COURT FILE NO.: CV-22-0124-00 DATE: 2022 03 24 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
LIGHTBOX ENTERPRISES LTD. David Altshuller and Eden Ifergan, for the Plaintiffs Plaintiffs
- and -
2708227 ONTARIO INC. and 2708227 ONTARIO INC. v. LIGHTBOX ENTERPRISES LTD., DONNELLY HOSPITALITY MANAGEMENT LTD., JEFFREY DONNELLY, SCOTT ROWE and REID OGDON Adrienne Boudreau and Lauren Baker, for the Defendants Defendants
HEARD: February 25, 2022, via videoconference
REASONS FOR JUDGMENT
P.A. DALEY J.
INTRODUCTION:
[1] The plaintiff Lightbox Enterprises Ltd, (“Lightbox”) moved for interlocutory injunctive orders related to its business relationship with the defendant 2708227 Ontario Inc. (“270”).
[2] In a short endorsement released on March 10, 2022, the plaintiff’s motion was dismissed with reasons to follow. These are the reasons for that decision.
[3] The defendant 270 was among the 42 winners of the second Ontario retail cannabis lottery. Following the lottery, 270 applied for and received the necessary provincial licenses to open retail cannabis stores in Ontario.
[4] 270 thereafter entered into two agreements with Lightbox, namely license agreements and service agreements which related to two retail cannabis stores, in Timmins and Brampton, Ontario. These retail cannabis locations were to be operated under the brand name “Dutch Love”. The Timmins and Brampton retail locations commenced business operations on May 9, and July 23, 2020, respectively.
[5] As provided for in these two agreements, Lightbox was required to operate both store locations on a day-to-day basis. 270 was never involved in the operation or direct management of these retail cannabis locations.
[6] It is alleged by Lightbox, but for the purposes of this motion not necessarily agreed to by 270, that it either owns or is in the process of applying for certain trademarks related to the retail sale of cannabis under two marks namely “Hobo Cannabis” and “Dutch Love”.
[7] It is acknowledged by the plaintiff’s deponent on this motion that none of the directors, shareholders or officers of 270 participated in any staff training relating to the operation of the Timmins or Brampton retail cannabis locations which were the subject of the two agreements.
[8] 270 asserts, in response to the plaintiff’s motion for injunctive relief, that 270 was a franchisee of Lightbox with respect to the two retail locations and as such the relationship between the parties is governed by the Arthur Wishart Act (Franchise Disclosure), 2000, S. O. 2000, c.3 (the “Wishart Act”).
[9] Lightbox disputes the defendant’s position that the parties were operating as a franchisor and franchisee respectively in relation to the operation of the two retail locations. It is urged on behalf of the plaintiff that the franchising of retail cannabis stores was prohibited at the time the parties entered into the two agreements and therefore the businesses were not franchises.
[10] 270, in response to this position urges that the provisions of the Wishart Act alone govern when determining whether a business relationship is a franchise subject to that legislation.
[11] It was common ground on the hearing of this motion that the court need not determine whether these parties were in a franchise relationship in order to fully adjudicate the issues at stake on this motion.
[12] The commercial realities of the relationship between these parties must, however, be considered when determining whether the plaintiff has demonstrated an entitlement to any injunctive relief, including an examination of the terms and conditions of the two agreements entered into by these parties.
[13] In this action the plaintiff seeks a declaration that 270 is in breach of both the license agreements and service agreements in respect of the Timmins and Brampton retail operations, as well as interim, interlocutory and permanent injunctions along with damages for breach of the agreements. In support of the claims advanced, the plaintiff asserts that it developed confidential and/or proprietary software, technology and “Operating Methods” (as defined in the plaintiff’s motion record) related to the retail sale of cannabis and although not expressly set out in its amended statement of claim, on this motion the plaintiff asserts that 270 misused certain confidential information, license marks and Operating Methods resulting in damages being sustained by it.
[14] In its statement of defence and counterclaim, 270 asserts that its relationship with Lightbox is one of franchisee and franchisor respectively in regard to both retail cannabis locations and it therefore relies upon the Wishart Act in alleging that the plaintiff breached section 5 of that legislation, by its failure to provide the defendant with the necessary franchise disclosure document within the timeframe provided for.
[15] As a result of the plaintiff’s breaches of the Wishart Act, by way of its counterclaim, the defendant asserts that the plaintiff has no right to seek the relief claimed and in turn the defendant states that it was entitled to exercise its statutory right to rescind the franchise agreements pursuant to section 6 of the Wishart Act and to seek damages flowing from the plaintiff’s breaches.
