory management onto the franchisees, in breach of Shoppers’ duty of fair dealing.  The court observed that the evidence had not established offloading of unwanted or stale products onto the franchisees and found as a fact that Shoppers’ imposition of mass orders was not a systemic breach of its contracts or breach of the duty of good faith. However, the court also accepted that there may have been breaches of good faith with respect to individual franchisees. Thus, the court sent the franchisees to individual issues trials on this point, among others (paras 375-377, 766-772).

Since the merits of this argument were left to individual issues trials, this decision does not establish that franchisors breach their duties of fair dealing if they impose minimum purchase requirements on their franchisees. However, this is now the third Ontario decision suggesting that force-feeding unwanted inventory on franchisees may be a violation of a franchisor’s legal obligations.[1] Hopefully, the individual issues trials will provide more definitive answers on this subject.

As we await further clarity on forced distribution from the courts, it is notable that actions found to be justified on a system-wide basis may be interpreted differently at the unit level.   Franchisors may have legitimate cause to impose certain policies on their portfolios but they must also bear in mind the impacts of their decisions on the individual franchisees with whom they have specific contractual relationships.

(4) Franchisor’s Revenues

Shoppers received more than $1 billion in “professional allowance” payments from generic drug manufacturers. These payments were permitted under the Ontario Drug Benefit Act, R.S.O. 1990, c. O.10 and the Drug Interchangeability and Dispensing Fee Act, R.S.O. 1990, c. P.23 because the franchisees were providing “direct patient care services”.

The plaintiff alleged that Shoppers was required to remit the professional allowance payments to the franchisees. Shoppers argued that it was allowed to keep that money under a clause allowing it to keep “all discounts, volume rebates, advertising allowances or other similar advantages”.[2]

The court found that this clause had different effects in the franchise agreement drafted in 2002 and the one drafted 2010. The 2002 franchise agreements predated the creation of the professional allowances regime, so the parties could not have intended that clause to cover these amounts. For such franchisees there had been a breach of contract.[3] Those class members who were not statute-barred by limitation periods were referred to individual issues trials (paras 825-843, 856-863).

In contrast, by 2010, the professional allowance regime was in existence and part of the factual nexus for that group at the time that they signed their contracts. Accordingly, the court found that the 2010 franchise agreements allowed Shoppers to retain professional allowance payments (paras 844-855).

Again, this decision demonstrates that the determination of whether a franchisor or franchisee has breached its duties of good faith and fair dealing is a fact-specific determination requiring an examination of the franchise contract and all the circumstances known to the parties at the time their agreements were executed (paras 709-721).

Another interesting issue raised in Spina was the extent to which the sharing of information may be required as part of the obligation of good faith.  Shoppers argued that franchisees were not entitled to information about the professional allowances. The court found that franchisees were aware of the professional allowances, so this argument was moot. But it noted, arguably in obiter, that Shoppers was wrong in saying that the franchisees were not entitled to disclosure (para 855).

It is unclear on what basis Shoppers would have been required to disclose this information. It was arguably required by the statute, but the court made this statement under the heading “Analysis: Professional Allowances and the Duty of Good Faith”, so the court may have been suggesting that disclosure was necessary under the duty of honesty, which is part of the duty of good faith.

Any common law developments finding that franchisors must disclose information on their alternative sources of revenue could be extremely impactful on franchising in Canada.  Currently, franchisors disclose the receipt of rebates and other benefits received as a result of purchases of goods and services by franchisees, as prescribed by statute.  However, many do not disclose other revenue sources, such as upcharges on products and leases, monetization of data, or other income streams. Franchisors would be expected to strongly resist expansion of the scope of such disclosure requirements, arguing that the information is highly confidential, and does not qualify either as a material fact under statute or as part of the common law duty.

Adil Abdulla, Sotos LLP

Adil is an associate with Sotos LLP in Toronto. He can be reached at 416.572.7325 or aabdulla@sotos.ca.

