Part 3: In What Circumstances Have the Courts Granted or Denied Injunctions in Franchise Disputes?
In this article, we present some of the important recent court decisions in which the court either granted, or refused to grant, an injunction to one of the parties in a franchise dispute.
New Beginnings Early Learning (White Rock) Ltd. v. CEFA Systems Inc. (2018)
Facts: This British Columbia case concerned a franchise system consisting of a format of early child learning and junior kindergarten schools. The franchisees purported to rescind their franchise agreement on the basis of certain alleged misrepresentations with regard to, for instance, the franchisor’s financial well-being and the franchisor’s principal’s educational credentials; there was some evidence, however, that the franchisees had been planning for months to convert their franchised schools into competing businesses, and in fact had commenced de-branding and opening up competing schools on the same premises. The franchisees’ competing schools used the franchisor’s proprietary curriculum.
When the franchisor learned of those activities, it terminated the franchise agreements and invoked its contractual right to purchase the assets of the schools. The franchisor also demanded that the franchisees immediately cease their de-branding activities. The franchisees declined to do so, and the franchisor sought injunctive relief.
The injunctive relief sought was primarily for an order requiring the franchisees to preserve their schools’ assets, including the schools’ contracts with their students, so that the franchisor could have something valuable to purchase should it prove, at trial, to be entitled to invoke its contractual right to do so.
Result: The court granted the franchisor that order. The court was motivated by concern that the franchisees’ efforts to compete would deprive the franchisor of any assets to collect on should the franchisor eventually succeed at trial.
Takeaway: This case illustrates how injunctions can be effectively used by a franchisors to restrain improper competition by franchisees.
Azmoon Trading Inc. v. Caffe Demetre Franchising Corp. (2018)
Facts: In this Ontario case, it was the franchisee, not the franchisor, seeking injunctive relief. The parties had been in a franchise relationship for over 15 years. A dispute arose with respect to the second and last renewal available under the franchise agreement. The dispute concerned the extent of renovations required as a pre-condition for the second renewal. The parties entered into lengthy negotiations with respect to the scope of the renovations; over the course of this period, the term of the franchise agreement expired but the parties agreed that it would continue to be in effect on a month-to-month basis. When those discussions reached an impasse, the franchisor terminated the franchise agreement.
The franchisee sued the franchisor on the basis of various alleged breaches of the franchise agreement, and at the same time sought an injunction restraining the franchisor from terminating the franchise agreement pending a trial of that lawsuit.
Significantly, and unusually in an injunction case, almost a year had passed from the time the franchisee initially sought the injunction and the hearing in which the injunction was finally denied. The delay was accounted for by the fact that the franchisee, with the franchisor’s consent, had attempted repeatedly but unsuccessfully to sell the franchise. Throughout this time, the franchisee continued to operate the franchise.
Also significant was the franchisor’s willingness to take over the operation of the franchise upon termination.
Result: The court denied the franchisee’s request, finding that the loss of the franchisee’s business would not constitute irreparable harm. By the time of the hearing, there were only three years left on the term of the franchise agreement, even if the second renewal were granted. Accordingly, any loss to franchisee’s reputation arising from the termination would be limited. Moreover, the franchisee’s losses, if it were eventually proven that the franchisor was wrong to have withheld the second renewal (and the franchisee permitted to continue operating) would be easy to quantify because the franchisee’s records from the previous 18 years of operation were available, and because the franchisor would continue to operate the restaurant post-termination, permitting a ready comparison of revenue.
Takeaway: This case serves as a reminder that the loss of a franchisee’s business upon early termination by the franchisor will not necessarily constitute “irreparable harm”. The court will closely scrutinize the effect of such a termination with a view to determining whether the resulting loss can be compensated with a monetary award, should the franchisee eventually succeed at trial.
MTY Tiki Ming Enterprises v. Azmy Enterprises Inc. (2018)
Facts: In this Newfoundland and Labrador case, the franchisor sought an injunction in an unsuccessful attempt to enforce a non-competition provision in the franchise agreement. The franchise system involved the operation of fast food restaurants. The franchisor had terminated the franchise agreement on the basis of alleged breaches of that agreement and the franchisee’s sublease. The franchisee immediately opened a competing fast food restaurant. The franchisor sought an injunction prohibiting the operation of the competing restaurant.
Results: The court denied the franchisor’s request. Finding that the injunction sought would have the effect of making a trial unnecessary, and that the injunction would require of the franchisee to take positive steps to shut down the competing restaurant, the court applied a higher standard under the injunction test: the franchisor was required to show that it had a “strong prima facie case”, and not merely that it had raised a “serious issue to be tried”. The court found that the franchisor had failed to meet that higher threshold because, among other things, the franchisor had failed to demonstrate that the non-competition provision was narrow enough to be enforceable. The court went on to find that the franchisor had failed to establish irreparable harm, mainly because the franchisor had failed to prove that the public was likely to confuse the competing business with the franchisor’s brand – the evidence did not establish any harm to the franchisor. Finally, the court held that the loss of the former franchisee’s new competitive business, should the injunction be granted, tipped the balance of convenience against granting that injunction.
Takeaway: This case is an example of the high degree of proof some courts will require from franchisors seeking injunctions to establish irreparable harm. While other courts have taken a more lenient approach, this court required proof of actual, not speculative, damage to the franchisor’s goodwill resulting from the franchisee’s alleged misconduct.