Quebec court rules in favour of Jean Coutu Group in franchise agreements

After years of litigation, the Superior Court of Quebec has ruled in favour of the Jean Coutu Group in a lawsuit with a franchisee over franchise, or royalty, payments. The legality of these fees, paid by pharmacists who are franchisees, has been on the table for years.

The question in Quesnel v. Groupe Jean Coutu was whether a contractual clause providing for a pharmacist-owner in the Jean Coutu chain of drugstores to pay a franchise fee on revenues from the sale of medicines contravened public policy and s. 49 of the Code of Ethics of pharmacists in Quebec. This section of the Code prohibits pharmacists from sharing profits from the sale of medications, or from their fees, with a non-pharmacist.

In 2008, Gatineau pharmacy owner Michel Quesnel was charged by the Ordre des Pharmaciens du Quebec with violating the regulator’s code of ethics by sharing profits with the Jean Coutu Group, which operates a network of 418 franchised stores in Quebec, New Brunswick and Ontario. Quesnel was a franchisee of the Jean Coutu Group. Quesnel pleaded guilty to the charge, but in turn sued the Jean Coutu Group for all the franchise fees he had paid over the nearly 30 years he had done business with Jean Coutu through the six pharmacies he then owned.

Justice Michèle Monast ruled that Jean Coutu’s franchise agreements with pharmacist-owners were not in violation of the Code of Ethics. Jean Coutu Group franchisees pay royalties corresponding to the fair value of the rights granted to them and the goods and services provided in return, Justice Monast found, including support services and benefits obtained through the use of the Jean Coutu Group name and trademarks for the operation of their establishments.

The franchise, or royalty, fee is a percentage of gross revenues of a business paid by a franchisee to the franchisor. Judge Monast found that it was legal for Quebec pharmacists who are franchisees to pay royalty fees to their franchisor, and that it did not constitute a profit-sharing agreement.

Identifying Cadrin c. Pharmaciens (Ordre professionnel des), 2015 QCTP 104 as a precedent, the judge looked at whether the independence of the pharmacist as a professional was put at risk by its payments to Jean Coutu, the franchisor, and found that it was not.

Justice Monast also found that the value of the consideration received by pharmacists working within the Jean Coutu organization was worth the franchise fees that they paid. She also determined that the franchisee agreement did not fit the definition of sharing of profits, because profit represents a bottom line, whereas franchise payments to the Jean Coutu Group are made as a percentage of the gross sales of the franchisee. This does not constitute a sharing of profits, the judge determined, but a payment made by pharmacists for goods and services received from the franchisor. In this case, these services include planning and operation of the pharmacy premises, group-purchase or volume discounts, and benefits related to the reputation of the Jean Coutu trademarks and its advertising.

Also referring to the decision in Cadrin, the judge noted that professionals make other payments, such as rent for premises, which may likewise be calculated at least in part on gross revenues, but do not constitute a sharing of profits nor compromise the independence of the professionals. And referring to Lebeuf c. Groupe S.N.C. Lavalin Inc., she noted the Quebec Court of Appeal’s comments on the relationship of S.N.C. Lavalin, an engineering firm that is a publicly traded company, to its shareholders. The fact that S.N.C. Lavalin pays dividends to its shareholders does not put at risk the independence of the company’s engineers doing their work.

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