Nov 3, 2016
A recent Alberta decision highlights the fact that agreements not characterized as franchise agreements by the parties may create a franchisor/franchisee relationship regardless of the parties’ intentions.
The Business Blossoms case arose out of a Proprietary Licensed Rights Agreement (the License Agreement) through which Blossoms Fresh Fruit Arrangements Ltd. (Fresh Fruit) licensed its methods of preparing, serving and merchandising fresh fruit and vegetable arrangements to Business Blossoms Inc. (Business Blossoms).
Business Blossoms first became aware of Fresh Fruit through an online advertisement put together by a brokerage firm which used the term “franchise” in its advertising. Fresh Fruit had the firm correct the term “franchise”, arguing it was an inaccurate description, and expressly communicated to Business Blossoms repeatedly that it was offering a license, not a franchise. Several years later, the parties began negotiations concerning entering into a business arrangement involving Fresh Fruit’s business model and training. Fresh Fruit communicated to Business Blossoms on several occasions that the agreement was to be a license, not a franchise, including during conversations about Business Blossoms creating its own franchise system using Fresh Fruit’s materials and following a request from Business Blossoms’ counsel for full financial disclosure.
The parties ultimately executed a License Agreement, as well as two ancillary agreements, granting Business Blossoms the right to use Fresh Fruit’s marks and materials in accordance with processes, specifications and standards established by Fresh Fruit. Fresh Fruit provided various materials and training to Business Blossoms on the operation of the business, but the agreements did not impose any restrictions on business operations other than to require proper use of the marks. The License Agreement included explicit language making it clear that it did not create a franchisor/franchisee relationship.
Business Blossoms sought summary judgment determining that the parties were nonetheless in a franchise relationship under the License Agreement. In his oral reasons, the Master held that the fact the agreement was a licensing agreement did not mean the relationship could not be characterized as a franchisor-franchisee relationship within the meaning of the Alberta Franchises Act. However, the Master found it was arguable the License Agreement did not fall within the definition of “franchise” under the Act, and, as such, refused to grant summary judgment.
On appeal, the Alberta Court of Queen’s Bench agreed.
Section 1(1)(d) of the Act lays out three elements necessary to be deemed a “franchise”:
“franchise” means a right to engage in a business
- in which goods or services are sold or offered for sale or are distributed under a marketing or business plan prescribed in substantial part by the franchisor or its associate,
- that is substantially associated with a trademark, service mark, trade name, logotype or advertising of the franchisor or its associate or designating the franchisor or its associate, and
- that involves
- a continuing financial obligation to the franchisor or its associate by the franchisee and significant continuing operational controls by the franchisor or its associate on the operations of the franchised business, or
- the payment of a franchise fee,
and includes a master franchise and a subfranchise.
The Court rejected Business Blossoms’ argument that the materials provided by Fresh Fruit satisfied the first element, preferring Black’s Law Dictionary’s definition of “prescribe”, which focuses on concepts of authority, direction, control and ownership, over a dictionary definition meaning “advice” or “recommendation”. The Court concluded these materials did not impose “significant continuing operational controls” over Business Blossoms’ marketing or business plan. In addition, Fresh Fruit held no control over any other advertising beyond review and approval of advertising or promotional materials related to the licensed products, and the wording of the License Agreement and the training and materials did not impact a “material aspect” of Business Blossoms’ business.
Regarding the second element, the Court held that although Business Blossoms had the right to engage in a business in which it could use Fresh Fruit’s trademarks and tradenames, it did not have to be “substantially associated” with those marks and names. Under the agreement, Fresh Fruit had no involvement with the ongoing business operations of Business Blossoms’ stores. Business Blossoms had autonomy to produce and sell Blossoms products and materials but it had no obligation to do so and its business was not necessarily “substantially associated” with Fresh Fruit’s trademarks and tradenames.
Regarding the final element, Fresh Fruit conceded that the fee paid by Business Blossoms did in fact constitute a payment of a franchise fee within the meaning of the Act.
Implications and practical considerations
It is important to note that this is a summary judgment decision and not a definitive decision on the merits. As emphasized by Justice Yamauchi, on the evidence before it, the Court could not determine whether or not the relationship between Business Blossoms and Fresh Fruit was a franchise.
However, while only a decision on a preliminary motion, this case highlights that careful attention must be paid to both the intentions of contracting parties as well as the statutory definitions of “franchise”. An agreement will be analyzed within the “factual matrix” in which it was created, taking into consideration both law and fact. While in this situation it was not possible to conclude that this relationship was effectively that of a franchisor-franchisee, it is clear that parties may be deemed to have entered into a franchise relationship regardless of what label they choose to use.
In addition, it highlights how control over a would-be franchisee’s operations will affect a court’s determination of whether the agreement constitutes a franchise agreement for the purposes of the Act. While licensing marks may not necessarily constitute a franchise, prescribing systems which the licensee must adhere to will bring the agreement closer within the scope of the legislation, increasing the likelihood the agreement will be deemed by a court to be a franchise agreement. Licensors wishing to avoid franchisor obligations should ideally exercise as little control over the licensee’s operations as possible so as to avoid falling within the scope of the legislation.