COURT FILE NO. 21-85993
DATE: 20210607
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Greco Franchising Inc., Plaintiff (moving party)
AND
Franco Milito, Wilma Milito, and 2483425 Ontario Inc., Defendants
BEFORE: The Honourable Justice C.T. Hackland
COUNSEL: Allan J. Dick and Daniel Hamson, for the Plaintiff
Fred Seller, Geoffrey Cullwick and Eric Dwyer, for the Defendants
HEARD: April 29 and May 4, 2021
The text of the original Reasons for Decision (Interlocutory Injuction) dated June 1, 2021 was corrected on June 7, 2021 and the description of the correction is appended
amended Reasons for Decision (Interlocutory Injunction)
Overview
[1] The plaintiff Greco Franchising Inc. (“Greco”) is the franchisor of the Greco System of fitness studios. The corporate defendant operates one of the franchised studios, known as the “Kanata South territory”, pursuant to a franchise agreement which will expire in just over 3 months time on September 8, 2021. The defendants acquired the franchise from an existing franchisee in October of 2015. On January 8, 2021 the defendant franchisee purported to terminate the franchise agreement on the basis of what it contends were a series of breaches of the agreement amounting to a fundamental breach on the part of Greco. Following the lifting of the provincial Covid-19 lockdown on February 16, 2021, the defendants re-opened the studio under the name “TG Athletics”. Health authorities then subjected the studio to another Covid-19 lockdown, which remains in place.
[2] Greco’s position is that the franchise agreement was not breached, certainly not fundamentally breached, by its conduct. It contends the agreement remains in full force and is being breached by the defendants who are now operating a competing business (TG Athletics) in contravention of the franchise agreement. Greco seeks an interlocutory injunction to prevent the defendants’ continuing breach of the franchise agreement. The defendants contend they are no longer bound by the franchise agreement and argue Greco can not establish irreparable harm or balance of convenience in the current circumstances to warrant the grant of an interlocutory injunction.
Analysis
[3] I take notice of the fact that the Covid-19 pandemic has been particularly hard on the personal fitness industry, including gymnasiums and personal training studios and indoor athletics generally. Public health authorities deem it unsafe for groups of people to work out in indoor settings. These facilities have great difficulty functioning without their members being able to attend in-studio activities and this has had devastating effects on the cashflow of these businesses. Greco currently has 7 locations (all but 2 are in the Ottawa area), down from 15 locations pre-pandemic.
[4] In 2019 the defendant’s Kanata South location did very well. It grossed over a $1.0 million in revenue and had over 400 members, the largest in the Greco system. The financial arrangement under the franchise agreement was essentially that the franchisee would pay to the franchisor Greco a monthly franchise fee, in this case about $6500, in consideration for which it was required to utilize the Greco system’s programming (i.e. the Greco ‘exercise system’) together with its trademarks and other entitlements under the franchise agreement. The franchisee would charge membership fees to its members at its studio location and would have the right to set the amount of the fees subject to certain maximums provided for in the franchise agreement. The Kanata South franchise operated out of a leased studio and was responsible to the landlord for monthly rental under the lease.
[5] The onset of the pandemic created a crisis for the Greco system due to the lockdowns and restricted openings which precluded most or, for much of the time, all in-studio activities. The franchisor Greco responded to the pandemic by rapidly rolling out an on-line at home exercise program called Greco Method At Home, (‘GMAH”), as a method of offering exercise programming to members. According to Greco, the purpose of the program was to ‘maintain value’ for the Greco fitness membership and so that franchisees and the overall system could survive.
[6] The GMAH at-home exercise program became the centre of the dispute between the parties. Unlike the Greco franchise’s other programs (which were provided by franchisees in-studio), GMAH was offered on-line directly by Greco to the membership of the various franchise locations. The financial arrangements for the program differed substantially from other programs. Prior to the pandemic restrictions, franchisees charged for the in-studio programming they offered their members and retained the fees, subject only to payment to Greco of the fixed monthly franchise fee. However, under the GMAH program, Greco received payment directly from members and then shared the net program revenues 50-50 with the home studio (i.e. with the respective franchisees), after crediting the franchisee with the amount necessary to cover the monthly franchise fees. The home studio did not invest in or operate the program. With the cooperation of the franchisees in the system, their members signed up directly with Greco for the virtual at-home program and, as noted, the fees for participation in the program were paid directly by the members to Greco or credited against annual membership fees already paid by the members to the respective franchisees.
[7] Notably, franchisees were not permitted to offer virtual programming to their members or in effect, to compete with Greco’s GMAH program. This was a major source of contention. The defendants took the position that the franchisee should have been entitled to offer on-line fitness programming and Greco was competing with them by doing so directly.
