MEDIchair LP v. DME Medequip Inc., 2015 ONSC 3718

Court File and Parties

COURT FILE NO.: CV-15-10858-00CL

DATE: 20150714

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

MEDIchair LP

Applicant

– and –

DME MEDEQUIP INC., ALLISON ROLPH, RON SEIDERER and 2169252 ONTARIO INC.

Respondents

Counsel: R. Seumas M. Woods and Max Shapiro, for the Applicant David Altshuller and Jennifer Pocock, for the Respondents

HEARD: May 13, 2015

BEFORE: McEwen J.

REASONS FOR DECISION

1This application has already been the subject of judicial mediation. Also, given the consequences of the relief sought, at the hearing of the application I advised the parties that I would give them approximately three further weeks to try and reach a settlement before I released my decision. I have not heard from the parties. I assume that no settlement has been reached and am therefore releasing my decision. For the reasons below, the application is granted in its entirety.

OVERVIEW

2The applicant MEDIchair LP (“MEDIchair”) is a franchisor operating a network of franchises that sell and lease a fairly comprehensive line of home medical equipment. For approximately 20 years, DME Medequip Inc. (“DME”) has been a franchisee operating in Peterborough.

3In April 2008 the respondents Allison Rolph (“Rolph”) and Ron Seiderer (“Seiderer”) incorporated 2169252 Ontario Inc. (“216”) to purchase the DME franchise from the original owners. With the approval of MEDIchair, 216 purchased all of the shares of DME and began operating the franchise. Rolph and Seiderer executed personal covenants in which they agreed, amongst other things, that they would comply with the restrictive covenant set out in Article 15.02 of the 2005 Franchise Agreement (“the Agreement”). Similarly, 216 guaranteed all of the obligations of DME under the Agreement.

4Article 15.02 provided that upon termination of the Agreement, for a period of 18 months, DME would not operate a similar business within a 30-mile radius of an existing store or the nearest franchisee in Canada. That provision reads as follows:

For a period of eighteen (18) months after the termination of this Agreement, Franchisee, its principals, officers, shareholders, directors, guarantors, personal convenantors, and the spouses and/or children thereof shall not either individually or in partnership, in conjunction with any person or persons, firm, association, syndicate, company or corporation as principal, agent, shareholder or in any manner whatsoever, carry on, or engage in, or be concerned with, or be interested in, or advise, lend money to, guarantee the debts or obligations of, or permit its name or any part thereof to be used or employed by, any person or persons, firm, association, syndicate, company or corporation engaged in any business similar to the business carried on by MEDIchair or any of its authorized Franchisees within an area of 30 miles of the nearest MEDIchair Store business in Canada or the MEDIchair Store business operated by the Franchisee prior to termination of this Agreement.

5DME became disenchanted with MEDIchair for a number of reasons, including changes in MEDIchair’s ownership. Upon the expiry of the Agreement in January 2015, DME removed MEDIchair’s signage and continued to operate its business at the same premises, with the same merchandise, and the same employees. At that time, DME sent emails to their suppliers advising that they would be carrying on business as usual under the new name Living Well Home Medical Equipment (“Living Well”).

6As a result, MEDIchair seeks to have the provisions in Article 15.02 enforced, as well as other related relief. The respondents contend that the application ought to be dismissed on the basis that the restrictive covenant is not enforceable or, alternatively, that they have not breached its terms.

7I will deal with each submission in turn.

DID MEDIchair VIOLATE THE DISCLOSURE PROVISIONS OF THE WISHART ACT?

8The respondents argue that at the time they purchased the franchise, MEDIchair provided them with a franchise disclosure document that did not comply with the requirements of s. 5 of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (“the Act”). Specifically, MEDIchair did not provide them with a copy of the Agreement. Only other draft agreements and schedules were disclosed. Consequently, Article 15.02 is not enforceable.

