Q: Why are so many class actions being launched against well-known franchisors? What are the implications for franchising in general and franchisees in particular?
A: At present, class actions are being brought against at least five well-known franchisors and are in various stages of progression through the courts. This trend is influenced by several factors.
First, a class action may only be commenced in a provincial court if the particular province has enacted specific class action legislation. Currently, all provinces except Prince Edward Island have such legislation, making class actions relatively accessible to franchisees across Canada.
That said, franchise laws must also be enacted by the provinces. Such laws are now in force in Alberta, Ontario, New Brunswick and Prince Edward Island (and soon, in Manitoba). As a result, a class action alleging breach of a franchise statute can be started in Alberta, Ontario, New Brunswick and Prince Edward Island. A franchise class action alleging breach of contract or the common law duty of fair dealing can be brought forward in any of the provinces that have class action legislation.
The courts are continually giving judicial guidance on the proper subject matter of class actions and the various tests required for a class action to proceed. As more franchise class cases are decided by the provincial courts, franchisors, franchisees and their legal advisors have more certainty on the types of claims and damage awards the courts are prepared to allow.
What constitutes a class action?
To recognize why they are gaining popularity, one must first understand some general principles regarding class actions and apply them to the franchise model. Using the Ontario Class Proceedings Act as an example, certain tests must be passed for a class action to be certified by a court as a valid claim.
Causes of action
First, the claim must disclose a cause of action against the franchisor—in short, there must be a valid reason for franchisees to bring an action. Typical causes of action in recent franchise class actions include:
- breach of contract;
- breach of the duty of fair dealing, as outlined in franchise legislation;
- breach of the duty of fair dealing as a common law contract principle,
- breach of the right of franchisees to associate;
- breach of the Competition Act; and
- unjust enrichment (i.e. unfairly benefitting from wrongful acts).