[8] It can be seen that Greco’s GMAH program and Greco’s control of the revenues from the program, combined with the Public Health shut down of the franchisees’ in-studio activity, resulted in a fundamental change in the manner in which the system operated. Much greater operational and financial control now rested with Greco as franchisor. Recognizing the gravity of these changes perhaps, Greco circulated a draft amending agreement to the franchise agreement concerning the GMAH program, which the defendants refused to sign.
[9] Negotiations took place through counsel, which did not succeed in resolving the issues. These negotiations were agreed to have been ‘without prejudice’, but that has not prevented the parties from filing a voluminous record containing many references to the negotiations. The parties agree that negotiations on the proposed amending agreement eventually evolved into a negotiation aimed at terminating the franchise agreement or as the parties termed it, “de-branding” the defendant’s studio.
[10] Although the defendants objected to the structure of the at-home program and refused to sign the amending agreement, they co-operated in having their members sign up for the GMAH program and, for its part, Greco dealt with the program revenues as contemplated by the program. In particular, Greco credited the revenues from the at home program in payment of the monthly franchise fees and ultimately split the net amount of remaining revenue from the program 50/50 with the defendant franchisee. The flow of payments and the timing of the payments became contentious, but I am not persuaded by the evidence on this motion that Greco was failing to properly credit or pay over to the defendants the amounts due from this program. The Greco financial system was maintained on-line by Greco and accessible to and used by all franchisees, but ongoing differences persisted between the parties about a variety of accounting and cash flow issues.
[11] Greco points out that it’s GMAH program was not mandatory and the defendants were free to not participate. While this was technically true, I find that in the circumstances of the pandemic shut down, it was the only programming available to the system’s members and therefore constituted the only real source of revenue in the system. The defendants also believed the at-home program was not so much a response to the pandemic emergency as it was an initiative to fundamentally restructure the franchise system by centralizing financial control in the hands of the franchisor. The defendants were aware that Greco had in fact been developing the on-line fitness program prior to the pandemic and were also aware from the negotiations that the at-home program and the attendant financial arrangements were intended to become permanent, rather than being a temporary pandemic measure.
[12] So far as the court is able to determine, both parties were acting in good faith in the context of the fundamental business challenges which the ongoing health emergency presented to Greco and the franchisees. While Greco was answering the system’s urgent need to provide a viable platform to deliver its programs and to generate cash flow, it was also attempting to significantly change the ongoing franchise relationship, for the future. The defendants honestly believed that the new structure would restrict their opportunity for profitability in the longer term. They queried why the on-line program could not have been rolled out through the various studios in the same manner as the in-studio programming had been structured.
[13] The parties agree that in late 2020 negotiations were proceeding toward an agreement whereby the defendants would “de-brand”. The concept was the defendants would pay certain amounts to Greco and would withdraw from the Greco system and continue to operate a fitness studio, from the same location. Notably, Greco has another nearby franchise, known as the ‘Kanata North’ location, only a seven minute drive from the defendant’s Kanata South studio. However, a number of significant issues remained unresolved and the evidence suggests the defendants’ belief that they almost had a deal with Greco to de-brand, was an exercise in wishful thinking.
The December 8, 2020 e-mail
[14] On December 8, 2020, the defendants unilaterally sent an email to all of their approximately 80 active members advising that they were converting their Greco Fitness studio to re-open as a “TG Athletics” studio offering an “extremely smooth transition and guarantee that you will not miss a beat in your workouts”.
[15] The defendants admit when this communication was sent out to their members, they knew that the negotiations had not been completed and concede that any such communication should have been discussed with and sent out jointly with Greco.
[16] In response to the defendants’ December 8, 2020 email, 80 of the defendants’ studio members cancelled their memberships with the plaintiff. This was nearly all the active members of the studio. The defendants’ “TG Athletics” studio was closed on December 26, 2020 due to another government public health lockdown.
[17] The defendants say that when this e-mail was sent out the parties had reached an understanding in principle, referred to above, whereby (among other terms set out in correspondence between counsel) the franchise agreement would terminate, the defendants would cease any and all connection to Greco, the defendants would pay Greco a ‘termination fee’ of 2/3 of the remaining royalty fees under the Franchise Agreement (later changed to a lump sum of $10,000.00) to be set-off by revenue earned from the franchise’s existing members up to the date of closing. The defendants’ lawyer had emailed Greco’s lawyer on December 5, 2020 asserting that the parties were close to agreement on most terms and that the “big sticking point” appeared to be the closing date. However, no response was received to that letter and the defendants proceeded to send out the December 8, 2020 email to their members, as noted previously.
