ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 3769/13

DATE: 2014-09-08

BETWEEN:

1291079 ONTARIO LIMITED

Plaintiff

– and –

SEARS CANADA INC. and SEARS, ROEBUCK AND CO.

Defendants

David Sterns and Andy Seretis, Counsel for the Plaintiff

Peter F.C. Howard and Samaneh Hosseini, Counsel for the Defendants

HEARD: June 11, 2014

REASONS FOR JUDGMENT

Gray J.

[1] The plaintiff was a “Sears Hometown Store” operator. Sears is a well-known, large retailer.

[2] This case has to do with the relationship between operators of Hometown Stores and Sears. In substance, it is alleged that Sears has taken inappropriate and undue advantage of its position, to the unlawful disadvantage of the store operators.

[3] In this motion to certify an action as a class proceeding, the plaintiff seeks to represent a class of persons who had, or have, Hometown Store contracts with Sears. It is said that the contractual arrangements constitute the members of the class as “franchisees” and the defendants as “franchisors”, thus making applicable the provisions of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3. If so, the provisions of that Act bring into play certain disclosure obligations that have not been fulfilled, and a number of substantive provisions that give rise to statutory causes of action and potential damages. In the alternative, it is alleged that the defendants have breached their common-law obligation of exercising discretion under the agreements in good faith, thus giving rise to damages.

[4] For the reasons that follow, the motion is granted and this action is certified as a class proceeding.

Background

[5] As I will discuss more fully later, the plaintiff is required to satisfy the requisites of section 5(1) of the Class Proceedings Act, S.O. 1992 c.6, as amended. With respect to the issue of whether a cause of action is disclosed, only the pleadings are to be examined. Regarding the other criteria, it is incumbent on the plaintiff to show that there is some basis in fact to support the conclusion that each criterion has been met.

[6] With these requirements in mind, I will discuss the basis of the claim and the defences as outlined in the pleadings, and some of the evidence that is relevant to the other criteria.

[7] The plaintiff alleges that the members of the class comprise a network of approximately 260 “Sears Hometown Stores” pursuant to a standard Dealer Agreement. The plaintiff alleges that the Dealer Agreement is a franchise agreement within the meaning of the Arthur Wishart Act.

[8] The plaintiff alleges that Sears uses its discretionary powers under the Dealer Agreement to make it virtually impossible for a dealer to realize a profit unless it achieves unattainable revenues. The plaintiff alleges that Sears is aware that the Hometown Store program is not economically viable for the dealers.

[9] The plaintiff alleges that the Hometown Store program is profitable for Sears. It is alleged that Sears realizes high profit margins on sales made through the Hometown Stores while downloading high costs onto the dealers. While Sears maintains unilateral, discretionary power under the agreement to adjust the dealers’ financial compensation, Sears has ignored repeated pleas to exercise its discretion to increase compensation to a sustainable level.

[10] The plaintiff alleges that Sears conceals the economic reality about the Hometown Store program from prospective dealers. It disregards franchise disclosure laws designed, among other things, to provide full disclosure of all material facts related to the franchise system. Instead of disclosing the truth about the economics of the system, it provides a common information package to prospective dealers which touts the system as “brilliant”, “better than a franchise”, and “a smart business model”.

[11] The plaintiff alleges that once the Dealer Agreement is signed, Sears exploits the dealer by maintaining a compensation structure that does not allow the dealer to make a living wage, let alone a return on its investment and efforts; Sears poaches sales in the dealers’ Market Areas by selling goods directly to customers; Sears charges an unauthorized “handling fee” on goods purchased online or by telephone and shipped to the dealers’ stores; and Sears has introduced new programs that actually claw back for many dealers what little economic benefits the program delivers to the dealers.

[12] The plaintiff alleges that these actions of Sears are contrary to its contractual duty of good faith and statutory duty of fair dealing.

[13] The plaintiff alleges that on goods sold through a Hometown Store, Sears realizes a gross margin of approximately 36 per cent. It is alleged that out of that amount, Sears pays the dealer approximately 10 per cent. Out of that commission, the dealer must pay rent, its employees, utilities and all other expenses. It is alleged that the vast majority of dealers barely earn enough commissions to cover their expenses and pay minimum wage to the principals.

[14] The plaintiff alleges that under the Dealer Agreement, the commissions can be changed by Sears in its sole discretion on 90 days notice. The plaintiff alleges that Sears has a duty of good faith and a statutory duty of fair dealing under the Arthur Wishart Act to exercise its discretion in a manner which is fair and commercially reasonable. Instead, it is alleged that Sears has perpetuated a predatory system of under-compensation. The plaintiff alleges that the commissions need to be increased to at least 15 per cent in order for the network to be viable. Instead, Sears has lowered commission rates and unlawfully competed within the dealers’ Market Areas by shipping directly to customers, and offered lowered prices through direct selling channels while prohibiting dealers from matching prices.

