A one-time Pet Valu franchisee is liable for the franchisor’s costs in class action litigation he brought against Pet Valu Canada Inc., the Ontario Superior Court of Justice ruled on Tuesday.
In Pet Valu Canada Inc. v. Rodger, 2018 ONSC 3353, Justice Sandra Nishikawa held that the individual officer, director, shareholder and guarantor of the representative plaintiff in a $100-million class action lawsuit against Pet Valu in 2009 was liable for the significant costs awards — in excess of $1.7 million — that Pet Valu had been awarded after defeating the class action.
Robert Rodger was the sole shareholder of 1250264 Ontario Inc. Since 2005, he had been a Pet Valu franchisee, and in 2009, he attempted to sell his franchise back to Pet Valu, a wholesaler and retailer of pet food, supplies and related services. In December 2009, 1250264 Ontario Inc. commenced a class action against Pet Valu alleging breach of contract and breach of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3. The gist of the claims was that Pet Valu had not shared volume rebates it received from suppliers with the franchisees and that it overcharged franchisees for certain items.
After nearly seven years of litigation, the class action was dismissed and Pet Valu was awarded its costs of $1,703,896. In January 2012, while the class action was still proceeding, Rodger sold the assets of 1250264 Ontario Inc. to a third party and left the Pet Valu franchise system.
Issues before the Ontario Superior Court of Justice were: i) whether Rodger was liable for the costs awards pursuant to the indemnification provision in the franchise agreement he had signed with Pet Valu in 2005, which specified that the franchisee agreed to indemnity Pet Valu for costs incurred in defending any action or claim brought the franchisee against Pet Valu; ii) whether Rodger was liable for the costs awards under the agreement’s guarantee; iii) whether Pet Valu’s claim was statute-barred by the Limitations Act; and iv) whether Pet Valu had released its claim against Rodger in the course of previous litigation between the parties.
In granting Pet Valu’s motion for summary judgment and dismissing Rodger’s cross-motion to dismiss the claim, Nishikawa ruled in favour of Pet Valu in all instances. She found that the indemnification provision in the franchise agreement applied to the costs awards, and she rejected Rodger’s assertion that he was not personally bound by that provision. Rather, the judge found that Rodger had signed the franchise agreement on his own behalf as well as on behalf of 1250264 Ontario Inc. and that he intended to be personally bound to the agreement as a franchisee. During cross-examination, Rodger had admitted that he had received independent legal advice and was aware that he was exposed to the risk of a potential adverse costs award in the class action.
“The unique part of this scenario is that, usually in these cases, in class actions, the potential cost consequences to representative plaintiffs are limited by indemnification by class counsel” if there is an adverse cost award to the plaintiffs, says Derek Ronde, a litigation partner at Cassels Brock & Blackwell LLP in Toronto who, along with co-counsel Kate Byers, represented Pet Valu. If the representative plaintiffs’ law firm does not cover costs to plaintiffs, “third-party funders can pay for those expenses or the Ontario Class Proceedings Fund. Unfortunately, in this case, that was not done.”
Since 1250264 Ontario Inc. had sold its assets during the litigation, Pet Valu was not able to enforce the judgment against the company — “it was a shell,” says Ronde — and so action was brought against Rodger instead.
“The other unique factor [in this case] was that there was a contract between the parties,” he says. “That’s not often the case between plaintiffs and defendants in a class action.”
A thorough commercial franchise agreement between the parties included an indemnification provision and also a personal guarantee by Rodger of 1250264 Ontario Inc.’s obligations.
Pet Valu was able to rely on those provisions to have Rodger be liable for the franchise corporation’s liabilities, Ronde told Legal Feeds, and “the indemnification and guarantee allowed us to pursue Mr. Rodger for what [1250264 Ontario Inc.] owed.”
A takeaway from this decision, he says, is that “it’s reassuring to franchisors that Ontario courts are willing to enforce these indemnification provisions and guarantees.” As well, he says, “it’s reassuring that there’s recognition that defendants in class actions are entitled to be compensated if they’re successful, and they’re not left holding the bag on costs.”
Finally, the decision of Nishikawa and an earlier decision of Justice Edward Belobaba of the same court both suggest that “indemnification from class counsel, third-party funders, the Class Proceedings Fund — they’re there for a reason,” says Ronde. “Ultimately, yes, Pet Valu was indemnified thorough this contract,” he says, but a franchisee who serves as the representative plaintiff in a class action can also be indemnified for any cost award against them.
“It’s important litigation, and sometimes these plaintiffs may not have the funds to survive an adverse cost award,” Ronde says. Indemnification by one’s own lawyers, or a fund, can relieve the burden of adverse costs if their action is unsuccessful. In this case, “no one indemnified [1250264 Ontario Inc.] and Mr. Rodger.”