Canadian Franchisees’ Class Action Against Quizno’s Allowed to Proceed

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

Class certification under Canada’s Class Proceedings Act was appropriate for an action brought by two Canadian Quizno’s franchisees on behalf of a class of all Canadian Quizno’s franchisees for breach of contract, illegal price maintenance, and conspiracy to fix prices, according to the Ontario Court of Appeal.

Even if the damage issues could not be handled on a class-wide basis, certification was proper because trial of the action’s common issues would significantly advance the litigation, the court determined

The appellate court affirmed a decision of the Ontario Superior Court of Justice, sitting as a divisional court, which reversed an earlier ruling by a motion judge that denied class certification (CCH Business Franchise Guide ¶7,398).

The franchisees alleged that Quizno’s, and the distributor that Quizno’s had selected to distribute food and other supplies to its Canadian franchises, established a price maintenance scheme in violation of the Competition Act through which large sums of money were extracted from the franchisees. The franchisees asserted that the prices they were contractually forced to pay for supplies pursuant to the scheme were inflated and commercially unreasonable.

Common Issues

In denying certification, the motion judge held that the franchisees failed to satisfy the common issue criterion for class certification because they failed to show that their damages, if any, could be proven in the aggregate on a class-wide basis.

The removal of the assessment of damages as a common issue had “the effect of an avalanche that buries the proposed common issues with an absence of commonality and a proliferation of individual issues.”

In reversing that ruling, the majority of the divisional court concluded that the motion judge’s reasoning was improperly focused on the issue of damages and that he committed reversible error in failing to consider the franchisees’ remaining proposed common issues.

There were enough significant common issues to each of the claims of illegal price maintenance, conspiracy, and breach of contract which would advance the litigation by proceeding on a class-wide basis, the divisional court ruled.

Price Maintenance

A finding of violation of the Competition Act’s price maintenance provision (since repealed in 2009, the court noted) did not require proof of loss or damage or a detailed analysis of the prices paid for each product by each franchisee and the prices that each franchisee would have paid but for the alleged illegal scheme.

The fact that franchisees would be required to show proof of loss or damage in order to recover damages for their price maintenance claim did not detract from the conclusion that breach of the price maintenance provision was a common issue that advanced the litigation.

If the court became satisfied that Quizno’s imposed sourcing fees and mark-ups by way of its distribution agreement in an attempt to influence upwards the prices paid by franchisees, and that the pricing scheme constituted illegal price maintenance, a substantial ingredient of liability for damages could be proven on a class-wide basis.

It was not necessary, at the class certification stage, to engage in debate over the relative strengths and weaknesses of the expert evidence presented by the two sides as the motions judge had done, the appellate court noted.

Conspiracy

In order to succeed on the conspiracy claim, the franchisees would be required to prove:

(1) that there was an illegal agreement to maintain prices between the defendants;

(2) that the distributor committed unlawful aiding and abetting conduct;

(3) that the defendants performed actions in furtherance of the conspiracy;

(4) that the defendants should have known the conspiracy would seriously harm the franchisees; and

(5) that the conspiracy caused damages to the franchisees.

The court affirmed the divisional court’s conclusion that—even in the absence of the fifth element (proof of the fact of loss)—the other elements of conspiracy were issues that would advance each franchisee’s claim and avoid duplication of factfinding and legal analysis.

Breach of Contract

A significant number of factual and legal issues integral to the franchisee’s breach of contract claim were common issues, the appellate court held, accepting the conclusions of the divisional court.

Issues that could be determined on a class-wide basis and advance the litigation included: the meaning of the contractual provisions, the existence and nature of any common law duty of fairness, and breach of contract by Quizno’s failure to provide the franchisees with specifications.

The June 24 decision is Quizno’s Canada Restaurant Corp. v. 2038724 Ontario Ltd. Text of the opinion will appear in the CCH Business Franchise Guide.

Further details regarding the CCH Business Franchise Guide appears here on the CCH Online Store.