Distinguishing Franchisors From Licensors

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Author: Evan Ivkovic, Student-at-Law, Law Works P.C.
Editorial Committee: Law Works P.C.
Editor: Ben Hanuka

In Business Blossoms Inc. v Blossoms Fresh Fruit Arrangement Ltd. 2016 ABQB 275, the Alberta Court of Queen’s Bench dismissed an appeal from a summary judgment motion. Business Blossoms Inc. (“Blossoms”) entered into a license agreement with Business Blossoms Fresh Fruit Arrangement Ltd. (“Fresh Fruit”), arguing that Fresh Fruit was a franchisor and that Fresh Fruit failed to meet its disclosure obligations under Alberta’s Franchises Act (“FA”). At issue was whether Fresh Fruit exercised sufficient control over the business activity of Business Blossoms to be a franchisor.

Because Blossoms made a summary judgment motion, Justice Yamauchi stated that Blossoms’ position had to be unassailably true. Yamauchi J held that Blossoms did not meet this legal test, highlighting facts that showed uncertainty about the nature of the relationship between Business Blossoms and Fresh Fruit.

Background

Fresh Fruit designs and sells decorative fruit and vegetable arrangements, licensing its arrangements to approved sellers for sale to consumers. Blossoms was an approved seller. During the negotiation, a principal from Blossoms and a representative from Fresh Fruit had back and forth discussions about financial statements, disclosure documents and the drafting of contracts. Following negotiation and discussions, Fresh Fruit and Blossoms signed a License Agreement, a Sales Support Agreement, and a Training Agreement. The latter two agreements were made at Blossoms’ request.

With the consent of Fresh Fruit, Blossoms used its License Agreement with Fresh Fruit to build a franchise system of its own. Blossoms was not successful as a retailer or a franchisor. Blossoms sought damages from Fresh Fruit for the failing to provide a disclosure document, claiming that the parties were in a franchise relationship.

Was it Unassailably True that Fresh Fruit was a Franchise?

Yamauchi J said that the test for summary judgments in Alberta requires Blossoms to prove that its “position is unassailable” and that “a party’s position is unassailable if it is so compelling that the likelihood of success is very high.” However, Yamauchi J also mentioned that the FA shifts the onus on Fresh Fruits to prove that it is not a franchise, noting that s. 19 of the FA provides that “in any proceeding under this Act, the burden of proving… (b) an exclusion from a definition is on the person claiming it.” Yet, Yamauchi J held that even if Fresh Fruit failed to meet its onus, Blossoms would still have to prove that its position was unassailable and based on uncontroverted facts and law to be successful in a summary judgment motion.

Yamauchi J said that the substance, rather than the form of the agreements, must be examined to ascertain the nature of the relationship between Fresh Fruit and Blossoms as either franchisor or licensor. He also noted that the full factual matrix underlying an agreement must be factored to determine the objective intention of the parties and thus the meaning of the contract.

Yamauchi J pointed out disputed facts about the objective intention of the parties. For example, there was a controversy over the definition of the word “prescribe”. A franchise is defined, in part, by s. 1(1)(d)(i) of the FA as a business that distributes goods or services for sale under a marketing or business plan prescribed in substantial part by the franchisor. According to the dictionary, the word “prescribe” can mean to “advise” or “recommend”, but the word “prescribe” can also mean to “dictate” or “establish authoritatively”. Fresh Fruit delivered to Blossoms materials describing pricing, equipment, sales techniques and training suggestions, which can be construed as advice or recommendations but not as obligations that control Blossoms’ business activity. Thus, to Yamauchi J, Blossoms was unable to prove that its position was unassailable on an integral element of the definition of “franchise”. Yamauchi J added that Fresh Fruit, which did not demand the exclusive sale of its arrangements and did not dictate training procedure, did not impose significant continuing operational controls, which according to s. 1(1)(d)(iii)(A) of the FA is another important element of the definition of “franchise”.

Key Takeaways

Simply because Blossoms was unsuccessful in its motion for summary judgment does not mean that on similar facts parties will not be in a franchise relationship. The onus in a full trial would be different. Blossoms would not have been required to prove that its position was unassailable. Rather, because of s. 19 of the FA, Fresh Fruit would have had to demonstrate on a balance of probabilities that it was not a franchise in its dealings with Blossoms. In Ontario, s. 12 of the Arthur Wishart Act similarly would require the franchisor to prove on a balance of probabilities that it is not a franchisor.

Also, Yamauchi J may have applied the wrong legal standard for summary judgments. He cited a 2013 Alberta Court of Appeal decision, yet more recently in 2014 the Alberta Court of Appeal explicitly followed the Supreme Court of Canada’s ruling in Hryniak v Maldin 2014 SCC 7, which states that summary judgments should be granted if there is no genuine issue requiring a trial.  Courts are required to factor in the principle of proportionality, which emphasizes the importance of timeliness and affordability. For Ontario franchisors and franchisees, the Hryniak standard is also the legal test for summary judgements.

Yet, even had Yamauchi J used the correct legal test, the outcome of the case likely would have been the same. There was enough uncertainty about whether Fresh Fruit imposed sufficient control on Blossoms to require a full trial.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone at (855) 978-5293.

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