Revolt of the franchisees

Share

Back in 2005, Robert Rodger was looking for a chance to be his own boss and spend more time with his family. So he left his post as a plant manager with auto parts giant Magna International Inc. in Aurora, Ont., and bought a local Pet Valu franchise.

He thought it would be a fun business to be in. Local kids used to volunteer to care for the lizards, rabbits and birds he had for sale. Being part of the Markham, Ont.-based Pet Valu chain - as opposed to opening an independent store - meant he was supposed to benefit both from a brand-name banner and the discounts on dog food and other pet supplies that come with a corporate giant's purchasing power.

It didn't turn out that way, he said. Today, Mr. Rodger, 48, is involved in a class-action battle on behalf of fellow franchisees against Pet Valu's head office. In court documents, he accused Pet Valu of failing to pass on the promised savings and rebates from its bulk purchases, sucking up profits while leaving franchisees - who must also pay various fees and royalties to head office - to struggle.

Pet Valu, which has 155 franchised stores in Ontario and Manitoba, denies the allegations. It says the real problem is Mr. Rodger's "poor management," according to court documents. The company has also called the suit an attempt to coerce it into buying back his unprofitable franchise. (According to court documents, talks between the two sides on a buyout failed before the lawsuit was launched in December, 2009.)

"It's all an invisible wall, where they are doing all the purchasing and buying, and you don't know what they are doing with the finances," Mr. Rodger said in an interview. "When you start to challenge those issues, it can make your life miserable."

Last week, Mr. Rodger's case won certification - or the right to proceed as a class action - in Ontario Superior Court. The suit is the latest in a wave high-profile litigation launched by aggrieved franchisees against their corporate parent. Midas, Shoppers Drug Mart, Quiznos, and national icon Tim Hortons each have similar class actions.

David Sterns of Sotos LLP, who is Mr. Rodger's lawyer and also acts for the franchisees in the Quiznos and Midas cases, said recent preliminary court judgments have favoured plaintiffs. In the Quiznos case, for example, the Ontario Court of Appeal, ruling last year on a decision to certify the case, said a fight between a franchisor and hundreds of franchisees is "exactly the kind of case for a class proceeding."

Class actions allows franchisees to band together and more easily to take on their corporate parent, Mr. Sterns said, although only one representative plaintiff is needed to proceed. The cases often revolve around how the franchisor uses its power to set the prices - both the prices that franchisees must pay for the products they sell, and how much they can sell them for.

"It's about dividing up the profit pie. And the person who has the pie cutter is the franchisor. And so, they cut themselves the biggest piece," Mr. Sterns said. "But on the other hand, the franchisees are the ones who put a lot of investment into making the pie."

In the Quiznos case, the representative plaintiffs - who operated submarine sandwich shops in Windsor and Oakville, Ont. - allege that Quiznos engaged in "price gouging." In court documents, they say that the company, which obligates franchisees to buy everything from meat to cleaning supplies through its distribution network, jacked up prices to inflate its value. Quiznos Canada Restaurant Corp. denies the allegations.

Larry Lowenstein, a Toronto lawyer with Osler Hoskin & Harcourt LLP who has defended franchisors in similar cases, said such suits they are more emotionally charged than the average commercial court fight.

"They tend to be a little fractious and acrimonious, because it has some of the aura of a union-management struggle," said Mr. Lowenstein, who acted for franchisor Bulk Barn Foods Ltd. in 1999, in a case labelled Ontario's first franchise class action.

In some cases, a plaintiff is simply seeking leverage in negotiations to get out of the business, he added. But courts do not always favour the plaintiffs.

In December, Mr. Lowenstein's team from Osler won a summary judgment dismissing a class action by gas-station franchisees against Suncor Energy Products Inc. That decision is now under appeal. (Summary judgments, in which a judge makes a ruling based on written submissions without the expense of a full trial, are now allowed more often under new Ontario rules brought in last year.)

Lawyer Geoffrey Shaw, who sits across the courtroom on the Pet Valu and Quiznos cases from Mr. Sterns, argues the David vs. Goliath perception underlying some of the franchise class actions is not reality.

"Good franchise systems - and there's tonnes of them out there, we buy gas at them, we buy groceries at them, we eat quick sandwiches at them - they generally work when franchisors and franchisees are all pulling on the same oar," said Mr. Shaw, a partner with Cassels Brock LLP in Toronto.

"There's an understanding among franchisors that they are not in business to beat up or to somehow make their franchisees worse off," he said. "They're in business to make the franchisees better off, because when that happens [the franchisors]are better off."

Mr. Shaw thinks the apparent increase in cases has more to do with the efforts of class-action lawyers to recruit plaintiffs than with alleged transgressions by big franchisors. He said the real test will be when one of the cases actually comes to a full trial. None have so far.

A judgment on the merits of a case would establish the hurdles plaintiffs need to leap over to actually win, and perhaps slow down the number of new cases being filed, Mr. Shaw said, adding: "I can hardly wait."

Meanwhile, Mr. Rodger plans to continue his fight against Pet Valu. He said other franchisees support his views but are reluctant to come forward publicly and confront the company, which ordered an audit of his store after the lawsuit was launched.

He said he would like his fight to end in an "amicable' settlement but doesn't see much hope of that. "Throughout the process with Pet Valu, I have only ever wanted a fair deal."