June 6, 2022

Don’t Let Your Next Injunction Go To Pot

Lightbox Enterprises Ltd. v. 2708227 Ontario Inc.[1] provides some interesting insights relating to injunctions at the budding intersection of franchising and retail cannabis.

The facts are straightforward.

270[2] entered into agreements with Lightbox for the operation of two retail cannabis stores under the “Dutch Love” brand.  Under the agreements, Lightbox was required to operate both stores on a day-to-day basis. 270 was never involved in the operation or direct management of the stores.

In December 2021, 270 delivered two notices of rescission to Lightbox pursuant to the Wishart Act.[3]  270 took the position that it was a franchisee of the “Dutch Love” franchise system, and it did not receive the required disclosure.  Lightbox disputed that the businesses were franchises.[4]

Upon delivering the notices of rescission, 270 jointly rebranded both stores.  It stopped using the “Dutch Love” marks, and began operations under its own brand, “Roll N Rock Cannabis.”

Lightbox commenced an action against 270 and brought a motion for an injunction.  It sought to prevent 270 from “owning and/or operating a ‘Roll N Rock Cannabis’ retail store or any other cannabis retail store, other than a ‘Dutch Love’ branded store.”  Lightbox also sought to restrain 270 from using the marks and “operating methods” associated with the Dutch Love brand.  This included a long list of prohibitions, including requiring 270 to no longer use the services of certain third-party suppliers (such as the global HR software company ADP) and not displaying certain items in-store, including “potted plants”.

The Court dismissed Lightbox’s motion after a preliminary assessment of the evidentiary record, and did not need to consider the three-part test that is standard on injunction motions.

First, the Court found no right capable of enforcement.  There was “no evidence whatsoever of any agreement between the parties that 270 would refrain from the ownership or operation of another cannabis retail brand at either of the store locations in question or at all.”  In fact, the Court noted that the order Lightbox wanted it to make would be contrary to certain express terms of the agreements, which allowed 270 to transition its operations to another cannabis brand.

Second, the Court found Lightbox had failed to lead any evidence to support its claim that 270 had misused any confidential information or operating methods.  In fact, one of Lightbox’s affiants bluntly admitted that many of the resources needed to understand the cannabis business can be found publicly online.

The following lessons can be learned from this case:

  1. An injunction remains an extraordinary remedy that must be grounded in pre-existing contractual rights. The Court will not enforce rights for which the parties never bargained. The Court will not find that a restrictive covenant is an implied term in the parties’ agreements, particularly where that implied term would contradict the express terms of the contract.
  2. Allegations must be supported by adequate evidence. Evidence in support of injunctive relief must be clear, cogent, and detailed. Any proprietary information or methods must be clearly identified, and the existence of such interests and methods must be established by the evidentiary record.  Vague allegations will not be sufficient to support a claim for injunctive relief.
  3. Whether the injunction is mandatory or prohibitive may be determined by evaluating the result of the proposed order. Lightbox argued on the motion that the injunction sought was prohibitive. 270 agreed that while the order was phrased as a prohibition, its practical effect was that 270 had no choice but to perform its positive obligations under the agreements.  Essentially, that 270 would have to operate as a “Dutch Love” or cease operations entirely.   The Court agreed with 270.  It concluded that because the result of the order would be to restore the status quo, the relief sought was mandatory in nature.  Had the Court been required to consider the three-part test for an injunction, Lightbox would have had to meet the more demanding strong prima face case standard.
  4. An “ill-conceived” motion is not sufficient grounds for an elevated costs award. Although the Court agreed with 270 that Lightbox’s motion was “ill-conceived and as well unsupported by a proper evidentiary record relating to the relief sought” it found this was not a sufficient basis to increase the costs awarded to 270 on the motion. 270 was awarded partial indemnity costs, payable within 30 days.[5]

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP.  Her practice focuses on all areas of commercial litigation with an emphasis on franchise litigation.  Adrienne can be reached directly at 416-572-7321 or aboudreau@sotos.ca.

[1] 2022 ONSC 1873 (CanLII).
[2] Sotos LLP was counsel to 270 on this motion.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] The parties agreed that the Court did not need to determine whether they were in a franchise relationship in order to fully adjudicate the issues on the motion.
[5] 2022 ONSC 2999 (CanLII).