[1] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at paras 16-17, 21, 49; Spina v Shoppers Drug Mart Inc, 2012 ONSC 5563 at paras 92, 170-171.
[2] This is the language from the 2002 franchise agreement. The 2010 franchise agreement is almost identical: “all discounts, rebates, advertising or other allowances, concessions, or other similar advantages”.
[3] The court found that there had been a breach of contract but not unjust enrichment due to specifics of the Associates’ arrangements, whereby increased revenue might have been claimed by Shoppers under separate revenue streams.

The post Dispensing Justice: Spina V. Shoppers Drug Mart appeared first on Sotos LLP.

You can read our submission here.

In brief, we are proposing a private right of action to courts for abuse of dominance. This has already worked in the US and the EU. It’s being used in the UK, Australia, New Zealand, South Korea, Argentina, and Saudi Arabia. By adding three words to the Competition Act, Minister Champagne can increase innovation, protect small towns, and allow billions of dollars in compensation to be recovered by consumers who have been wronged. We urge Minister Champagne to adopt these changes.

The post Review of the Competition Act appeared first on Sotos LLP.

For many reasons including the need to control their brands, franchisors exert considerable control over franchisees’ businesses. Usually, that control is explicitly authorized by the franchise agreement. Sometimes, however, franchisors make demands beyond their strict rights under the franchise agreements. Franchisees may feel pressured to accede to these demands because their livelihoods depend on cooperating with their franchisors. In some circumstances, this can amount to economic duress, justifying franchisees’ refusals to comply. This article summarizes the test for economic duress, how it has been applied in the franchise context, what questions remain unresolved, and some takeaways.

The Test for Economic Duress

Economic duress, also known as lawful act duress, can be raised as a defence to a claim for breach of contract. This doctrine recognizes that, where one party extracted a promise via a “coercion of the will”,[1] the other party did not truly consent. Thus, it has no obligation to perform.

To establish economic duress, a party must show that:

• The other party applied illegitimate pressure; and
• It was in a position where it had “no realistic alternative but to submit”.[2]

(1) Illegitimate Pressure

The doctrine of economic duress does not prohibit exploiting terms of an existing agreement to pressure a party into making concessions. This is normal and acceptable commercial pressure, which courts have regularly accepted. For instance:

• It is legitimate to insist on performance of any terms of a franchise agreement, even if those terms are “onerous”;[3]
• It is legitimate to threaten to terminate a franchise agreement where the franchisee breached the agreement and the franchisor has a right to terminate for that breach;[4] and
• It is legitimate to threaten to refuse to renew an agreement at the end of its term if the other party has no right to extend it.[5]

On the other hand, it is illegitimate to refuse (or threaten to refuse) to perform obligations already incurred to pressure a party into making concessions. For instance:

• It is illegitimate to threaten to refuse to perform terms of an agreement unless the other party provides additional consideration, i.e. demanding to re-write the contract;[6]
• It is illegitimate to threaten to terminate a franchise agreement unless the franchisee pays a fee not listed in the franchise agreement;[7]
• It is illegitimate to threaten to terminate a franchise agreement unless the franchisee makes a staffing change not required under the franchise agreement;[8] and
• In a related context, it could be illegitimate for a landlord, whose non-compliance with the building code caused a flood, to refuse to provide a rent reduction unless the franchisee releases it from claims related to the flood.[9]

The key principle from all of these cases is that using an imbalance in bargaining power is entirely legitimate, but creating an imbalance in bargaining power by one’s own breach is not. As phrased in PIAC, a recent case by the United Kingdom Supreme Court, it is not acceptable to “directly maneuver the claimant into a position of vulnerability”.[10]

(2) Coercion of the Will

In assessing the impact on the party complaining about the duress, the court considers four factors:

• Whether that party protested at the time;
• Whether that party had an alternative available;
• Whether that party received independent legal advice; and
• Whether that party took steps to avoid the obligations after signing.[11]

Not all of these factors are equal. For instance, failure to protest and having alternatives appear to be fatal.[12] On the other hand, if there are no alternatives, the fact that the one party told the other to get legal advice is not necessarily fatal.[13] That being said, pressuring one party to sign immediately, before consulting counsel, has been found to be a coercion of the will.[14]