Letter of Termination Purporting to Terminate the Franchise Agreement
[18] On January 8, 2021, the defendants sent a letter to Greco purporting to terminate the franchise agreement, alleging that the plaintiff had fundamentally breached the agreement in that “since the beginning of the COVID-19 pandemic, the Franchisor has, unilaterally and without the Franchisee's prior knowledge or written consent as required by Section 21.2 of the Agreement, implemented sweeping changes to the Agreement and Franchise System that offend the duty of good faith and fair dealing, and that fundamentally breach the existing Agreement, amounting to its repudiation” The letter went on to specify the alleged breaches:
“Fundamental Breach and Repudiation of the Franchise Agreement:
The Franchisor's fundamental breaches of the Agreement include but are not limited to:
(1) Competing directly with the Franchisee within its exclusive territory, both during and after the pandemic shutdown through the virtual 'Greco Method at Home' ("GMAH"). The Franchisee purchased an exclusive territory from the Franchisor and the Agreement protects this fundamental right by prohibiting the Franchisor (or any other franchisee) from operating (virtually or otherwise) within the defined territory. The Franchisor has unilaterally implemented and runs, for its own benefit, the GMAH on-line program in direct competition with the Franchisee. Further, the Franchisor has, through one of the Franchisor's corporate locations, specifically solicited the Franchisee's members to join GMAH. The Franchisor has flagrantly breached the Agreement and has substantially nullified one of the most important and fundamental benefits the Franchisee bargained for - the exclusive right to a defined territory.
(2) Unilaterally setting prices contrary to Section 13.3 of the Agreement. The Franchisor only has the right to set the maximum price, not to mandate fixed pricing. In breach of this provision and against the Franchisee's strong objections, the Franchisor has set (and increased) prices and refused to allow the Franchisee to offer 'in-studio' only memberships and restricted the products and services the Franchisee can offer to its members, all of which make it impossible for the Franchisee to remain competitive. These restrictions are unrelated to any legitimate attempt by the Franchisor to protect or enhance the Franchise System, but rather are clearly designed to provide an unfair advantage to the Franchisor in competing with its own franchisees. The Franchisor is prohibited from unilaterally taking control of the Franchisee's existing clients and pricing. By doing so, the Franchisor has significantly damaged the Franchisee's business.
(3) Unilaterally changing payment policies/procedures so that the Franchisor directly receives the funds generated from the Franchisee's sale of on-line and in-studio memberships. By doing so, the Franchisor pays itself in advance of any payments owing to the Franchisor in breach of section 5.3 of the Agreement, seriously effecting the Franchisee's cash flow and its ability to conduct its business. Furthermore, and even more egregious, the Franchisor has, notwithstanding the Franchisee's repeated demands, failed to provide any accounting for the funds collected and has withheld from the Franchisee its Gross Revenues, in what can only be an attempt to put the Franchisee out of business and take the benefit of Franchisee's on-line business. It is impossible for any business to run without knowing what its receipts are or receiving its revenues.
(4) The Franchisor promoting and offering services on the internet, and not permitting the Franchisee to do so on its own, contrary to the express grant of this right under section 9.9(b) of the Agreement and as a result depriving the Franchisee of a benefit and asset it bargained for in the Agreement.
[19] The letter goes on to assert:
“The above breaches are individually serious, but taken together, they eviscerate the benefit of the Agreement and make it impossible for the Franchisee to continue operating its Franchise. The Franchisor's unilateral changes have frustrated the commercial purpose of the Agreement and eliminated any reasonable prospect of profitability for the Franchisee. Breaches of this nature go to the very root of the contract and nullify the primary benefits that the Franchisee bargained for and leave the Franchisee with no reliable revenue to satisfy its obligations as they come due.”
Restrictive Covenants in the Franchise Agreement
[20] Greco submits that the defendants’ conduct in opening its competing TG Athletics business from the premises of the former Greco fitness studio is in breach of the franchise agreement which, the plaintiff says, remains of full force and effect. In particular, the plaintiff submits the defendants are in breach of their in-term non-competition covenants with the plaintiff as follows (entitling the plaintiff to injunctive relief at section 21.6 of the franchise agreement):
20.2 Not to Compete during the Terms of this Agreement
The Franchisee and Principals shall not during the Initial Term nor any renewal term hereunder, directly or indirectly, including without limitation individually or in partnership or jointly or in conjunction with any person, as principal, agent, shareholder or in any other manner whatsoever carry on, be engaged in or be concerned with or interested in or advise, lend money to, guarantee the debts or obligations of or permit his name or any part thereof to be used or employed by any person engaged in or concerned with or interest in any business competitive with or similar to the Franchised Business as carried on from time to time during the Initial Term or any renewal thereof.