[15] Specifically, the plaintiff alleges that in August 2012, Sears reduced the average retail commission rates paid to dealers.

[16] The plaintiff alleges that the Dealer Agreement does not permit Sears to compete in the dealers’ Market Areas using direct shipping through direct channels. Despite this, it is alleged that Sears actively competes by selling through direct channels and shipping directly to customers in the dealers’ Market Areas. In the event that the Dealer Agreement does not specifically prohibit Sears from acting in this way, it is alleged that Sears has failed to take the dealers’ reasonable commercial interests into account or comply with the duties of good faith and fair dealing.

[17] The plaintiff alleges that Sears charges a $3.95 flat handling fee for customers that purchase items through a direct channel and choose to ship to a Hometown Store for pick up. This fee is kept by Sears and not by the dealer. The plaintiff alleges that the imposition of the fee is a breach of the Dealer Agreement or alternatively it constitutes a breach of the duties of good faith and fair dealing.

[18] The plaintiff alleges that Sears has changed the method of sharing advertising costs with the dealer, the result of which is that dealers are now paying more for local advertising. It is alleged that these changes are a breach of the Dealer Agreement, or alternatively they constitute a breach of the duties of good faith and/or fair dealing.

[19] The plaintiff alleges that Sears is a franchisor under the Arthur Wishart Act, and each dealer is a franchisee. Thus, it is alleged that Sears owes the class members a duty of fair dealing in the performance and enforcement of the Dealer Agreement under section 3 of Act. It is alleged that the actions of Sears constitute violations of these duties.

[20] The plaintiff alleges that pursuant to the Arthur Wishart Act, Sears was required to deliver to prospective dealers a statutorily prescribed disclosure document. It is alleged that Sears did not do so. Had it done so, Sears would have to had to disclose materials facts, including:

a) over 70 per cent of dealers are not profitable;

b) many dealers exhaust their resources and cease operating within a few years;

c) revenues of Hometown Stores have been steadily declining;

d) Sears competes directly by selling into dealers’ Market Areas through direct channels;

e) Sears charges an improper handling fee of $3.95 for items purchased through a direct channel for shipment to a Hometown Store;

f) Sears does not share the cost of local advertising undertaken by the dealer.

[21] The plaintiff claims that each dealer is entitled to damages pursuant to sections 3 and 7 of Arthur Wishart Act.

[22] In the event that the Arthur Wishart Act does not apply, the plaintiff claims that the members of the class are entitled to damages for breach of contract, including breach of the duty of good faith; and disgorgement of profits unreasonably retained as a result of Sears’ unjust enrichment. It is pleaded that Sears has retained those profits unjustly, to the detriment of dealers and without juristic reason.

[23] The plaintiff claims that Sears has violated the Dealer Agreements by failing to account for commissions, and now claims a complete accounting of all commissions since the inception of the Dealer Agreements, and judgment for any shortfall arising therefrom.

[24] In the statement of defence, it is asserted that Sears Canada Inc. is a leading retailer of general merchandise in Canada. It is asserted that Sears, Roebuck and Co. does not carry on business in Canada. It is asserted that Sears, Roebuck is only a party to the Dealer Agreements because it is the owner of several Sears trademarks. Otherwise, Sears, Roebuck has no other duties or obligations under the Dealer Agreements.

[25] The defendants assert that the Arthur Wishart Act does not apply to the Sears Hometown Stores. It is asserted that the operators of the Hometown Stores are not franchisees within the meaning of the Act.

[26] The defendants deny that dealer commissions have been reduced. In fact, it is asserted that the August, 2012 changes to the compensation structure resulted in an increase to the average commission. It is asserted that direct sales have been part of Sears’ business for many years, and there is nothing in the Dealer Agreement that precludes Sears from engaging in this practice. It is asserted that Sears provides a 4.5 per cent commission to dealers on catalogue and internet sales shipped to their stores. It is asserted that the changes to advertising subsidies led to the reduction of advertising expense for the dealers.

[27] The defendants deny that any amendments to the dealer compensation structure and advertising subsidies were detrimental to the dealers, or amounted to a breach of contract, breach of a duty of good faith (or breach of the statutory duty of fair dealing in the event that the Arthur Wishart Act applies, which is denied) or unjust enrichment.

(Decision continues with the full reasoning, certification analysis, and Appendix A exactly as in the source text.)

Gray J.

Released: September 8, 2014