Unsettled Questions

There are two major unsettled questions in the law of economic duress. The first unsettled question is what practical value the doctrine has given the overriding duty of good faith and the statutory duty of fair dealing which regulates the parties to a franchise agreement. It is important to note that conduct amounting to economic duress can relieve the franchisee from performance and potentially give rise to a damage claim. A breach of the fair dealing / good faith obligation may only give rise to a damage claim or potentially be a basis for seeking equitable relief in the form of an injunction. It is unclear whether breaching the duty of good faith qualifies as illegitimate pressure. This question is of renewed interest because the court in PIAC suggested that the doctrine in the UK was limited because UK law does not recognize a duty of good faith like the one in Canada.[15] Almost all of the cases cited above were decided before Bhasin[16], where the Supreme Court of Canada recognized that there is a common law duty of good faith. Some were decided before adoption by legislation in various of the Canadian provinces including Ontario of a fair dealing obligation which parties to a franchise agreement owe to one another as an organizing principle applicable to all contractual relationships in Canada.

It is suggested here that the existence of the duty of good faith in contractual performance may further limit the scope of legitimate pressure, and correspondingly broaden the scope of illegitimate pressure that might give rise to economic duress. There might be some circumstances where exercising rights under a franchise agreement in a particular manner could be illegitimate:

• Even if a franchise agreement allows the franchisor to require the franchisee to purchase a minimum quantity of inventory from it, it might be illegitimate to increase that minimum inventory level to well above what the franchisee could possibly sell.[17]
• Even if a franchise agreement allows the franchisor to require the franchisee to make renovations, it might be illegitimate to require the franchisee to make expensive changes shortly before the end of the term.
• Even if a franchise agreement requires the franchisor to consent to any assignment of the franchise, it might be illegitimate to unreasonably refuse to consent to an assignment to a competent assignee,[18] in the hopes that the franchisee will sell to it at a lower price.
• Even if a franchise agreement requires the franchisor to consent to an extension of the franchise agreement, it might be illegitimate to mislead the franchisee into believing that it will consent to an extension, and then refuse to consent,[19] in the hopes that the franchisee will agree to modify terms in the renewed agreement.

In these cases, the franchisor imposes an unexpected cost or limitation on the franchisee, and that investment or burden does not benefit the franchisee. Substantially all of the benefits flow to the franchisor. In other words, the franchisor only considered its own interests, which would constitute a breach of the duty of good faith in franchise law.[20] As the franchisor could be found to have breached its fair dealing / good faith obligations in each of these examples depending on context, the fact that such conduct may also amount to economic duress may be of practical value when it comes to remedy.

The second but related unsettled question is whether economic duress can be used as a sword, as well as a shield. In NAV Canada, the New Brunswick Court of Appeal suggested in obiter that economic duress has been recognized as an independent tort in the UK, which applies the same test but perhaps a higher standard for finding illegitimate pressure.[21] The court did not express any opinion on whether that tort exists in Canadian law. If the tort does exist, then in addition to arguing the existence of economic duress to avoid an obligation, the franchises can make a claim for the duress including seeking damages.

Takeaways

Franchisors should be aware that, even if a franchisee agrees to do something over and above what is required by the franchise agreement, it may not be possible to enforce that new obligation. To limit this risk, franchisors should give franchisees ample time to consult counsel before they have to agree to the new obligation. This will not guarantee that the new obligation is enforceable, but it should make it more likely.

Franchisees should be aware that franchisors must follow the franchise agreement. If a franchisor threatens to breach the franchise agreement by adding a new obligation for no genuine consideration, the franchisee should protest before signing anything. Additionally, if the franchisor imposes a requirement that undermines the economic viability of the franchise, such as manipulating pricing or other levers to benefit itself at the franchisee’s expense, the franchisee should consult a lawyer before performing the new obligation. In rare cases, the franchisee might be able to avoid the new obligation.

Sotos LLP advises franchisors and franchisees on these and other issues arising from the ever-evolving legal landscape. If you would like to discuss how our firm can help your business, please contact us.