9As a preliminary matter, I note that there was some dispute as to whether a copy of the Agreement was, in fact, provided to the respondents. Although there is some persuasive evidence to this effect, I am not prepared to find that the respondents actually received a copy of the Agreement in light of Rolph’s affidavit evidence; the respondents’ solicitors’ file produced by the respondents did not contain a copy of the Agreement; and the fact that the applicant did not (or would not) adduce any evidence from its own files to establish that it had sent the Agreement to the respondents. Accordingly, I am proceeding on the basis that the documentation provided did not include the Agreement.

10MEDIchair submits that disclosure, pursuant to s. 5 of the Act, was not required. It relies upon the exemption set out in s. 5(7)(a)(iv), and 5(8), which provide as follows:

5. (7) This section does not apply to,

(a) the grant of a franchise by a franchisee if,

(iv) the grant of the franchise is not effected by or through the franchisor;

5. (8) For the purpose of subclause (7)(a)(iv), a grant is not effected by or through a franchisor merely because,

(a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or

(b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.

11The respondents do not contest that the aforementioned exemption is potentially applicable in this case. Rather, they argue that MEDIchair had sufficient involvement in the sale of the franchise such that it cannot benefit from the exemption and is accordingly bound by the disclosure requirements of s. 5. Furthermore, they submit that once MEDIchair purported to provide disclosure in compliance with the Act, it can no longer take the position that it is not bound by the disclosure provisions, even if disclosure was not necessary. In other words, the respondents suggest that in purporting to provide adequate disclosure, MEDIchair effectively acknowledged the necessity of doing so. I do not agree.

12First, a review of the record discloses that MEDIchair had very little involvement with respect to the sale of the franchise. Accordingly, disclosure was not required. Where a franchisor takes a passive role, merely agrees to the sale, and does little else beyond providing some documents, the disclosure requirements under s. 5 of the Act are not triggered.

13Second, I am of the view that the fact that MEDIchair provided some documentation to the respondents has no bearing on whether MEDIchair was bound by the disclosure requirements of s. 5 of the Act. The respondents’ position reverses the flow of the logic: since no disclosure was required the respondents cannot take the position that the documentation provided was deficient. Additionally, it is worth emphasizing that, since the aforementioned documentation was produced on a contemporaneous basis with the purchase of the franchise, the respondents must have been aware of the fact that the Agreement existed. Certainly, they could have requested a copy if one was not received.

14Based on the above I therefore find that disclosure was not required.

IS THE RESTRICTIVE COVENANT VALID AND ENFORCEABLE?

15The respondents advance multiple arguments concerning the validity of the restrictive covenant. I will address each in turn.

Is the Restrictive Covenant Contained in Article 15.02, in and of itself, an Unreasonable Restraint on Trade, Freedom or Competition?

16I do not accept the respondents’ submission that the restrictive covenant contained in Article 15.02 is unenforceable on the basis that it constitutes a restraint of trade, freedom or competition. I do not accept the general proposition that such restrictive covenants are, in and of themselves, unreasonable. In my view, it is always necessary to review and analyze the particular provisions of the term in question to determine whether it is reasonable. Determining whether to enforce restrictive covenants, such as the one contained in Article 15.02, is based on a specific examination of their terms; rather than any general proposition regarding restraint of trade. No authorities were provided to me to support the respondents’ position.

17That being said, I accept that MEDIchair bears the onus to establish the reasonableness of the restrictive covenant. I also accept the respondents’ submission that an ambiguous restrictive covenant will be prima facie unreasonable and unenforceable. Further, I accept the respondents’ submission that if the covenant is unambiguous, the four-stage test in Tank Lining Corp. v. Dunlop Industrial Ltd. (1982), 1982 CanLII 2023 (ON CA), 40 O.R. (2d) 219 (C.A.) is applicable:

a) Is the covenant under review a restraint of trade?

b) Is the restraint against public policy, and therefore, prima facie, void?

c) Can the restraint be justified as reasonable in the interests of the parties?

d) Can the restriction be justified as reasonable with reference to the interest of the public?

Is the restrictive covenant ambiguous?

18The restrictive covenant prohibits the respondents from engaging in any business “similar to” the business carried on by MEDIchair or its authorized franchisees.