[16] In its counterclaim the defendant seeks damages in respect of the Timmins retail location in the net sum of $844,632.41 based on sales of $10,378,068.83. It also seeks damages in respect of the Brampton retail location in the net sum of $1,047,001.41 based on sales of $11,529,058.75.
[17] On December 22, 2021, the defendant served upon the plaintiff notices of rescission pursuant to section 6 (3) of the Wishart Act in respect of both the Timmins and Brampton retail locations, wherein payment was sought from Lightbox in the amounts set out above. As provided for in section 6 (6) of the legislation, a franchisor has up to 60 days from the delivery of a notice of rescission to pay to a franchisee the amounts set out in a notice of rescission. The plaintiff did not respond to the notices of rescission nor pay the amounts claimed but rather instituted this action against the defendant on January 11, 2022, and then brought the present motion.
[18] Following its service of the notices of rescission, the defendant ceased using any marks or logos related to “Dutch Love” and began operations at both retail locations under the brand – “Roll N Rock Cannabis.” The evidence, which is uncontradicted, is that the defendant took steps to de-identify the two business locations from the brand “Dutch Love” following the service of the notices of rescission.
[19] In its motion, Lightbox seeks interim and interlocutory injunctions which can be summarized as follows:
(a) restraining 270 from owning or operating a Rock N Role Cannabis or any other cannabis retail store other than a cannabis retail store of the type referenced in the two sets of agreements between the parties;
(b) restraining 270 from using the Licensed Marks or Operating Methods or disseminating same except as provided for in the two sets of agreements.
[20] The plaintiff also seeks injunctive relief in the alternative to that set out in paragraph 19 (a), above, namely restraining the defendant from using the “Duchy” online order management account, along with numerous other forms of injunctive relief relating to “Dutch Love”, including the use of all proprietary documentation relating to training and operating procedures, service standards, merchandising standards, and business processes.
LEGAL FRAMEWORK:
[21] The granting of injunctive relief in a contractual context must be grounded on pre-existing rights. Rights being asserted that are not pre-existing contractual rights are simply “rights in the air” unconnected with the parties’ contractual obligations and in respect of which equity will not provide a remedy.
[22] In many cases, injunctive relief will be appropriate as the specific remedy for breach of contract. Where a party has by contract undertaken not to do something, specific performance of that obligation is achieved by enjoining its breach. Where specific performance is sought of a positive obligation, the plaintiff must establish that the ordinary remedy of damages would be inadequate. In the case of negative obligations, however the courts have more readily granted injunctive relief: Sharpe, R.J., Injunctions and Specific Performance (2nd ed.) at ¶ 9:1.
[23] In Doherty v. Allman, (1878), 3 App. Cas. 709 (H. L.) Lord Cairns L. C. stated as follows:
If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the Court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or injury – it is the specific performance, by the Court, of that negative bargain which the parties have made, with their eyes open, between themselves.
[24] In its motion for injunctive relief, the plaintiff asserts that the defendant was in receipt of certain confidential and/or proprietary information or things as a result of the parties’ contractual relationship and on that basis it seeks to restrain the defendant’s use and handling of such information and material.
[25] The right of a party to claim damages or injunctive relief as a result of a breach of confidence requires that party to meet the three-part test enunciated by the Supreme Court of Canada in Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 SCR 574, which test was later summarized in the Ontario Court of Appeal decision in Free-Trade Medical Network Inc. v. RBC Travel Insurance Company at para [8] where the court stated as follows:
[8] The three elements that must be established to make out a claim for breach of confidence, as established in Lac Minerals are the following:
- The information conveyed must be confidential;
- The information must have been communicated in confidence, and,
- The information must have been misused by the party to whom it was communicated to the detriment of the party who confided it.
[26] As to the well-known test for the granting of injunctive relief as established in RJR–McDonald Inc. v. Canada (Attorney General), [1994] 1 SCR 311, the parties on this motion agreed that the three-part test from this decision applies to this motion, however they do not agree as to the nature of the injunctive relief being sought, namely whether it is mandatory or prohibitive and as a result they disagree as to which level of scrutiny must be used by the court on considering the first branch of RJR-McDonald.
[27] The general rule established in RJR-McDonald as to the first stage of the inquiry calls for a determination as to whether the moving party has demonstrated a “serious question to be tried”, in the sense that the application is neither frivolous nor vexatious.
[28] Where the injunctive relief sought would result in a mandatory injunction, a heightened threshold should be applied at the first stage namely whether the applicants have shown on a “strong prima facie case”: R. v. Canadian Broadcasting Corp., 2018 SCC 5, [2018] 1 SCR 196, at paras [12] – [15].
ANALYSIS:
[29] Before considering the three-part test in RJR-McDonald, I have concluded that a preliminary assessment of the evidentiary record is necessary to first determine whether the plaintiff has adduced sufficient evidence to even engage the inquiry established by the court in that decision.