20.4 Interference with Employment Relations of Others
During the Initial Term and any renewal term and for a period of two (2) years thereafter, the Franchisee nor any officer, director or shareholder of the Franchisee including the Principals shall:
(a) attempt to obtain any unfair advantage over any other franchisee, Franchisor or any Affiliate thereof by soliciting for employment any person who is, at the time of such solicitation, employed by such other franchisee, Franchisor or such Affiliate, nor shall they directly or indirectly induce any such person to leave his employment; or
(b) divert at attempt to divert any business of, or any customers of, the Franchised Business to any other competitive establishment, by direct or indirect inducement or otherwise.
Discussion
[21] The plaintiff’s position is that an injunction should be granted as (i) there is a serious issue to be tried and the plaintiff has a strong prima facie case, (ii) the plaintiff will suffer irreparable harm that will result if the injunction is not granted and (iii) the balance of convenience favours granting the injunction. The applicable test on a motion for an interlocutory injunction was outlined by the Supreme Court of Canada in RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 SCR 311. A party seeking an interlocutory injunction must show that:
(a) There is a serious question to be tried (or, in certain circumstances, that they have a strong prima facie case);
(b) Irreparable harm will be suffered if the injunction is not granted; and
(c) The balance of convenience favours granting the injunction.
[22] The defendants contend that none of these criteria are met because the franchise agreement has ended as a result of the franchisor’s fundamental breach, the plaintiff will not suffer irreparable harm if an injunction is not granted and the balance of convenience favours the defendants.
Strong Prima Facie Case
[23] It is manifestly clear that the defendants’ actions in opening and carrying on the TG Athletics fitness studio from their current location are in direct contravention of the franchise agreement, particularly clauses 20.2 and 20.4, quoted above. I find no merit in the defendants’ submission that these covenants are void for uncertainty or are in contravention of public policy. The covenants in question on this motion are in force during the term of the franchise agreement. I agree with the observation of Wilton-Segal J. in a very similar case, Invescor Restaurants Inc.v. 3574423 Canada Inc., 2011 ONSC 1609, “so long as the franchisee is receiving the benefit of the franchise agreement, the franchisee should not be able to undermine the value of the franchise unless special circumstances can be demonstrated. The franchisee has not provided evidence of any such special circumstances.
[24] The fundamental issue however is whether the franchise agreement continues to survive as Greco contends or has there been a fundamental breach of the agreement on Greco’s part, as the defendants claim? There is a high evidentiary bar to be met in establishing a fundamental breach, see Shelanu Inc. v. Print Three Franchising Corp 2003 CanLII 52151 (ON CA), 2003 O.J. no. 1919 (CA), in which the Court of Appeal set out the applicable considerations in assessing whether a party has fundamentally breached a contract, as follows:
They are: (a) the ratio of the party's obligation not performed to the obligations as a whole; (b) the seriousness of the breach to the innocent party; (c) the likelihood of repetition of such breach; (d) the seriousness of the consequences of the breach; and (e) the relationship of the part of the obligation performed to the whole obligation.
[25] In the court’s opinion, the defendants have raised a serious issue as to whether the GMAH program which Greco was directly marketing to the franchisee’s members, when combined with the financial re-structuring which is inherent in the program and the major changes to the role of the franchisee and the restrictions on the franchisee’s opportunity to earn revenue through in-studio activities, undermines the fundamental underpinning of the franchise arrangement. The reality of that complex issue, which will require resolution at trial, suggests there is a substantial issue to be tried from the perspective of both parties and militates against the conclusion that the plaintiffs have a strong prima facie case.
[26] I hold that the plaintiffs are required in the circumstances of this case to establish that they have a strong prima facie case (meaning an almost certainty of succeeding) and not simply that there is a substantial issue to be tried. There is only a short period of time (3 months) remaining in the term of the franchise agreement and it will not be possible to have the issues brought to trial prior to the expiration of the agreement. Therefore, this interlocutory order will likely serve to finally determine or render moot at least some of the issues in dispute. In such circumstances, the plaintiff should be required to establish a strong prima facie case to obtain an interlocutory injunction, see Second Cup v. Niranjan 2007 O.J. no. 3409. Moreover, cases have held that a strong prima facie case is needed where an injunction will interfere with a person’s ability to earn a livelihood, see Kapur et al v. Konevic et al., 2020 ONSC 5706.
