January 21, 2016

Franchisor wins at court to shut down “rogue” franchisees

A recent decision of the Ontario Superior Court of Justice, Home Instead Inc. v. 244674 Ontario Inc., et al[1] resulted in the Court siding with the Franchisor and making an order preventing “rogue” Franchisees from operating their franchised businesses.

The Franchisor/plaintiff, Home Instead, Inc., operates a senior care services chain that “provides very personal services to vulnerable people.”  The Franchisor had purported to terminate the two defendant Franchisees for numerous breaches of their franchise agreements.  The alleged breaches included misleading the Franchisor by failing to disclose they were in business together and operating an unrelated third business out of one of the franchisee’s offices.  The franchise agreements at issue had specific prohibitions against owning interests in multiple franchises without the Franchisor’s consent and operating other businesses out of the franchise premises.  The Franchisor had come to court seeking an injunction against the Franchisees to ensure that they fulfilled their contractual obligations post-termination.

The Franchisees/defendants brought a cross-motion, seeking an injunction to prohibit the Franchisor from terminating their franchise agreements.

The Court granted the Franchisor’s request for an injunction.  In doing so, the court’s reasons suggest what facts were important to the motion judge in reaching his decision.  These reasons provide some insight into how future, similar cases may be decided.

  • Credibility matters.  The motion judge found that the Franchisees’ written evidence raised serious issues regarding their credibility.  For instance, although the Franchisees denied they were in a business relationship, their own emails to each other seemingly showed otherwise. This factor appears to have negatively affected the Franchisees’ case.
  • The nature of the system can make a difference. The Court found that a business built on trustworthiness, such as one that provides personal care services to seniors, is “in a different position” than other, less personal types of businesses. The Court found that the continued operation of “rogue” franchisees could threaten the Franchisor’s goodwill and reputation, particularly given that the parties operate in “this age of social media and viral phenomena.”  The Court suggested that negative publicity, even on seemingly small matters, can cripple a brand built on trust.
  • “On purpose” may outweigh “by accident”.  In its reasons the Court stated that where there is a strong prima facie case suggesting deliberate misconduct, the Court should be less sympathetic to any pleas made by the apparent wrongdoers.  Here, the Court seemed to give significant weight to the fact that the Franchisees “deliberately deceived” the Franchisor and were operating “rogue” businesses.  Given the nature of the business and the importance of ensuring the system’s reputation for trustworthiness, the Court found that the harm of the Franchisees continuing to operate would be “irreparable” because, among other factors, “the risk of a rogue franchisee very much threatens the franchisor’s goodwill, reputation, and implicates its responsibility to maintain the integrity of the chain.”  The Court also noted that if franchisees who “actively colluded to deceive the franchisor” were permitted to continue operations a franchisor may be unable to protect itself from further misconduct.

This case is an example of the Court making an order, in this case an interlocutory injunction, to hold franchisors and franchisees to the strict terms of their agreements.  Here, the Court expressly declined to delve into an analysis of the nature or reasonableness of the franchise agreements.  Instead, it simply enforced the bargain the parties made:  “The franchisor operates on strict contractual rules on which its business lives or dies. I make no comment or finding on the wisdom of its rules. The franchisees have chosen to invest in and bind themselves to the franchisor’s system and franchise agreement.”

In a subsequent decision dealing with costs of the motion,[2] the motion judge was similarly guided by the franchise agreements in fixing costs.  The judge saw “no basis to exercise discretion to relieve the defendants from their commercial bargains.”  Accordingly, he fixed the costs of the plaintiff on a substantial indemnity basis, as specified by the franchise agreements, in the amount of $200,000.  However, in a somewhat surprising twist, the motion judge did not make those costs payable to the franchisor immediately.  Rather, the motion judge deferred to the trial judge to determine whether those costs should actually be paid, depending on the outcome of the trial.  This is unusual given the harsh findings on the motion, including that the Franchisees had significant credibility issues.

[1] 2015 ONSC 7630 (CanLII).

[2] 2016 ONSC 255 (CanLII).