19The respondents submit that the term “similar to” is ambiguous and renders the clause unenforceable. The respondents point to the fact that MEDIchair sells a variety of products, not all of which are sold at any one location. Therefore, there is some disparity between the franchisees as to what products they sell. In total, MEDIchair has approximately 16 different business lines, resulting in some franchisees being able to offer products that others do not. All this leads, in the respondents’ view, to an ambiguous restriction.

20I do not agree that in this case the term “similar to” results in an ambiguity. As Wilton-Siegel J. pointed out in Invescor Restaurants Inc. v. 3574423 Ontario Inc., 2011 ONSC 1609, [2011] O.J. No. 1412, courts regularly address the operation of restrictive covenants that enforce a standard of a “similar business”. Further, on the facts of this case, DME simply carried on with its own business, Living Well, the day after the expiration of the Agreement offering the exact same products for sale. This case is therefore unlike the others relied upon by the respondents where franchisees carried on businesses that were distinguishable from those they operated while still a franchisee, thus establishing ambiguous circumstances.

21Furthermore, looking at the record in its entirety, I accept the submissions of MEDIchair that the mere fact that it offers a range of products, not all of which are available at every franchise, does not result in an ambiguity. In my view, MEDIchair clearly has a method of operation, goodwill, products, and services that it has a legitimate interest in protecting from similar operations specializing in the sale or rental of home medical equipment.

22Lastly, it is worth noting that the non-competition agreement that 216 entered into with the former owners of DME contained the same type of prohibition to which the respondents now object. While in no way determinative, the fact that the respondents ensured that the former owners were prohibited from carrying on “a similar business” undermines the credibility of the respondents’ submission that such terms are ambiguous and unenforceable.

Does MEDIchair have a Legitimate Business or Proprietary Interest to Protect?

23The respondents submit that MEDIchair has failed to tender adequate evidence to prove that it has legitimate business interests that could be harmed if the covenant is not enforced. As noted above, the respondents submit that MEDIchair provides franchisees with a number of different products. They note that the operations manual has not been updated in approximately five years and that MEDIchair does not provide training and support on certain product lines. In my view, this submission has little merit.

24As outlined above, I accept that, through MEDIchair, DME received the benefit of a method of operation, goodwill, products and services as a franchisee and now seeks to take advantage of that by operating Living Well. Indeed, Rolph agreed with this very proposition in her cross-examination. In these circumstances, MEDIchair has established that it has a valid franchise system in place that merits safeguarding by the implementation of a restrictive covenant. The respondents’ argument is once again weakened by the fact that, unlike some of the cases upon which they rely—i.e. cases wherein the ex-franchisees began to offer services outside the normal scope of those offered by the franchisor—Living Well simply carried on with the exact same business as it did while a franchisee in the MEDIchair system.

Is the Temporal and Spatial Scope of the Restrictive Covenant Unreasonable?

25The respondents submit that a term of 18 months and/or the geographic scope of a 30-mile radius contained in Article 15.02 is unreasonable. I disagree.

26First, the aforementioned restrictions are in keeping with relevant case law referred to by the parties at the application.

27Second, once again, the respondents make submissions that are not supported by their own business activities. When DME was purchased by 216, the respondents obtained a restrictive covenant prohibiting the former owners from engaging in a similar business for a period of five years (as opposed to 18 months) and within a radius of 100 kilometers (as opposed to 30 miles). Again, while this is not determinative of the issue, it illustrates what the respondents thought was reasonable in the commercial transaction they entered into with the former owners. It is not supportive of their argument against MEDIchair.

28Third, the respondents argue that the restrictions are not reasonable as MEDIchair has been in decline: it has seen a number of its locations closed, many franchisees, including the Whitby location, are operating on a month-to-month lease, and there is no indication that MEDIchair will open a store in Peterborough. The respondents therefore submit that there is no evidence demonstrating that it is reasonable to enforce the temporal and spatial scope of the restrictive covenant to protect the reasonable interests of MEDIchair. In essence, there is nothing to protect.

