Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ont. App. Ct.: Restrictive covenant unreasonable; franchisor lacked protectable interest, (Mar 8, 2016)

By Michael Menzhuber, J.D., LL.M.

The Court of Appeal for Ontario rejected an application judge’s decision that a franchise agreement’s restrictive covenant was reasonable in scope. It granted the former franchisees’ appeal after determining that the franchisor had no legitimate or proprietary interest to protect (MEDIchair LP v. DME Medequip Inc., February 29, 2016, Feldman, K.).

In 2008, Allison Rolf and Ron Siederer purchased DME Medequip Inc., a MEDIchair franchise store located in Peterborough, Ontario, from the original franchisees. MEDIchair LP, which operated a network of franchise stores that sell and lease home medical equipment, approved the sale. Rolf and Siederer agreed to be personally bound by the franchise agreement, including the restrictive covenant that MEDIchair and the former DME owners had entered into in 2005. The appellants operated the franchise for two years, then renewed it in 2010 for a five-year term.

In 2011, MEDIchair was sold by its corporate owner to Centric Health Corporation (Centric). The following year, Centric also purchased Motion Specialties, a group of 24 corporate stores similar to the MEDIchair stores. One of these stores competed directly with the appellants’ store.

The appellants did not renew their franchise agreement when it expired in 2015. After removing all the MEDIchair signage, they continued to operate their business at the same premises with the same merchandise and the same employees under a new name, Living Well Home Medical Equipment. These actions led the MEDIchair to apply to the court to enforce the franchise agreement’s restrictive covenant. The application judge found that the covenant was enforceable and that the appellants were in breach. The appellants appealed.

The appellants sought to introduce “fresh evidence” on appeal that consisted of: (1) the appellants’ attempts to comply with the restrictive covenant by modifying their business in order to make it sufficiently dissimilar to the MEDIchair business; and (2) further details from MEDIchair about the declining state of the MEDIchair franchise system at the time of the application and since. The court declined to allow “fresh evidence” after determining that the admitted evidence was sufficient for a proper consideration of the issue.

The court saw no error in the application judge’s decision that MEDIchair was not required to provide the appellants with a franchise disclosure document. While acknowledging that the Arthur Wishart Act required a franchisor to provide a prospective franchisee with a disclosure document, the court noted that a franchisor is exempt from that obligation where the grant of the franchise by a franchisee is not effected by or through the franchisor. Because MEDIchair had very little involvement in the appellants’ purchase of the franchise, the court agreed that it was exempt from the disclosure requirement.

There was no error in the application judge’s decision that the term “similar” in the restrictive covenant was not ambiguous because: (1) the appellants had extracted the same restrictive covenant from the former owners of the franchise when they purchased it in 2008; and (2) “similarity” is found by comparing not only the product line but also the method of operation, including whether the appellant was trading on the goodwill of the MEDIchair operation from which it had benefited over the years.

The court, however, disagreed with the application judge’s decision that the scope of the restrictive covenant was reasonable. In reaching his decision, the application judge focused on the effect of non-enforcement on the MEDIchair franchise system as a whole, without regard to reasonableness of the restrictive covenant to protect the franchisor’s legitimate or proprietary interest within the temporal and territorial scope of the covenant. The purpose of a restrictive covenant is to protect an interest only for a limited time and within a defined area. Because there were no plans for a new MEDIchair franchise in the area of the appellants’ store, MEDIchair had no legitimate or proprietary interest to protect, the court concluded.

The case is No. C60733.

Attorneys: R. Seumas M. Woods and Peter Smiley (Blake, Cassels & Graydon LLP) for MEDIchair LP. David S. Altshuller and Jennifer Pocock (Teplitsky, Colson LLP) for DME Medequip Inc.; Allison Rolf; and Ron Seiderer.

Companies: MEDIchair LP; DME Medequip Inc.

Cases: FranchisingDistribution