About Sotos LLP

As Canada’s leading franchising, licensing and distribution law firm, with over 20 legal professionals dedicated to the industry, we provide a comprehensive range of franchise law, corporate, private equity financing, commercial, litigation, intellectual property, employment and real estate services to franchisors. For over 40 years, we have been working with regional, national and international franchisors in every sector of the franchise industry from launch to exit including with their international expansion.

[1] Pao On v Lau Yui, [1979] 3 All ER 65 (PC).

[2] Stott v Merit Investment Corp (1988), 63 OR (2d) 545 (CA).

[3] Ellis v Subway Franchise Systems of Canada Ltd, 2000 CanLII 22770 (Ont Sup Ct) at para 39. See also 12399745 Ontario Ltd v Bank of America Canada, 2003 CanLII 26791 (Ont Sup Ct) at para 12.

[4] Dairy Queen Canada, Inc v MY Sundae Inc, 2017 BCCA 442 at para 61.

[5] Techform Products Ltd v Wolda (2001), 56 OR (3d) 1 (CA) at para 35.

[6] Knutson v The Bourkes Syndicate, [1941] SCR 419 at pp 422-423; NAV Canada v Greater Fredericton Airport Authority Inc, 2008 NBCA 28 at para 46; Burin Peninsula Community Business Development Corporation v Grandy, 2010 NLCA 69 at paras 4, 35.

[7] WH Violette Ltd v Ford Motor Co of Canada Ltd, 1980 CanLII 3250 (NB QB) at paras 5, 44, 48.

[8] Valley Equipment Ltd v John Deere Ltd, 2000 CanLII 17208 (NB QB) at paras 1, 248-249.

[9] DLG & Associates Ltd v Minto Properties Inc, 2014 ONSC 7287 at paras 21, 37-38, 101.

[10] Pakistan International Airline Corporation v Times Travel (UK) Ltd, [2021] UKSC 40 at para 4.

[11] Process Automation Inc v Norstream Intertec Inc, 2010 ONSC 3987 at para 71; DLG & Associates Ltd v Minto Properties Inc, 2014 ONSC 7287 at para 99.

[12] Luxor Food & Beverage Inc v Country Style Food Service Inc, 2008 BCSC 1433 at para 62.

[13] Burin Peninsula Community Business Development Corporation v Grandy, 2010 NLCA 69 at para 28.

[14] Stott v Merit Investment Corp (1988), 63 OR (2d) 545 (CA).

[15] Pakistan International Airline Corporation v Times Travel (UK) Ltd, [2021] UKSC 40 at paras 27-28.

[16] Bhasin v Hrynew, 2014 SCC 71.

[17] See generally Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at paras 16-17, 21; Spina v Shoppers Drug Mart Inc, 2012 ONSC 5563 at paras 92, 170-171.

[18] See generally Quickie Convenience Stores Corp v Parkland Fuel Corporation, 2020 ONCA 453 at para 40; Cellular Baby Cell Phones Accessories Specialist Ltd v Fido Solutions Inc, 2014 BCSC 1959 at para 197.

[19] See generally Bhasin v Hrynew, 2014 SCC 71 at paras 72-73, 94, 103; CM Callow Inc v Zollinger, 2020 SCC 45 at paras 37-38, 89-92.

[20] See generally Shelanu Inc v Print Three Franchising Corp (2003), 64 OR (3d) 533 (CA) at para 69.

[21] NAV Canada v Greater Fredericton Airport Authority Inc, 2008 NBCA 28 at para 49.

The post Economic Duress appeared first on Sotos LLP.

The post Adil Abdulla co-authored two chapters in the Civil Procedure and Practice in Ontario appeared first on Sotos LLP.

THE INVENTIONS & APPLICATIONS

DABUS is a system of interconnected neural networks that can design new products. The user inputs information about existing products and identifies the variables used to judge the quality of those products. DABUS then creates products with the same functionality and refines them to maximize those variables. In late 2018, DABUS created two inventions: (1) a food container with superior interconnectivity, grip, and heat transfer; and (2) a method to modulate pulses of light to make a beacon more easily identifiable.

