Another franchisee trial?

I don’t recommend that any of you try to peruse the public records of the Canadian court system. It’s terribly tedious. But it’s something I do from time to time and occasionally I find something of interest. For example, this past month I found a record from the Ontario Superior Court of Justice of a case between Sobeys and a number of its Price Chopper franchisees. The court granted an injunction that prevented Sobeys from terminating the franchise agreements of seven Price Chopper operators.

When I dug further into this case I discovered that it started with a legal suit the Price Chopper franchisees filed against Sobeys, claiming breach of contract and charging that the agreements the stores had signed with Sobeys were so structured that the franchisees could never make a profit, preventing them from ever increasing their equity in their businesses and thereby retiring debts they owed to Sobeys.

Sobeys subsequently filed a counterclaim denying all the franchisees’ charges. Sobeys claimed the franchisees had breached their contracts by taking funds from their businesses to pay for the legal action they had initiated. Sobeys threatened to terminate the franchises, unless the money was returned. Madam Justice Barbara Conway ruled that Sobeys could not terminate the franchises, pending settlement of the original suits and also ruled that the franchisees could not use further funds from their businesses for legal expenses. She also ruled there was sufficient cause produced in the original suits to send the entire matter to trial. That trial has not yet taken place.

In their original statement of claim, the franchisees argued that “Sobeys administers the Price Chopper program so as to ensure Price Chopper franchisees collectively and consistently lose millions of dollars annually.” This is an issue because franchise owners and spouses are personally liable for all losses of the business under personal guarantees in favour of Sobeys, and secured by unlimited collateral mortgages on their homes.

Franchisees claim that when they first signed agreements with Sobeys they were told they could work off their debt through profits, thereby gaining equity in their businesses. They also claim that Sobeys is in total control of the gross margins of the Price Chopper program, and the gross margins available are insufficient to make a profit. Sobeys, they say, is also in total control of “discretionary subsidies” paid to the franchisees to help them break even. Their suit asks for $3 million per franchise in the settlement.

Sobeys’ countersuit denies any wrongdoing, saying the franchisees were made fully aware of all their obligations under the various Price Chopper agreements, in particular the Price Chopper low-equity program, or LEP. Under the LEP, Sobeys advances substantial interestfree sums of money for inventory, leasing of the store and equipment. In return the franchisees acquire a turnkey grocery business for the low initial contribution of $25,000. The franchisees, says Sobeys, agreed to all the controls when they joined the Price Chopper LEP, and those controls are reasonable given the amounts invested in the business by Sobeys.

Sobeys also claims the franchisees have increased their equity in their businesses by paying back a portion of their loans, and notes only seven of 45 Price Chopper franchisees have instituted this action against Sobeys. In its counterclaim, Sobeys seeks damages of $2 million for breach of contract and $10 million to repay the money it says it is owed.

The suit and countersuit statements of claim are very lengthy. To my inexperienced eyes they appear like a matter of “he said, she said.” But that’s exactly why this issue will be argued at a trial. Unless, of course, there is an out-of-court settlement first.

Shall we hold our breath?