29In my view, this point is overblown. The respondents had the benefits of being in the franchise system and admittedly have established a brand that is important to them. DME has been associated with MEDIchair since 1995. The fact that the MEDIchair franchise system may be experiencing difficulty and has no plans to operate a store in Peterborough does not lead to the conclusion that the temporal and spatial scope of the restrictive covenant are unreasonable. In my view, there are other important factors to consider, such as the integrity of the franchise system, which would be significantly compromised if franchisees were simply allowed to walk away from the terms of the Agreement if MEDIchair was unable to establish that another store was going to open in the same area. In any event, there is a store located in Whitby, which is outside the 30-mile radius, but relatively nearby.

30Last, the respondents rely on the decision of Murray J. in the unreported case of Allegra of North America Inc. v. Russel Sugimara et al., dated August 26, 2008. In my view, the facts of that case are distinguishable for a number of reasons – including the fact that Allegra, unlike MEDIchair, did not carry out specialized services; an interim injunction was sought in that case; and, as noted, the respondents have carried on with the same business at the same location.

HAVE THE RESPONDENTS BREACHED THE RESTRICTIVE COVENANT?

31For the reasons set out above, it is my view that the respondents have breached the restrictive covenant. On their own evidence, they simply re-named the store and carried on the exact same type of business, using the exact same employees, phone number and products. Rolph conceded in her cross-examination that Living Well continues to do so and that she does not want to move, since the brand and location are important to the respondents.

SHOULD THE RESTRICTIVE COVENANT BE ENFORCED?

32The restrictive covenant ought to be enforced. This conclusion is supported by the recent decision of the Supreme Court of Canada in Payette v. Guay, 2013 SCC 45, [2013] 3 S.C.R. 95 at para. 58 in which the court held that restrictive covenants in commercial contracts are presumptively lawful “unless it can be established on a balance of probabilities that its scope is unreasonable.”

33MEDIchair has established that Article 15.02 is an unambiguous restrictive covenant that is reasonable and protects legitimate business and proprietary interests that would be harmed if it was not enforced.

34I agree with MEDIchair that since a final order is sought I need not conduct the analysis that is required for an interim injunction as per the Supreme Court of Canada decision in RJR-MacDonald v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311. Lastly, I should also note, that the parties made me aware of an ongoing action that has been commenced by the respondents against MEDIchair. The respondents did not dispute my ability to carry on with this application in the interim.

35In closing, I have sympathy for the respondents, given the financial sacrifices they have made. I also have great sympathy for the employees that will be affected by my decision. However, the restrictive covenant is enforceable. I cannot ignore the importance of maintaining commercial certainty by enforcing terms of agreements to which parties have freely entered into. The respondents knew of the restrictive covenant, chose to ignore it, failed to settle the issue, and now are left to face the unfortunate consequences.

DISPOSITION

36The applicant is entitled to the following orders and declarations:

a) that the respondent DME is in breach of the restrictive covenant in the Agreement;

b) that the respondents Rolph and Seiderer are in breach of the personal covenant in Schedule H of the Agreement to comply with and be bound by that restrictive covenant;

c) that the respondent 216 is in breach of its obligation to guarantee all obligations of DME under the Agreement;

d) that DME, Rolph, Seiderer and 216 to cease, for a period of 18 months from January 17, 2015, from either individually or in partnership, in conjunction with any person or persons, firm, association, syndicate, company, or corporation as principal, agent, shareholder, or in any manner whatsoever, carrying on, or engaging in, or being concerned with, or being interested in, or advising, lending money to, guaranteeing the debts or obligations of, or permitting their names or any part thereof to be used or employed by any person or persons, firm, association, syndicate, company, or corporation engaged in any business similar to the business carried on by MEDIchair or any of its authorized franchisees within an area of 30 miles of the nearest MEDIchair store business in Canada or 30 miles of 329 McDonnel Street, Peterborough, Ontario.

37The applicants are also entitled to their costs of $35,000 inclusive.