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Ontario court applies statutory definition of franchise

franchiseIn Fyfe v. Stephens, 2018 ONSC 5066 (“Fyfe”), the Ontario Superior Court of Justice found that the relationship between two parties was a franchise relationship, even though the agreement at issue expressly disclaimed a franchise relationship.

In Fyfe, the plaintiffs and defendant entered into an “exclusivity agreement” under which the plaintiff was granted the right to operate a “Dial a Bottle” business in Richmond Hill. The plaintiffs claimed that this was a franchise relationship within the meaning of the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Act”) and that they never received a “Disclosure Document” as required by the Act.

The Court applied the primary test for what constitutes a franchise as found in s. 1(1) of the Act:

franchise” means a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor… in the course of operating the business or as a condition of acquiring the franchise or commencing operations and,

  1. in which,
    1. the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor’s… trademark, service mark, trade name, logo or advertising or other commercial symbol, and,
    2. the franchisor… exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training.

The Court found that all three of the elements of test were met. In particular:

Element 1: Payment or continuing payment

The first part of the test requires the court to consider whether the plaintiff was required by contract to make a payment or continuing payments to the defendant. Given that the plaintiffs paid $40,000 to acquire the territorial rights, and was obliged by the contract to pay $3 to the defendants for each order, the Court held that this element of the test was met.

Element 2: Goods or services substantially associated with defendant’s trademark

The second part of the test considers whether the defendant granted the plaintiffs the right to sell or distribute goods or services that are substantially associated with the defendant’s trademark or other trade name.

The Court held that this element was met because the “Dial a Bottle” business name was substantially associated with the defendant’s trademark. The Court relied on the fact that defendant told the plaintiff that if a stranger were to commence a business under the same trade name, the defendant’s trademark would be infringed.

Element 3: Significant control or assistance.

The third part of the test requires significant control over the plaintiff’s method of operation (or significant assistance provided to the plaintiff in respect of its method of operation).

The Court found that this element was met, since the agreement provided the defendant with operational management rights over plaintiff’s business. This included control over all order taking, referring orders to the plaintiff, the marketing materials and web design for the business, and phone billing.

The Court noted that the fact that the defendant did not have any control over the plaintiff’s location or vehicles was not dispositive, since these were relatively unimportant aspects of the plaintiff’s business.

Fyfe is an example of an “accidental franchise” – a contractual license relationship in which the licensor does not intend to grant a franchise but is found to have done so. The definition of “franchise” under the Act is broad enough to encompass relationships that may not be intended to be franchises. Businesses who grant contractual licenses should consider obtaining legal advice on this important issue to reduce their risk of liability under the Act.

By Adam Ship

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McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
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