Ontario Superior Court Justice George Strathy ruled July 31 in 1250264 Ontario Inc. v. Pet Valu Canada Inc. that the efforts of a dissenting group of franchisees’ right to associate under a section of the Arthur Wishart Act interfered with the rights conferred by the Class Proceedings Act.
The decision was prompted by a motion to re-open the opt-out process in the Pet Valu class proceedings. Strathy invalidated the opt-outs of several class members in a certified action due to a campaign led by a group of franchisees who were opposed to launching the case.
Strathy outlined two reasons why he felt there needed to be more control over communications in the action: The first had to do with the on-going relationship with the franchisor, while the other was the acrimonious nature of the case.
The sub-group of vocal franchisees — some from a franchisee association — had formed to lobby others to opt-out of the class action on the eve of the opt-out period. Former and current franchisees found themselves split on the issue. The current franchisees were less interested in being part of the class action. There was a telephone campaign, a web site established, and other efforts to convince franchisees to abandon the class action.
Strathy referred to it as a campaign of “misinformation.”
“I am satisfied that class members have been unfairly pressured, singled out and misinformed by the actions of the respondents and that the opt-out process has been corrupted as a result. The damage has been done,” Strathy wrote in his decision.
The class action seeks damages in the amount of $100 million on behalf of all Canadian Pet Valu franchisees against the franchisor of the Pet Valu chain. The statement of claim alleges the franchisor breached its obligations under the franchise agreement and Arthur Wishart.
The court had certified the case to proceed as a class action on the issue of whether Pet Valu breached its contractual duty to the class members at any time during the class period by failing to share volume rebates, allowances, and discounts given by suppliers and manufacturers to Pet Valu or its affiliates, and other related claims.
The proposed class consists of all individuals carrying on business as a franchisee under a franchise agreement with Pet Valu at any time on or after Dec. 31, 2003.The action was launched on Dec. 9, 2009 and was certified Jan. 14, 2011.
However some suggest Strathy’s decision goes beyond the mandate of the court.
“It seems like a paternalistic role for the court to play to say, ‘You must go the distance before you can make a decision about whether you want to be involved in this proceeding.’ It doesn’t address the concern raised by some of the franchisees that the class action is disrupting their relationship with the franchisor,” says Michael Rosenberg, an associate at McCarthy Tétrault LLP and adjunct professor of class actions at the University of Toronto Faculty of Law.
He says the case pushes boundaries of the court and takes the desire to protect the class to a new level, in particular because it’s offering protection, not against the defendant, but against the other class members.
“There’s no suggestion the defendant exercised any form of coercion. Quite the contrary,” he says.
What the court should primarily be trying to protect against, he argues, is reprisals from the defendant, particularly where there is an on-going relationship. “There’s not necessarily the same interest in protecting class members where that threat isn’t present.”
Rosenberg argues there should be a stronger test to see if there is a substantial class of plaintiffs who do want to sue in a class action to justify using the public resources to conduct a class proceeding.
In 1176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd., two franchisees came forward and swore affidavits saying they didn’t want the class proceeding to go ahead.
“In that case Chief Justice Warren Winkler said a class proceeding is not a referendum,” says Rosenberg. “Despite the fact they weren’t happy with it, he certified the action. What you see is a class is formed because some members of the class come forward with a claim. The remedy for those who disagree with an action is to opt-out.”
The problem, however, says Rosenberg, is it doesn’t fully address the situations in Pet Valu and A&P.
“They feel the cloud of litigation hanging over their business is harmful and distracts from the on-going business relationship. That’s the difficult line the courts have to walk here — they have to recognize there is some prospect that unwilling class members are being drawn into this litigation and on the other hand, have to recognize the important role of class actions in promoting access to justice.”
Jennifer Dolman, a franchise lawyer with Osler Hoskin & Harcourt LLP, agrees what’s unique about the case is not so much Strathy’s intervention, but that he intervened in a situation where it was a third party that had interfered with the opt-out process.
“He doesn’t reprimand them or say they weren’t allowed to do that, but says that having taken place it jeopardized the entire process. His job is to ensure class members are given an opportunity to be fully informed and can make private decisions about what they want to do with the process. Because he found enough examples of members who had been coerced he felt he had no choice but to invalidate those opt-outs,” says Dolman.
“In all class actions, there is a concern about the integrity of the opt-out process,” says Dolman. “There is a particular concern in cases where there is an on-going relationship between class members and the defendant. That’s what makes franchise class actions generally challenging.”
Dolman adds that where there is such an ongoing and an acrimonious dispute, the court needs to monitor the process and the communications made to class members.
“That’s why in Pet Valu there was a specific plan of proceeding about communications appended to certification order,” she says.
“As the judge managing this class proceeding, Justice Strathy had to make sure class members were not confused or misinformed about the opt-out process,” she says.
The court has jurisdiction over un-named class members and what is fundamental to this jurisdiction is the right of a party to opt-out.
“Their right to not participate in a class action must be preserved,” says Dolman.
In his decision, Strathy points out that the opt-out process must be fair and informed and protected from coercion and from misleading, biased, and inappropriate information. Even though the opt-out process was not affected by anything either of the main parties to the action did, the court still chose to intervene because the actions of the subgroup of franchisees corrupted the process.
Strathy notes the court’s overriding responsibility is to the absent class members. “It is not a matter of exercising jurisdiction over non-parties. It is a matter of protecting the integrity of the court’s process and protecting the rights of all class members.”
“Since the opt-out process was corrupted in this case, it needed to be re-opened. The results were not reliable. Class members will get another chance to opt out after plaintiff’s motion for partial summary judgment has been heard,” says Dolman.