A recent appeal decision of the British Columbia Court of Appeal highlighted two important issues for franchise parties in respect of potential liability in consumer class actions. First, the existence of franchise agreements may be sufficient to ground a claim for a civil conspiracy between franchisors and franchisees. Second, the use of a class action waiver provision in standard form consumer contracts that are used across a franchise system could be found to be unconscionable and unenforceable.
It is rare that franchisors and franchisees find themselves on the same defendant side of proposed class proceedings. The majority of franchise-based class proceedings have generally involved franchisee actions against franchisors in respect of breach of contract and duty of good faith actions. However, due to the complex interrelationship between franchisors and franchisees and those parties’ interactions with consumers in consumer protection and product liability matters, it appears that Canadian courts now appear to be reckoning with franchisors and franchisees as potential joint defendants in class proceedings.
The case, Pearce v. 4 Pillars Consulting Group Inc., involved a proposed consumer-based class action against members of the “4 Pillars” franchise system, which offered debt advisory services to people on the brink of insolvency who sought debt restructuring. In this action, the representative plaintiff consumer, Pearce, claims that the defendants are unlicensed, charge excessive fees, and operate illegally. Pearce sought a return of fees paid and damages on behalf of the class. The defendants are the franchisor, various franchisees, and directors of the franchisor business. On the initial hearing before the British Columbia Supreme Court, the action was certified as a class proceeding. The defendants appealed the certification decision.
THE CONSPIRACY CLAIM
The first key issue concerning franchising that arose on the appeal involved the claim of civil conspiracy that was made against all of the defendants, both franchisors and franchisees alike. Specifically, the allegation was that:
“…the franchisors and franchisees, through the execution of a franchise agreement, agreed to implement a scheme to collect fees for debt restructuring services in breach of provisions of the [British Columbia Business Practices and Consumer Protection Act (“BPCPA”)] and the [Canada Bankruptcy and Insolvency Act (“BIA”)]; the [franchisors and franchisees] committed unlawful acts in furtherance of this conspiracy, including acts in breach of the BPCPA and BIA; the [franchisors and franchisees] knew or ought to have known that the unlawful acts were likely to cause harm and injury to the class members; and as a result of the unlawful acts committed in furtherance of the conspiracy, the class members suffered loss and damages through payment of the fees for which the [franchisors and franchisees] are liable.”
On appeal, the court flatly confirmed that the plaintiff had properly pleaded all of the elements of a claim in civil conspiracy. The only dispute the court addressed on this issue was whether the plaintiff could rely on a breach of the BIA as an element of unjust enrichment or the tort of conspiracy because the BIA is a complete code. After reviewing the jurisprudence on the issue, the court held that the defendants did not establish that it was plain and obvious that the BIA precluded a common law claim based on conspiracy and unjust enrichment where one of the elements of the claims relies on allegations that the defendants breached the BIA.
Although class proceeding certification motions are procedural in nature and generally do not involve definitive legal findings for the purposes of the underlying claims, certification motions provide some insight into judicial views on creative or novel causes of action. Accordingly, franchisors and franchisees should be aware that their contractual relationships may help ground a civil conspiracy claim if the consumers of the products and services of their franchise system seek redress by way of a class proceeding. Franchise parties should ensure that their franchise agreements properly address limitation of liability and indemnification as between the parties in the event of such external lawsuits.
ENFORCEABILITY OF CLASS ACTION WAIVER
The second interesting legal issue that arose out of the appeal decision was the examination of the enforceability of a class action waiver clause in the consumer contract used by the franchisors/franchisees. In reviewing whether the class action waiver clause was unconscionable, the court addressed whether there was inequality of bargaining power between the parties. In this case, the franchisees claimed that they were simply small businesses themselves and not multinational operations. The court rejected this argument, noting that the evidence on the certification motion established that the individual franchises operated as part of a national chain of franchises, using standardized policies, practices, and procedures as well as standardized contracts across the franchise system. The court also noted the number of potential class members (over 8,000) and franchise system-wide sales (over $20 million per year). The court held that despite the existence of individual franchisees, when the defendants were looked at collectively, there was inequality of bargaining power vis-à-vis the consumer class members. In ultimately finding that the class action waiver was unconscionable and unenforceable, the court noted that “The proposed class members entered the agreement as persons in financial distress, while the appellants are sophisticated business owners who use a standardized contract across a national chain of franchises.” Further, the court rejected the franchisees’ argument that a class proceeding would be unduly burdensome on them as small businesses, noting that it would be more of a burden to be sued in over 8,000 separate claims.
Franchisors and franchisees should be cognizant of the risk of their collective standard form consumer agreements not being enforceable if certain provisions are found to be either unconscionable or an obvious improvident bargain for their customers. As seen in 4 Pillars, the argument that franchisees are small business persons may hold little weight when seen in the context of the collective power of a franchise system being compared with individual consumers. Franchise parties should take care to ensure that their standard form consumer agreements are enforceable by ensuring that counsel drafts and/or reviews these agreements.
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