[30] The first form of injunctive relief sought by the plaintiff in its amended notice of motion is as follows:
An interim and/ or interlocutory injunction pending the final determination of this action restraining 270-8227 Ontario Inc. (“270 Ontario”) from owning or operating a Roll N Rock Cannabis or any other cannabis retail store other than a cannabis retail store using the Licensed Marks (defined below) and Operating Methods (defined below) at the Timmins or the Brampton Stores (defined below).
[31] In summary, this head of relief seeks to restrain and enjoin 270 from: owning and/or operating a “Role in Rock Cannabis” retail store or any other cannabis retail store, other than a “Dutch Love” branded store.
[32] There is a significant evidentiary gap in the plaintiff’s motion record in that there is no evidence whatsoever of any agreement between the parties that 270 would refrain from the ownership or operation of another cannabis retail brand at either of the store locations in question or at all. The license agreements and service agreements applicable to the two retail locations do not contain any restrictive covenants pertaining to the ownership or operation of a retail cannabis store under another brand at the same geographic locations.
[33] The license agreements applicable to the two retail locations expressly provide a contractual right to the defendant allowing for the transition of its business operations at the retail locations to another brand of cannabis. This is provided for in section 3.5 of the license agreements which reads as follows:
3.5: Upon termination of this Agreement for any reason, Licensee may continue to use the Licensed Marks in accordance with this Agreement for a period of thirty (30) days to wind-down all use of the Licensed Marks, including without limitation, changing corporate names and replacement of marketing materials, signage and the like bearing the Licensed Marks.
[34] Thus, the plaintiff is seeking to enforce a restrictive covenant that the parties never bargain for in their contracts and in fact the plaintiff is seeking to impose terms into the contracts that contradict the terms as agreed to by the parties, notably as set out in section 3.5 of the license agreements.
[35] The plaintiff is advancing a position in law on this motion which is entirely contrary to the long-standing case authority of Doherty v. Allman, cited above, which requires that the parties to a contract must have covenanted that certain things shall not be done, before a court, in exercising its equitable jurisdiction, will grant injunctive relief in order to sanction a process which has already been contracted to by the parties.
[36] None of the equitable relief sought by the plaintiff in the first section of its motion is grounded in the contracts entered into between these parties and therefore there is no basis for the court to grant the relief sought, whether it is mandatory or prohibitive.
[37] As to the second and alternate form of injunctive relief being sought by the plaintiff in its amended notice of motion, in summary the plaintiff seeks to restrain the defendant from:
(a) using the “Licensed Marks” (the “HOBO” and “Dutch Love” trademarks) and
(b) using or disseminating the “Operating Methods” except as provided for in the agreements. In the alternative, the plaintiff seeks an order requiring the defendant to refrain from using certain items in its operations, including displaying “potted plants”.
[38] Responding to the plaintiff’s motion, 270 has adduced significant and cogent evidence to demonstrate that it is not using the plaintiff’s trademarks and that it has de-identified with the “Dutch Love” franchise system and that it is now operating under the name “Roll N Rock Cannabis”. Furthermore, the defendant has adduced uncontradicted evidence as to steps taken to de-identify with “Dutch Love” following the service of its notice of rescission, including:
(a) removal of all materials containing the Licensed Marks for “Dutch Love” or “HOBO;” (b) the removal of “Dutch Love” signage outside of the store locations and installation of new signage in the name of “Roll N Rock Cannabis;” (c) the interior design and appearance of both store locations have been changed significantly from its prior appearance and the “Dutch Love” colour scheme and design, as is apparent from the photographic evidence introduced by the defendant; (d) the defendant introduced evidence that it has contacted third-party suppliers and vendors to advise them that the defendant was now operating under the “Roll N Rock Cannabis” brand.
[39] In cross-examination, the plaintiff’s deponent Harrison Stoker acknowledged that 270 is no longer using the “Dutch Love” name, branding or colours at either of the retail locations operated by the defendant.
[40] The evidence is uncontradicted that prior to the defendant’s service of the notice of rescission, 270 was not involved in the day-to-day operations of either retail location and that subsequent to the service of that notice it took over the daily operations of the stores after the de-identification steps as outlined above had been implemented.
[41] In asserting that the defendant has improperly used what it refers to as “Operating Methods” in its evidence on this motion, which it broadly asserts includes digital technology, and sophisticated marketing methods, the plaintiff has failed to adduce any cogent and detailed evidence as to its claims that it has either a confidential and/or proprietary interest over any of the so-called operating methods and technology.
