Unfairness Drives Court’s Rejection of Class Action Settlement

The Ontario Superior Court of Justice has recently rejected a proposed settlement in a Quiznos franchise class action settlement approval hearing.  The court held that the scope of the proposed release was too broad, while the terms of the settlement were otherwise “very poor”.

In my opinion, the key reasons why the court rejected the settlement are in fact twofold:

First, the proposed release as a condition of the settlement would preclude class members from pursuing similar claims in the future – the defendants would in effect be allowed to continue the alleged illegal activities that prompted the case.

Second, the settlement would not provide to class members any compensation in connection with the present settlement.

Based on my assessment of the reasons for decision, neither of these two factors, in and of themselves, would have barred the approval of the settlement.  But the combination of the two factors – namely, potentially broad future release of all similar claims and poor monetary settlement – resulted in a finding of unfairness and rejection of the settlement.

In the decision, released on October 6, 2014 (see 2038724 Ontario Ltd. v. Quizno’s Canada Restaurant Corporation, 2014 ONSC 5812), an experienced class action judge, Mr. Justice Perell,  rejected the proposed settlement and dismissed the approval motion.  The Court had significant concerns about the proposed release being overly broad and unfair.  Perell J. held that the proposed settlement was not fair and reasonable and was “not in the best interests of the class as a whole”.

In a nutshell, the plaintiff’s class was comprised of roughly seven hundred Quiznos franchisees who operated a Quiznos restaurant between 2006 and 2009.  The case was commenced back in 2006, and initially failed to be certified as a class action.  It was certified on appeal to the Divisional Court in 2009.  The case had two main parts.  In the first, the franchisees claimed that the franchisor, Quiznos, attempted to increase the price of supplies charged by the designated supplier, Gordon Food Service, through conspiracy, contrary to the Competition Act.

In the second part, the franchisees claimed that Quiznos breached its obligation to carry out the franchise agreement in good faith, by failing to ensure that products were charged at commercially reasonable prices, contrary to the common law and the Arthur Wishart Act (Franchise Disclosure), 2000.

Over the years, various litigation steps were taken.  In the early part of 2014, many Quiznos companies in the U.S. filed for bankruptcy protection (although the court found that the Canadian Quiznos companies were financially stable).  Following that, in July 2014, the parties to the class action reached a settlement agreement.

The key terms of the settlement agreement were comprised of (a) payment of $275,000 as compensation for disbursements, (b) a full and final release by class members in favour of the Quiznos and GFS defendants, and (c) a release by Quiznos in favour of the class members in relation to their operation of the Quiznos restaurants.

Relevant to the rejection of the settlement, the class of franchisees, even though technically limited to franchisee restaurant owners between 2006 and 2009, in practice included franchise owners who have continued owning their restaurants to the present, and anticipated that they would continue to own their franchised restaurants in the future.

A few of these class members objected at the settlement approval hearing, to the effect that (a) a portion of the $275,000 settlement should be shared with class members, and (b) given the continuing nature of Quiznos’ alleged food price maintenance allegations, the proposed settlement would allow Quiznos the ability to continue, or even further aggravate the alleged breaches with impunity.

Under the Class Proceedings Act, 1992, and the jurisprudence, a court is required to be satisfied that a proposed settlement is reasonable and in the best interests of the class as a whole.  As Perell J. noted, in deciding whether a proposed settlement is reasonable, the case law provides a range of possible resolutions that have to take into account the nature of the litigation and nature of the damages on an objective standard.  Proponents of the settlement are required to justify it.  The court is required to evaluate the proposed settlement in light of all relevant factors, including objections.

One of the most important factors to be kept in mind, particularly topical in this day and age, is access to justice.  Class actions were designed to provide a class of plaintiffs with means to collectively access justice where they may individually find it very difficult or prohibitive.

Perell J. held that even though the proposed nominal value settlement amount of only $275,000, “comes close to being more a discontinuance than a settlement”, and the outcome of the proposed settlement for class members was “very poor” as they would have gained nothing, he would have nevertheless approved the proposed settlement.

Of concern was the potentially risky nature of the case.  It was “very risky” in light of recent changes to the Competition Act and an apparent recent so-called “chilling effect” to franchise class actions in Ontario.

However, the decisive factor was the proposed release.  While class counsel viewed it narrowly as only barring future claims based on existing alleged misconduct in the case, the defendants viewed the release much more broadly, as barring any claims of the type similar to those in the case.  Perell J. wrote at paras. 55 and 61:

• [55]… However, in my opinion, it is unfair to categorically bar all future claims of the types identified in the Statement of Claim, which is a possible interpretation of the proposed release.
• [61] It is one thing for Class Members to not have gained anything by a class action, it is another thing to give up rights as the price for settling the Class Action, and such a settlement would not be in the Class Members’ best interests.

I read the court’s reasons to stand for the proposition that the unique combination in this case of the following factors are the underlining reasons for rejecting the settlement: (a) poor financial settlement where no financial compensation is proposed to be paid to class members, and (b) broad release of any future claims that are similar to the claims in this case.