By: Mandana Niknejad, Law Works
Editor: Ben Hanuka, Law Works
In RFSP Equipment v. Singh, a decision of the Supreme Court of British Columbia, released on April 4, 2022, the court dismissed two applications for interlocutory injunction that the franchisor, Freshslice, was seeking against a group of franchisees in Vancouver.
The court held that, even though the franchisor had established a strong prima facie case against the franchisees for breach of their non-competition covenants under their franchise agreements, there was no irreparable harm to the franchisor. The franchisees had completely rebranded their restaurants. As such, there was no risk or harm to the brand, goodwill, or reputation of the franchisor as a result of the operation of the new businesses.
The respondents were two former franchisees of Freshslice who owned nine franchised restaurants. In early 2021, they rebranded their nine restaurants as HellCrust Pizza and Yummy Slice Pizza. As part of the rebrand, they removed all Freshslice marks, as well as all Freshslice dough, and changed to other suppliers. They also changed the restaurants’ telephone numbers, stopped using Freshslice social media accounts, introduced a new menu, and implemented a new point of sale system.
After the rebranding, the franchisees delivered notices of rescission to Freshslice. Freshslice brought interlocutory injunctions to restrain the former franchisees from carrying on their business within the defined scope of the non-competition clause in the franchise agreements.
The non-competition clauses prohibited the franchisees from engaging in a business that is similar to or competitive with Freshslice in sale of pizza and other Italian food items for take-out within five kilometers of any Freshslice store (with the exception of one location for which the geographic scope was 100 kilometers). The term of the non-competition clause was for a period of two years after transfer, assignment or termination of the franchise agreements.
Franchise agreements’ non-competition clauses were enforceable, and franchisees were in breach of those obligations
The franchisees argued that the non-competition clauses were unenforceable because they were ambiguous – they were missing word “neither” in the clause. The court rejected this argument and held that any reasonable person reading the clause would immediately know the intent and purpose of the clause despite the missing word.
The franchisees also argued that the non-competition clauses were not enforceable because they were too broad in the scope of activity, geography, and timing. The court agreed that the 100 km geographic scope as defined for one of the locations was unreasonable for restaurants that predominantly sell takeout pizza. However, it found the five-kilometer scope for the other franchise locations was a reasonable restriction. It also found that the temporal scope of two years and the scope of activity were also reasonable in the view of the court.
As a result, the court concluded that Freshslice had made a strong prima facie case that the franchisees had breached their non-compete obligations under their franchise agreements. The franchisees were in breach of restrictive covenants of their franchise agreements by carrying on the same business as they carried on while they were franchisees.
Franchisees were not permitted to rescind the franchise agreements under the Franchises Act
The court held that the franchisees were not entitled to seek rescission of their purchases under subsection 6(2) of the Franchises Act because they received disclosure documents. The allegation that the disclosure documents were deficient did not support the claim for rescission under subsection 6(2) of the Act, which deals with fundamentally deficient documents or where no disclosure document was delivered. As such, the franchisees’ rescission claims were limited to subsection 6(1) of the Act, which had to be brought within 60 days of receipt of the disclosure documents. The franchisees were out of time for that.
The franchisees did not validly terminate the franchise agreements
The franchisees further argued that Freshslice had repudiated the franchise agreements, and they subsequently accepted the repudiation, bringing the agreements to an end. The franchisees alleged that the basis of the repudiation was Freshslice’ unilateral policies that were designed to increase its own revenues to the financial detriment of the franchisees, such as policies resulting in increased sale of dough to franchisees by Freshslice or its affiliates. The court held that the evidence of the franchisees fell short of establishing that Freshslice implemented policies to increase sales to the detriment of the franchisees. As such, the court held that the franchisees had not displaced the strong prima facie case established by Freshslice on the injunction application test.
No irreparable harm for Freshslice
Having said that, the court was not satisfied that Freshslice had suffered or would suffer irreparable harm if the injunctions were not granted. Freshslice argued that the rebranding of the restaurants caused confusion among consumers and irreparable harm to its reputation and goodwill. It also argued that the rebranding caused harm to the Freshslice system and caused Freshslice to lose key locations and market share.
The court disagreed and found that there was no realistic possibility of customer confusion or damage to the reputation, brand or goodwill of Freshslice, since the former franchisees had completely rebranded their restaurants. There was no evidence that the former franchisees were using confidential information, that key locations have been lost, or that market share had been lost. Furthermore, loss of sales or revenue suffered by Freshslice, if any, could be adequately compensated for with an award of damages.
Balance of convenience in favor of former franchisees
Overall, the court found that the balance of convenience favoured the former franchisees because granting the injunction would shut them down. The amount that they invested in the locations was significant. Shutting down the locations would have resulted on laying off employees.
The court disagreed with Freshslice that dismissing the injunction application would be unjust because it would allow the former franchisees to take advantage Freshslice’ goodwill and access to the system and confidential information – there was no evidence to support this argument.
The court also held that, since the franchisees had completely rebranded their restaurants, there was no possibility that the brand, goodwill or reputation of Freshslice would be affected by the operation of the HellCrust and Yummy Slice restaurants.
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