[42] There is no evidence whatsoever that the plaintiff has any form of proprietary interest in the so-called operating methods. Notably, it has been acknowledged by the plaintiff’s deponent that much of the resources needed to understand the cannabis business can be found publicly online.
[43] Furthermore, the evidence adduced by the plaintiff as to any rights of confidentiality in any of the methods or systems described is so vague that the plaintiff has failed to establish even a prima facie the case in accordance with Lac Minerals that it conveyed to the defendant confidential information, that the information was communicated in confidence, and that the information had been misused by the defendant to the plaintiff’s detriment. No evidence has been adduced in support of any of these three requisite elements required to establish a breach of confidence.
[44] As to the plaintiff’s assertion that the defendant is somehow in breach of its agreements by its use of third-party companies such as ADP (payroll system), 7Shifts (employee shift scheduling system) and COVA (a provider of software used to track store inventory) is entirely without merit in that the third-party companies referred to in the motion material are all unrelated and arm’s-length from both the plaintiff and the defendant and therefore the plaintiff has no right to seek injunctive relief to prohibit the defendant from continuing the use of these third-party services. Furthermore, there are no restrictive covenants in the agreements between these parties that would in any way limit the defendant from contracting with the third-party companies.
[45] Although I have concluded that the plaintiff has failed to adduce any cogent evidence in support of its claim for injunctive relief, I will nevertheless consider the criteria established in RJR-McDonald having regard to the evidentiary record adduced.
[46] As to the threshold applicable on the first stage of the test, I have concluded that the primary relief sought is mandatory in nature and as such a heightened degree of scrutiny of the evidence is required. Thus, in order to succeed on this first stage of the test, the plaintiff must establish a strong prima facie case.
[47] As was noted by Brown J in R. v. Canadian Broadcasting Corp. at para [15]:
A mandatory injunction directs the defendant to undertake a positive course of action, such as taking steps to restore the status quo, or otherwise to “put the situation back to what it should be,” which is often costly or burdensome for the defendant and which equity has long been reluctant to compel.
See also: Bark & Fitz Inc. v. 2139138 Ontario Inc., 2010 ONSC 1793 at para 9.
[48] It was urged on behalf of the plaintiff that all the relief sought was prohibitive in nature, however I have concluded that the ultimate result that would flow from the granting of the relief sought would have been to restore the status quo as it was prior to the defendant’s service of the notice of rescission and therefore the relief truly was mandatory in nature.
[49] Considering the first stage with this heightened threshold, I have concluded that the plaintiff has failed to establish a strong prima facie case, given the significant shortcomings in the evidence it has adduced, as discussed above.
[50] Turning to the second stage of the test and RJR-McDonald, as to whether the plaintiff has demonstrated that irreparable harm will result if the relief is not granted, I have concluded that based on the evidence adduced on behalf of the plaintiff, the irreparable harm asserted is unsupported by any evidence and is in large part speculative. Losses from lost sales, loss of market share and lost royalties that would otherwise have been generated under the contracts in question are all losses which can be readily fixed with a dollar value.
[51] In asserting that irreparable harm will result if the injunctive relief is denied, the plaintiff makes various submissions including that its relationships with customers, staff, vendors and third parties will be adversely impacted, that confusion and distrust will result if the injunctive relief is not granted, and that there will be confidential information at risk. The plaintiff has failed to adduce any evidence in support of these bald allegations, and therefore I have concluded that it has failed to demonstrate that irreparable harm would result if the relief requested is denied.
[52] Finally, with respect to the balance of convenience to be considered on a motion for a mandatory injunction, I have concluded that this factor favours the defendant.
[53] In addressing the balance of convenience, namely which party can best bear the results of injunctive relief, Brown J in R. v. Canadian Broadcasting Corp., at para [15] stated as follows as to the affect a mandatory injunction:
Such an order is also (generally speaking) difficult to justify at the interlocutory stage, since restorative relief can usually be obtained at trial. Or, as Justice Sharpe (writing extrajudicially) puts it, “the risk of harm to the defendant will [rarely] be less significant than the risk to the plaintiff resulting from the court staying its hand until trial.” The potentially severe consequences for defendant which can result from a mandatory interlocutory injunction, include the effective final determination of the action in favour of the plaintiff, further demand what the Court described in RJR-McDonald as “extensive review of the merits” at the interlocutory stage.
CONCLUSION:
[54] For the reasons outlined above, the plaintiff’s motion was dismissed.
[55] Counsel for the defendant shall serve its submissions as to costs, of no longer than two pages, along with a costs outline within 15 days from the date of release of these reasons. Counsel for the plaintiff shall serve similar submissions within 15 days thereafter. No reply submissions are to be filed.
DALEY J. DATE: March 24, 2022