The creator of DABUS, Dr. Stephen Thaler, executed assignments of the inventions from DABUS to himself, and then applied for patents on the inventions in South Africa, Australia, the European Union, the United Kingdom, and the United States of America.

THE PATENTS GRANTED

Dr. Thaler won in South Africa and Australia. South Africa’s Companies and Intellectual Property Commission approved the applications at first instance. Australia’s Deputy Commissioner of Patents initially rejected the applications, but the Federal Court of Australia reversed that decision.

The Federal Court of Australia made three relevant points. First, there is a difference between a patentee and an inventor. A patentee is entitled to the benefit of a patent. They must be a legal person because only a legal person can sue for those benefits or control the patent. By contrast, there is no policy reason to require an inventor to be a legal person. For instance, unlike in copyright law, inventors have no moral rights to enforce.

Second, Australian patent legislation does not define “inventor” or contain provisions expressly limiting the term to natural persons. Its ordinary meaning is simply “the agent which invents”, which can apply equally to a thing as to a person.

Third, the use of AI has sped up innovation, especially in the pharmaceutical industry with tools like BANDIT and AlphaFold. In some cases, there is no human who could be called an inventor. If AI cannot be an inventor, then patents could not be granted on those products, reducing the incentives to invest in AI, and slowing down innovation in that sector.

THE PATENTS NOT GRANTED

Meanwhile, Dr. Thaler lost in the EU, UK, and US. The European Patent Office, UK Patents Court, UK Court of Appeal, US Patent and Trademark Office, and US District Court for the Eastern District of Virginia all rejected applications on the basis that an “inventor” is limited to a natural person, which excludes AI. Dr. Thaler has appealed the EU decision.

The US District Court made two relevant points. First, US patent legislation defines “inventor” as “an individual”. Other legal provisions also use this term to describe the inventor and several US cases have held that this language limits the term to a natural person.

Second, the court cited a report from the US Patent and Trademark Office, suggesting that even where an AI conceives of an idea, there is likely to be a human inventor or joint inventor. A human can be found to have invented the products of the AI by “designing the architecture of the AI system, choosing the specific data to provide to the AI system, developing the algorithm to permit the AI system to process that data, and other activities not expressly listed”. Therefore, there will almost always be a human inventor to apply for a patent. This should prevent any reduction in incentives to invest in AI and consequential slowing of innovation.

Similarly, the UK Court of Appeal was skeptical that there would ever be a situation where a human inventor could not be identified because the applicant should always be able to point to a “group of persons who could have contributed to the devising of the invention”.

IMPLICATIONS FOR CANADIAN PATENT LAW

Canada’s Patent Act does not define “inventor” or contain language suggesting that an inventor must be a natural person – more like Australia than the EU, the UK, or the US. This may mean that Canadian courts will be more likely to follow the Australian rule.

However, it may not matter what rule prevails in Canada. If the Australian rule prevails, then an AI can be an inventor, so AI-generated inventions can be patented. If the US/UK rule prevails, then an AI cannot be an inventor, but there will generally be a human who can claim to be the inventor and AI-generated inventions can be patented in that human’s name. This results in the issuing of patents in either case.

Nevertheless, the choice of rule may matter in the far future. The above analysis assumes that we are talking about narrow AI – that is, a system that needs human input to define its goals and the data that it will use. That human input is the basis for finding a human inventor, which is the reason that the two rules produce the same result. By contrast, if humanity ever develops general AI – that is, a system that can set its own goals, and collect data autonomously – then only the Australian rule would allow those inventions to be patented. Thus, the Australian rule would increase incentives to invest in AI inventors more than the US/UK rule. Of course, once AI begins to define its own goals, we may have bigger things to worry about…

This article was originally published by the Ontario Bar Association on October 3, 2021.

Adil Abdulla, Sotos LLP

Adil is an associate in our litigation department. Prior to joining Sotos, Adil summered and articled at a prominent Bay St. litigation boutique, working on various class actions for both plaintiffs and defendants. Before that, he worked on privacy class actions at a boutique in Ottawa.

The post AI Inventors: Do They Exist, and Does It Matter? appeared first on Sotos LLP.