How do you proceed at the end of a franchise agreement when the franchisee has the right, and wishes, to continue his activities under another banner?
Most franchise agreements simply stipulate that, upon termination of the agreement, the franchisee must immediately cease using the concept, trademarks, other documents and goods, as well as telephone numbers and e-mail addresses identified with the franchise network.
However, until this date, the franchisee remains a franchisee of the network and must therefore behave as such, respecting all the clauses of the franchise agreement.
This raises a number of questions, including the following: When, and how, can the franchisee notify his customers of his banner change? Does he have to wait until the end of the contract, or can he prepare a little in advance?
In a service industry such as real estate brokerage, when and how can a franchisee notify the real estate brokers affiliated with its franchised real estate agency of the end of its franchise and its change of banner without violating its franchise agreement?
These are the questions that the Quebec Superior Court had to answer in its highly interesting March 1 decision in Sutton (Québec) services immobiliers inc. Sutton ") v. La société immobilière M.C.M. inc. which did business under the name Groupe Sutton-Humania ( Humania ") (judgment which you can read by click here).
In this case, Sutton and its Humania franchisee were bound by a franchise agreement expiring on May 1, 2017, in respect of which the franchisee confirmed to Sutton, on February 17, 2017, its decision not to renew.
According to the judgment, the following events took place on the day Humania notified Sutton of its decision not to renew the franchise agreement and in the days that followed:
" [6] [...] At the end of the day, Sutton communicates by email with the brokers. Sutton attests to the end of the agreement as of May 1, 2017 and to the fact that a Sutton banner will be in operation in the territory no later than May 2, 2017.
[7] François Léger claims that this e-mail has had the effect of a bombshell on Humania brokers, and that he is receiving a hundred phone calls from brokers seeking explanations.
[8] A video, which is not available to the Tribunal, is broadcast for brokers by Humania on February 17, 2017 and informs them of the choice made by Humania and which, according to Sutton, attacks the Sutton system and the quality of its technological tools.
[9] On February 22, 2017, Groupe Sutton-Synergie, a franchisee in the neighboring territory, announced to brokers that following the non-renewal of the agreement with Humania, it was becoming the owner of the territory and highlighted the opening of 3 or 4 new offices to which brokers would eventually have access. "
Subsequently, in response to communications from Sutton and its other franchisee Groupe Sutton-Synergie, and, presumably, in preparation for the termination of its franchise agreement :
" [10] On February 23, 2017 Humania holds a meeting and informs brokers that it will now do business under the Royal LePage banner, a competitor of Sutton. A press release is issued to this effect on the same day. François Léger is quoted extolling the merits of the new banner. Another press release for Humania brokers picks up on the same theme, telling brokers that Humania will take care of everything: "Rest assured, the transition from one banner to the other will be very easy. Your licenses won't change; the transition to the OACIQ and the real estate board will be done automatically for you; your e-mails will be transferred; and your signs and business cards will be renewed when the time comes. The document is headed by the Sutton Humania logo.
[11] Another document, still showing the Sutton Humania logo, follows on February 24, 2017 and informs brokers that they now have access to their Royal LePage email and the Royal LePage intranet site.
[12] On February 25, 2017, a video was sent to brokers featuring François Léger. The latter gives the brokers what he calls pieces of information.
[13] First, he refers to protection Royale, a Royal LePage product, whose exceptional quality he praises and which has been available to brokers since February 24, 2017. Next, he mentions the presentation given to brokers by a Royal LePage representative of the toolbox used by the banner, a presentation that will be repeated at the Sutton Royal LePage office in Ste-Thérèse for those who were unable to attend. He suggests that brokers visit the Royal LePage site to see the quality of the tools at their disposal, and reminds them that they now have an access code to the intranet site. He summarizes a conversation with the Royal LePage franchisee in the neighboring territory, who tells him that there is a world of difference between the tools offered by Sutton and those of Royal LePage. It's clear that Royal LePage products are, according to this interlocutor, superior.
[14] He ended his presentation by announcing a tsunami: the replacement of the Sutton signs by those of Royal LePage, an event that will make Royal LePage Humania the number 1 reference in real estate brokerage in Quebec. "
Franchisor Sutton then filed legal proceedings in which Sutton alleged that its Humania franchisee and its shareholders and officers " are in breach of the agreement and have engaged in unfair competition and illegal solicitation, against which a provisional injunction is appropriate ".
The proceedings instituted by Sutton included a motion for an interim injunction and a safeguard order to prevent the franchisee from continuing to take such actions prior to the termination date of his franchise agreement.
Here are the court's pertinent comments on this situation:
" [27] In the Court's opinion, the content of the agreement clearly favours Sutton's position. During the term of the agreement, the franchisee cannot extol the merits of another banner, enjoin brokers from becoming part of the Sutton system, attack the system and its tools, and provide for an automatic transfer of the broker to another banner. This is contrary not only to the spirit of the agreement, but also to its terms, which provide for the promotion and use of the Sutton system by the franchisee and his commitment not to establish competition.
[...]
[30] Obviously, the agreement remains in force until May 1, 2017, and Humania is bound by its terms, including the solicitation clause.
[31] The parties did not discuss the urgency criterion at length, but the Tribunal is satisfied that it was indeed met. [...]
[32] Given the short time between the known facts and the presentation of the injunction, no reproach can be directed against the application. Moreover, without the Tribunal's intervention, it is clear that Humania will continue its efforts to compete with Sutton and harm its brand while the agreement is still in force.
[33] What about irreparable harm? Humania says that the harm, if any, is limited to the royalty that Sutton can collect and that this is easily quantifiable. On the contrary, the claim raises irreparable harm to the Sutton banner. [...]
[34] The Court understands that the potential harm to the claim is difficult to quantify. Sutton is entitled to protection of its franchise system and respect for the agreement, and this cannot be determined in terms of numbers of brokers or royalties.
[35] Finally, given the Tribunal's conclusions on the evidence and Humania's actions, it is clear that the balance of convenience weighs in favor of the application. "
The court therefore granted in part the franchisor's motion for a provisional injunction and safeguard order in the following terms:
"37] GRANTS the request for the issuance of an interim injunction, a request for the issuance of a safeguard order valid for a period of ten (10) days from the date of this judgment;
[38] ORDERS the defendants, La Société Immobilière M.C.M. inc. ( Groupe Sutton - Humania ), François Léger and Anne Léger, their partners, directors, officers and shareholders to refrain, for the duration of the franchise agreement, directly or indirectly, in any capacity whatsoever, from competing, operating, participating or becoming involved in any real estate brokerage business that competes with Sutton;
[39] ORDERS defendants La Société Immobilière M.C.M. inc. (Groupe Sutton - Humania ), François Léger and Anne Léger to refrain from promoting Royal LePage, its products, systems, service offerings and tools for the duration of the Agreement;
[40] ORDERS the defendants, La Société Immobilière M.C.M. inc. (Groupe Sutton - Humania), François Léger and Anne Léger to refrain from using the name, logo and trademarks belonging to Sutton in association with Royal LePage;
[41] DECLARES that the parties remain subject to the franchise agreement entered into on May 1, 2013;".
Of course, this litigation is still in its infancy, and unless a settlement is reached, it is likely that further judgments will be rendered.
This ruling illustrates some of the many difficulties faced by franchisors and franchisees when a franchise agreement comes to an end.
This step, often crucial for both franchisor and franchisee, also raises a number of other important questions and issues. In order to avoid complex and costly legal proceedings, I believe it is essential to call on the services of a legal advisor with real expertise in franchising.
Jean H. Gagnon, Ad.E.
Lawyer | Mediator | Arbitrator
