Will an American Franchisor Establishing a Franchise in Canada be Subject to Special Laws Providing Liability For Failing to Maintain Brand Strength?

American Franchisors should be aware of the special laws relating to establishing franchises in Canada. For example, the Quebec Civil Code attaches a contractual obligation to the franchisor of a franchise agreement to protect and enhance the franchise brand.  In Bertico Inc, et al. v. Dunkin’ Brands Canada LTD., No. 500-17-015511-036; 500-17-019989-048; 500-17-028727-058 (Quebec Super. Ct. June 21, 2012), the Quebec Superior Court addressed this issue and held that an American franchisor could be liable for failing to sufficiently maintain the strength of its brand for Canadian franchisees.

In that case, a class action was filed against the Dunkin’ Donuts franchisor in Quebec for failing to address the franchisees’ concerns about rejuvenating the Dunkin’ brand and business strategy to compete with a new franchise competitor.  The franchisees argued that the Dunkin’ Donuts franchisor was unresponsive to their request in violation of their franchise agreements.  In the agreements the franchisor promised to protect and enhance Dunkin’ Donuts’ reputation and “the demand for the products of the Dunkin’ Donuts system.” Id at 6.

The Court sided with the franchisees, finding the franchisor’s failure to sufficiently protect the brand had fundamentally breached its franchise agreements. As a result of the franchisor’s inaction, the competitor’s franchise achieved considerable market share in Quebec at the cost of Dunkin’ Donuts and its franchisees. The Judge stated that the franchisor’s failure to respond in a way that was competitive with others in the industry prevented the franchisees from benefiting from their investments in the Dunkin’ Donuts franchise.  See id. at 19, 37.

In coming to its decision, the Court did make mention of the franchisees’ level of fault or lack therefore.  Ultimately, the Court did not find that the franchisees were poor operators.  See id.  In fact, the Judge stated that ‘[t]hey were amongst the best and most successful in the Quebec …”  Id.

It should be noted that while the franchisor was found at fault, this decision is particular to Quebec Civil Code, and only binding on Quebec courts. As previously stated, the Quebec Civil Code attaches a contractual obligation to the franchisor of a franchise agreement to protect and enhance the brand.  In Bertico, the Court relied on the specific terms of the franchise agreements and made the franchisor accountable for its written promise to protect and enhance the Dunkin’ Donuts brand.

Franchisors should be cautious of the kinds of promises and representations made when drafting or signing a franchise agreement in Canada.  As shown here, a Court may look to the terms of the franchise agreement when determining the franchisor’s responsibilities, and ultimately, the franchisor’s liability.

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© 2012 Nissenbaum Law Group, LLC