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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.
In Sopropharm c. Jean-Coutu Group (PJC) Inc., a November 1, 2018, decision of the Quebec Superior Court, the court allowed the plaintiff to amend its class action application against the defendant franchisor, defined the size of the class, certified the common issues of fact and law and allowed it to proceed to trial.
The plaintiff, Sopropharm, is an association comprised of pharmacists who have signed franchise agreements with The Jean Coutu Group Inc. (“JCG”). The defendant, JCG, has a network of franchised stores in Quebec, Ontario and New Brunswick. JCG is not authorized to practice the profession of a pharmacist or operate a pharmacy within the meaning of Quebec’s Pharmacy Act.
Sopropharm sought leave to amend its class action application against JCG. It sought to add a new allegation about interference with its members’ freedom of association, to request that the receipts signed by the franchisees about a release in favour of the franchisor should be nullified, and to impose a duty on JCG to help its franchisees comply with Quebec’s Code of ethics of pharmacists.
In its original class action application, Sopropharm alleged that the royalty clauses in the franchise agreements contravene the Code of ethics of pharmacists, which prohibits fee-sharing between pharmacists and non-pharmacists. Sopropharm claimed compensation for the royalties paid to JCG under the franchise agreements.
Sopropharm also alleged that JCG breached the duty of fair dealing by imposing in the franchise agreement terms that require its members to breach the Code of ethics of pharmacists. It also sought to nullify transfer restrictions in the franchise agreement which allegedly violate restrictions on ownership in the Pharmacy Act.
JCG opposed the application on the grounds that the criteria to certify a class action, as set out in the Quebec Code of Civil Procedure, were not met.
Sopropharm was allowed to add new allegations
The court allowed Sopropharm to amend its class action application to include the following new allegations against JCG and requested relief:
a. JCG has infringed its members’ right of freedom of association since the original class action application was filed on July 15, 2016;
b. the receipts signed by the franchisees about the automatic grant of a general release to the franchisor upon renewal of the franchise agreement should be nullified;
c. JCG has a duty to work with its franchisees to ensure compliance with the Code of ethics of pharmacists, including by giving to them, on an ongoing basis, information about the fair market value of the services rendered by JCG in consideration for the royalty fees charged.
It found that it would not be in the interests of justice to require Sopropharm to invoke new procedures to make these allegations against PJC. The court also determined that JCG had the opportunity to put all its arguments forward about the new causes of action at the hearing.
The class must not be open-ended
Sopropharm’s proposed class was made up of all franchisees who have signed a franchise agreement with JCG since July 15, 2013. The court held that the class could not be open-ended and required a closing date. It determined that the appropriate cut-off was the date of its judgment, i.e. November 1, 2018.
JCG argued that the class should be restricted based on a three-year limitation period under the Civil Code of Quebec that applies to actions for nullifying contractual terms. The court found that the cause of action for nullity would not necessarily be discoverable by the franchisees at the time that they signed the franchise agreements with JCG. It decided to allow the trial judge to rule on the merits of any limitations defences available to JCG.
Sopropharm was an appropriate representative of the class
The court determined that the material conditions for instituting a class action were met by Sopropharm. Its president, Mr. Bourget, was a duly registered pharmacist and was a party to a franchise agreement with JCG.
Sopropharm’s members were also members of the class. The court found that Sopropharm was prepared to manage the class action in the interest of the members and had no conflict of interest with them.
The allegations raised common issues and had a legal basis
The court applied the “colour of right” legal test under the Civil Code of Quebec and concluded that the class action application had “a serious appearance of law”, with a “chance of success”.
About the illegality of the royalty clauses, JCG relied on Quesne (full citation), an earlier case in which the royalty clause had been found not to be illegal per se. It was enforceable if there was correspondence between the amount of the fee charged and the fair market value of the services rendered.
The court held that the Quesnel decision did not make the issue about the illegality of the royalty clause res judicata (not open to relitigation). There was no identity of parties because the class members were not represented in Quesnel. They may have evidence to show that there was no correspondence between the amount of the fee charged and the value of the services rendered, which would be impermissible profit sharing.
About the requested duty of continuing disclosure, the court found that Sopropharm’s allegations were sufficiently clear and precise. The relief sought was defensible in view of the franchisees’ obligations about fee-sharing under the Code of ethics of pharmacists.
About the transfer restrictions in the franchise agreement that Sopropharm alleged contravened the property rights of pharmacists under the Pharmacy Act, the court found that the cause of action was defensible. It preferred to allow a trial judge to rule on the scope of the challenged clauses and their impact on the alleged interference of JCG with the professional independence of pharmacists.
The court also found that the allegations by Sopropharm about interference with its members’ right of association were defensible. It relied upon correspondence that JCG sent to its franchisees that encouraged them to seek independent legal advice about participating in the class action proceeding and attached an opposition form.
Finally, the court held that Sopropharm’s allegations that the release terms in the franchise agreement, as well as the related receipts signed by the franchisees, were void by operation of law satisfied the colour of right test.
Litigating the claims individually was not feasible
The court found that, given the size and geographic distribution of the JCG franchise system, it would be impractical for Sopropharm to meet with every member of the class to obtain a specific mandate from each of them, and to take individual proceedings on behalf of them all. It concluded that the proposed class action was the appropriate procedural mechanism to determine Sopropharm’s allegations against JCG on the merits and allowed it to proceed.
For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at email@example.com or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.Tags : Franchise Agreement, Good & Bad Faith, Franchise System, Damages, Class Action, Release, Royalties
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