Irreparable Harm and Balance of Convenience
[27] Irreparable harm and balance of convenience are closely related concepts and, in this case, should be assessed together. The franchise agreement on which Greco bases its present claims, will shortly expire, leaving only certain buy out provisions and restrictive covenants. The requested interlocutory injunction will likely put the defendants out of business immediately and eliminate the possibility of Greco realizing any compensation for the claims it is asserting in this action or may be looking to assert under the termination provisions of the franchise agreement. This could cause irreparable harm to both parties. The damage to Greco’s goodwill, reputation and membership allegiance, if any, has already occurred and may be compensable in damages.
[28] Granting the requested injunction is highly unlikely to result in the resumption of the franchise relationship or the renewal of the franchise agreement, with or without Greco’s GMAH program. There remains both antipathy and major conceptual business differences between the parties.
[29] Unlike Greco, the defendants do not appear to be committed to or particularly interested in on-line programming, except as a means of temporary cash flow during lock downs, which may end within weeks. The defendants are focused on in-studio fitness activity. It is not without significance that in the de-branding negotiations Greco was prepared to allow the defendants to operate a fitness studio from their present location if appropriate financial and de-branding arrangements could have been agreed to. This suggests that Greco accepts in principle that a competing fitness studio run out of the same location would not necessarily harm its business.
[30] There are also interests affected by this dispute, other than those of the parties, which warrant consideration on a balance of convenience analysis. The defendants’ fitness studio employs 21 employees who may lose their livelihood if the studio closes. There are now 190 members of the public who have chosen to join and pay fees for the TG Athletics studio. These members stand to lose their fees if the defendants are required to close the TG Athletics studio. Court ordered closures of fitness facilities during a pandemic, for non health related reasons, creates a very poor optic to the public.
[31] Then there is Greco’s strong objections to the defendants’ using the name “TG Athletics”. The plaintiff is lawfully entitled to object to the defendants carrying on a business that is being misrepresented to or confused by the public with a Greco brand studio. The defendants have responded that they have taken the necessary steps to avoid such confusion and wish their membership to be clear that they are no longer operating as a Greco fitness studio. However, this is belied to a considerable extent by the adoption of the name ‘TG Athletics’. ‘TG’ stands for Tony Greco, who is the founder of the Greco fitness system. Mr Greco is an uncle of the defendant Franco Milito. Mr. Greco, who is not a party to this action, is apparently contractually permitted by Greco to offer physical training under his personal brand ‘TG fitness’, from the defendants’ studio. The defendants are also using Mr. Greco’s website as part of their business.
[32] The defendants appear to be deliberately trading on the Greco name by using Mr. Greco’s brand “TG Athletics” as their business name. The likelihood of creating confusion in the minds of the public in the Ottawa area is obvious. On the other hand, it appears that the plaintiff Greco Franchising has enabled this situation by entering into contractual arrangements with Tony Greco, upon his recent withdrawal from any continuing role in the Greco franchising system. The plaintiff has chosen not to put the details of these arrangements before the court on this motion, nor, as noted, is Mr. Greco a party to this action. There is a possibility that the defendants are legitimately using the TG Athletics name. This uncertainty prevents the TG Athletics name issue from being of significance in considering balance of convenience on this motion.
Disposition
[33] In summary, the court finds the evidence on this motion fails to establish that the plaintiff has met its burden of demonstrating a strong prima facie case (although there is undoubtedly a serious issue to be tried) as to the plaintiff’s contention that the franchise agreement has not been fundamentally breached and remains in full force and effect. Moreover, the court finds the balance of convenience does not favour granting an interlocutory injunction.
[34] Accordingly, this motion is dismissed. The issue of costs of this motion is reserved to the trial judge.
Date: June 7, 2021
APPENDIX
June 7, 2021
- In the title of proceedings, Eric Dwyer, Counsel for Franco Milito, Wilma Milito, and 2483425 Ontario Inc., Defendants.
COURT FILE NO. 21-85993
DATE: 20210607
ONTARIO
SUPERIOR COURT OF JUSTICE
RE: Greco Franchising Inc., Plaintiff (moving party)
AND
Franco Milito, Wilma Milito, and 2483425 Ontario Inc., Defendants
COUNSEL: Allan J. Dick and Daniel Hamson, for the Plaintiff
Fred Seller, Geoffrey Cullwick and Eric Dwyer, for the Defendants
AMENDED REASONS FOR DECISION (INTERLOCUTORY INJUNCTION)
Justice Charles T. Hackland
Released: June 7, 2021